SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 7, 2001
HERSHA HOSPITALITY TRUST
(Exact name of registrant as specified in its charter)
Maryland 005-55249 251811499
(State or other jurisdiction (Commission File No.) I.R.S. Employer
of incorporation) (Identification No.)
148 Sheraton Drive, Box A
New Cumberland, Pennsylvania 17070
(Address of principal executive offices)
(717) 770-2405
(Registrant's telephone number, including area code)
N/A
(former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
Hersha Hospitality Trust is filing this Current Report on Form 8-K to
describe various material risk factors that may affect our business, financial
condition and operations.
Some of the information you will find in our Securities Exchange Act of
1934 filings and our prospectuses or any prospectus supplements may contain
"forward-looking" statements. Also, documents subsequently filed by us with the
Securities and Exchange Commission may contain similar forward-looking
statements. You can identify these types of statements by their use of
forward-looking words such as "may," "will," "should," "could," "plans,"
"intends," "expects," "anticipates," "estimates," "projects," "continues" or
other similar words. These types of statements discuss future events or
expectations or contain projections or estimates.
When considering these forward-looking statements, you should keep in mind
the following risk factors. These risk factors could cause our actual financial
and operating results to differ materially and adversely from those contained in
or implied by any forward-looking statement.
The following risk factors are not necessarily exhaustive, particularly as
to possible future events, and new risk factors may emerge periodically. Many
things can happen that can cause our actual financial and operating results to
be very different than those described by us in our SEC filings. Any statements
made by us that are not historical facts should be considered to be
forward-looking statements. We make no promise to update any of our
forward-looking statements, or to publicly release the results if we revise any
of them.
RISK FACTORS
RISKS RELATING TO OUR BUSINESS, STRUCTURE, GROWTH STRATEGY AND COMPANY
AS A REIT WE ARE UNABLE TO OPERATE THE HOTELS AND WILL NOT HAVE DIRECT
CONTROL OF OUR STRATEGIC DECISIONS.
As a result of our status as a REIT, we are not and will not be able to
operate our hotels. We are not and will not be able to make and implement
strategic business decisions with respect to our hotels, such as decisions with
respect to the repositioning of a franchise, repositioning of food and beverage
operations and other similar decisions, even if such decisions are in the best
interests of a particular hotel. Accordingly, there can be no assurance that our
lessees will operate our hotels in a manner that is in our best interests.
DEPENDENCE ON OUR LESSEES FOR RENT MAY IMPACT DISTRIBUTIONS TO
SHAREHOLDERS.
We rely on our lessees to make rent payments in order to make distributions
to shareholders. Our lessees' obligations under the percentage leases, including
the obligation to make rent payments, are unsecured. Reductions in revenues from
our hotels or in the net operating income of our lessees may adversely affect
the ability of our lessees to make these rent payments and thus our ability to
make anticipated distributions to our shareholders. Although failure on the part
of our lessees to comply materially with the terms of a percentage lease would
give us the right to terminate any or all of their percentage leases with that
lessee, to repossess the applicable hotels and to enforce the payment
obligations under the percentage leases, we then would be required to find
another lessee. There can be no assurance that we would be able to find another
lessee or that, if another lessee were found, we would be able to enter into a
lease on favorable terms.
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INDEBTEDNESS CAN REDUCE CASH AVAILABLE FOR DISTRIBUTION AND CAUSE LOSSES.
Although our policy is to limit consolidated indebtedness to less than 67%
of the total purchase prices paid by us for the hotels in which we have
invested, our Declaration of Trust does not limit the amount of indebtedness we
may incur. Debt, whether with recourse to us generally or only with respect to a
particular property, creates an opportunity for increased net income, but at the
same time creates risks. For example, variable rate debt can reduce the cash
available for distribution to shareholders in periods of rising interest rates.
We incur debt only when we believe it will enhance our risk-adjusted returns.
However, we cannot be sure that our use of leverage will prove to be beneficial.
At September 30, 2001, we had debt outstanding of $61.9 million. We may borrow
additional amounts from the same or other lenders in the future, or may issue
corporate debt securities in public or private offerings. Some of these
additional borrowings may be secured by our hotels. There can be no assurance
that we will be able to meet our debt service obligations and, to the extent
that we cannot, we risk the loss of some or all of our hotels to foreclosure.
WE FACE RISKS ASSOCIATED WITH THE USE OF DEBT, INCLUDING REFINANCING RISK.
We are subject to the risks normally associated with debt financing,
including the risk that our cash flow will be insufficient to meet required
payments of principal and interest. We anticipate that a portion of the
principal of our debt will not be paid prior to maturity. Therefore, we will
likely need to refinance at least a portion of our outstanding debt as it
matures. There is a risk that we may not be able to refinance existing debt or
that the terms of any refinancing will not be as favorable as the terms of the
existing debt. If principal payments due at maturity cannot be refinanced,
extended or repaid with proceeds from other sources, such as new equity capital
or sales of properties, our cash flow may not be sufficient to repay all
maturing debt in years when significant "balloon" payments come due.
CONFLICTS OF INTEREST MAY HAVE LED TO THE PERCENTAGE LEASES, CONTRIBUTION
AGREEMENTS, THE ADMINISTRATIVE SERVICES AGREEMENT AND THE OPTION AGREEMENT
NOT HAVING BEEN NEGOTIATED ON AN ARM'S-LENGTH BASIS.
Some of our trustees and executive officers had ownership interests in
entities from which we have purchased hotels and in Hersha Hospitality
Management, L.P., one of our lessees, at the time we entered into leases.
Consequently, the terms of the percentage leases, the contribution agreements
pursuant to which we and our partnership acquired some of our hotels, the
Administrative Services Agreement and the Option Agreement between the
partnership and some of the trustees and executive officers may not have been
negotiated on an arm's-length basis, which may have resulted in agreements that
are not in the best interest of all our shareholders.
CONFLICTS OF INTEREST WITH OTHER ENTITIES MAY RESULT IN DECISIONS THAT DO
NOT REFLECT OUR BEST INTERESTS.
Some of our trustees, executive officers and their affiliates have
ownership interests in and/or positions with our operating partnership, HHMLP
and us. Conflicts of interest may arise in regards to the ongoing lease,
acquisition, disposition and operation of our hotels including, but not limited
to, the percentage leases and enforcement of the contribution agreements, the
Administrative Services Agreement and Option Agreement. Consequently, the
interests of shareholders may not be reflected fully in all decisions made or
actions taken by our officers and trustees.
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CONFLICTS OF INTEREST RELATING TO SALES OR REFINANCING OF HOTELS ACQUIRED
FROM SOME OF OUR INSIDER TRUSTEES AND SOME OF OUR EXECUTIVE OFFICERS MAY
LEAD TO DECISIONS THAT ARE NOT IN OUR BEST INTEREST.
Some of our trustees and executive officers have unrealized gains
associated with their interests in the hotels acquired by us from them and, as a
result, any sale of the these hotels or refinancing or prepayment of principal
on the indebtedness assumed in purchasing these hotels by us may cause adverse
tax consequences to some of our trustees and executive officers. Therefore, our
interests and the interests of these individuals may be different in connection
with the disposition or refinancing of these hotels.
ADJUSTMENTS TO THE PURCHASE PRICE TO OUR HOTELS MAY LEAD TO SUBSTANTIAL
SHAREHOLDER DILUTION.
In the event that any of the purchase prices of the newly-renovated hotels
or the newly-developed hotels are increased on an adjustment date, owners of the
priority common shares at such time will experience dilution.
OUR ACQUISITIONS MAY NOT PERFORM UP TO THE LEVEL FORECASTED, WHICH MAY HARM
OUR FINANCIAL CONDITION AND OPERATING RESULTS, AND WE MAY NOT BE ABLE TO
MAKE THE DISTRIBUTIONS REQUIRED TO MAINTAIN OUR REIT STATUS.
We intend to pursue acquisitions of additional hotel properties.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that estimates of the cost of improvements necessary to
market and acquire properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. We anticipate
that acquisitions will largely be financed through externally generated funds
such as borrowings under credit facilities and other secured and unsecured debt
financing and from issuances of equity securities. Because we must distribute at
least 90% of our taxable income to maintain our qualification as a REIT, our
ability to rely upon income from operations or cash flow from operations to
finance our growth and acquisition activities will be limited. Accordingly, were
we unable to obtain funds from borrowings or the capital markets to finance our
growth and acquisition activities, our ability to grow could be curtailed,
amounts available for distribution to shareholders could be adversely affected
and we could be required to reduce distributions.
NEED FOR CERTAIN CONSENTS FROM THE LIMITED PARTNERS MAY NOT RESULT IN
DECISIONS ADVANTAGEOUS TO SHAREHOLDERS.
Under our operating partnership's amended and restated partnership
agreement, the holders of at least two-thirds of the interests in the
partnership must approve a sale of all or substantially all of the assets of the
partnership or a merger or consolidation of the partnership, provided, however,
that such approval shall no longer be required if we fail to pay a distribution
of $0.72 per share to the holders of the priority common shares for any 12-month
period. As of December 1, 2001, some of our trustees, executive officers and
their affiliates own approximately a [69%] interest in the partnership and thus
hold veto power over such extraordinary transactions, which could result in the
disapproval of a transaction that would be beneficial to our shareholders.
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OUR OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES.
To qualify as a REIT under the Code, no more than 50% of our outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
during the last half of each taxable year. To preserve our REIT qualification,
our Declaration of Trust generally prohibits direct or indirect ownership of
more than 9.9% of the number of outstanding shares of any class of our
securities, including the priority common shares, by any person. Generally,
priority common shares owned by affiliated owners will be aggregated for
purposes of the ownership limitation. The ownership limitation could have the
effect of delaying, deferring or preventing a change in control or other
transaction in which holders of some, or a majority, of priority common shares
might receive a premium for their priority common shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests.
THE BANKRUPTCY OF GUARANTORS OF THE INDEBTEDNESS RELATING TO SOME OF OUR
HOTELS COULD TRIGGER A DEFAULT UNDER OUR LOAN DOCUMENTS.
Mr. Hasu P. Shah, chairman of our Board of Trustees, and some of the
limited partnerships that hold the hotels acquired by us guarantee the
indebtedness of four of our hotels. The bankruptcy of any of the guarantors
would constitute a default under the related loan documents, and such default
would cause some or all of the assumed indebtedness to become immediately due
and payable. In the event that the lender accelerates the payment, such
acceleration could adversely affect our cash available for distribution. If we
are unable to make such payment, we may be forced to sell the hotels that serve
as collateral for the indebtedness in order to make such payment.
ACQUISITION OF HOTELS WITH LIMITED OPERATING HISTORY MAY NOT ACHIEVE
FORECASTED RESULTS.
Newly-developed or newly-renovated hotels do not have the operating history
that would allow our management to make objective pricing decisions in acquiring
these hotels (including hotels which may be acquired from certain of our
executive officers, trustees and their affiliates). The purchase prices of these
hotels are based upon projections by management as to the expected operating
results of such hotels, subjecting us to risks that such hotels may not achieve
anticipated operating results or may not achieve these results within
anticipated time frames. As a result, the lessees may not generate enough net
operating income from these hotels to make the fixed rent payments or, after the
adjustment date, to make the base rent payments. In addition, after the
adjustment date, room revenues may be less than that required to provide us with
our anticipated return on investment under the percentage leases. In either
case, the amounts available for distribution to our shareholders could be
reduced.
THE DECLARATION OF TRUST CONTAINS A PROVISION THAT CREATES STAGGERED TERMS
FOR OUR BOARD OF TRUSTEES.
Our Board of Trustees is divided into two classes. The terms of the first
and second classes expire in 2002 and 2003, respectively. Trustees of each class
are elected for two-year terms upon the expiration of their current terms and
each year one class of trustees will be elected by the shareholders. The
staggered terms of trustees may delay, defer or prevent a tender offer, a change
in control of us or other transaction, even though such a transaction might be
in the best interest of the shareholders.
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OUR LIMITED OPERATING HISTORY DOES NOT INDICATE FUTURE RESULTS.
We became a public reporting company in early 1999 and have a limited
operating history. Because of this limited history, investors should be
especially cautious before drawing conclusions about our future performance. Our
past performance is not necessarily indicative of future results.
WE OWN A LIMITED NUMBER OF HOTELS AND SIGNIFICANT ADVERSE CHANGES AT ONE
MAY IMPACT OUR LESSEES' ABILITY TO PAY RENT AND OUR ABILITY TO MAKE
DISTRIBUTIONS TO SHAREHOLDERS.
We own only eighteen hotels. Significant adverse changes in the operations
of any hotel could have a material adverse effect on our lessees' ability to
make rent payments and, accordingly, on our ability to make expected
distributions to our shareholders.
WE MAY BE UNABLE TO ACQUIRE OR MAY BE DELAYED IN ACQUIRING PROPERTIES WITH
THE PROCEEDS OF THE OFFERING.
We currently have no specific properties under contract for acquisition and
we may be unable to acquire or may be delayed in acquiring appropriate
properties with the proceeds of the offering that will generate returns
consistent with our historical returns on our other hotels. Pending the use of
the net proceeds to acquire properties, we intend to use the net proceeds to
reduce outstanding indebtedness, fund renovations on, capital improvements to or
pay leasing costs in connection with our existing properties and make
investments in short-term income producing securities. Reducing outstanding
indebtedness and making short-term investments generally will provide us with a
lower rate of return than investing in income producing real estate. As a
result, our inability to acquire, or delays in acquiring, appropriate properties
may likely dilute the amount of cash available per share for distributions to
our shareholders.
MARYLAND BUSINESS COMBINATION LAW MAY DISCOURAGE A THIRD PARTY FROM
ACQUIRING US.
Under the Maryland General Corporation Law, as amended (MGCL), as
applicable to real estate investment trusts, certain "business combinations"
(including certain issuances of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares or an affiliate thereof are prohibited
for five years after the most recent date on which this shareholder acquired at
least ten percent of the voting power of the trust's shares. Thereafter, any
such business combination must be approved by two super-majority shareholder
votes unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
shareholder for its common shares. These provisions could delay, defer or
prevent a transaction or change of control of our company in which our
shareholders might otherwise receive a premium for their shares above
then-current market prices or might otherwise deem to be in their best
interests. Some of our trustees, executive officers and their affiliates may
control a sufficient percentage of the voting power to block a proposal
respecting a business combination under these provisions.
THE BOARD OF TRUSTEES MAY CHANGE OUR INVESTMENT AND OPERATIONAL POLICIES
WITHOUT A VOTE OF THE PRIORITY COMMON SHAREHOLDERS.
Our major policies, including our policies with respect to acquisitions,
financing, growth, operations, debt limitation and distributions, are determined
by the trustees. The trustees may amend or revise these and other policies from
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time to time without a vote of the holders of the priority common shares.
Although four of the trustees currently are independent trustees, our
Declaration of Trust only requires three of our trustees to be independent.
Consequently, in the future a majority of the Board of Trustees may not be
independent and thus such policies could be changed by the non-independent
trustees. Investment and operational policy changes could adversely affect the
market price of our priority common shares and our ability to make distributions
to our shareholders. Under the Declaration of Trust, we cannot change our policy
of seeking to maintain our qualification as a REIT without the approval of the
holders of two-thirds of the outstanding priority common shares.
WE FOCUS ON ACQUIRING HOTELS OPERATING UNDER A LIMITED NUMBER OF FRANCHISE
BRANDS, WHICH CREATES GREATER RISK AS THE INVESTMENTS ARE MORE
CONCENTRATED.
We intend to place particular emphasis in our acquisition strategy on
hotels similar to our current hotels. We invest in select franchises and
therefore will be subject to risks inherent in concentrating investments in a
particular franchise brand, which could have an adverse effect on our lease
revenues and amounts available for distribution to shareholders. These risks
include, among others, the risk of a reduction in hotel revenues following any
adverse publicity related to a specific franchise brand.
MANY OF OUR HOTELS ARE LOCATED IN PENNSYLVANIA, WHICH MAY INCREASE THE
EFFECT OF ANY LOCAL ECONOMIC CONDITIONS.
Thirteen of our eighteen hotels are located in Pennsylvania. As a result,
localized adverse events or conditions, such as an economic recession, could
have a significant adverse effect on the operations of our hotels, and
ultimately on the amounts available for distribution to shareholders.
COMPETING HOTELS OWNED OR ACQUIRED BY SOME OF OUR TRUSTEES, EXECUTIVE
OFFICERS AND THEIR AFFILIATES MAY HINDER THESE INDIVIDUALS FROM SPENDING
ADEQUATE TIME ON OUR BUSINESS.
Some of our trustees, executive officers and their affiliates own hotels
and may develop or acquire new hotels, subject to certain limitations. Such
ownership, development or acquisition activities may materially affect the
amount of time these officers and trustees have to devote to our affairs. Some
of our trustees, executive officers and their affiliates operate hotels that are
not owned by us, which may materially affect the amount of time that they devote
to managing our hotels.
In addition, there may be conflicting demands on Mr. Shah caused by his
overlapping management of us and Hersha Enterprises Ltd. Hersha Enterprises Ltd.
owns and operates properties other than our hotels, and Mr. Shah, who serves as
our Chairman of the Board and Chief Executive Officer and President of Hersha
Enterprises, Ltd., may experience a conflict in allocating his time between
these entities.
WE DEPEND ON KEY PERSONNEL.
We depend on the services of our existing senior management to carry out
our business and investment strategies. As we expand, we will continue to need
to attract and retain qualified additional senior management. The loss of the
services of any of our key management personnel, or our inability to recruit and
retain qualified personnel in the future, could have an adverse effect on our
business and financial results.
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WE FACE INCREASING COMPETITION FOR THE ACQUISITION OF HOTEL PROPERTIES AND
OTHER ASSETS, WHICH MAY IMPEDE OUR ABILITY TO MAKE FUTURE ACQUISITIONS OR
MAY INCREASE THE COST OF THESE ACQUISITIONS.
We face competition for investment opportunities in mid-scale hotels from
entities organized for purposes substantially similar to our objectives, as well
as other purchasers of hotels. We compete for such investment opportunities with
entities that have substantially greater financial resources than we do,
including access to capital or better relationships with franchisors, sellers or
lenders. Our policy is to limit consolidated indebtedness to less than 67% of
the total purchase prices paid by us for the hotels in which we have invested.
Because of the amount of our indebtedness, the success of our acquisition
strategy will depend primarily on our ability to access additional capital
through issuances of equity securities. Our competitors may generally be able to
accept more risk than we can manage prudently and may be able to borrow the
funds needed to acquire hotels. Competition may generally reduce the number of
suitable investment opportunities offered to us and increase the bargaining
power of property owners seeking to sell.
WE RELY ON TRUSTEES AND MANAGEMENT TO MAKE DECISIONS ON OUR BEHALF.
Common shareholders have no right or power to take part in our management
except through the exercise of voting rights on certain specified matters. The
Board of Trustees is responsible for our management and strategic business
direction. The policies of the Board of Trustees may not coincide with the
immediate best interests of shareholders.
POSSIBLE ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON PRICE OF
PRIORITY COMMON SHARES.
After termination of the priority period, any outstanding Class B Common
Shares automatically will be converted into Priority Class A Common Shares on a
one-for-one basis. Sales of a substantial number of priority common shares or
Class B Common Shares, or the perception that such sales could occur, could
adversely affect prevailing market prices of the priority common shares. As of
December 1, 2001, there are [5,094,851] outstanding operating partnership units.
These units currently are convertible into Class B Common Shares. Upon the
redemption of operating partnership units, the Class B Common Shares or priority
common shares received therefore may be sold in the public market pursuant to
shelf registration statements that we are obligated to file on behalf of the
limited partners of our operating partnership, or pursuant to any available
exemptions from registration.
WE ARE THE GENERAL PARTNER OF OUR OPERATING PARTNERSHIP AND MAY BECOME
LIABLE FOR THE DEBTS AND OTHER OBLIGATIONS OF THIS PARTNERSHIP BEYOND THE
AMOUNT OF OUR INVESTMENT.
We are the general partner of our operating partnership, Hersha Hospitality
Limited Partnership, and own approximately a 31% interest. As a general
partner, we are liable for the partnership's debts and other obligations. If
this partnership is unable to pay its debts and other obligations, as general
partner, we will be liable for such debts and other obligations beyond the
amount of our investment in this partnership, including unforeseen contingent
liabilities.
OUR BOARD OF TRUSTEES MAY ISSUE ADDITIONAL SHARES THAT MAY CAUSE DILUTION.
Our Declaration of Trust authorizes the Board of Trustees, without
shareholder approval, to:
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(i) amend the Declaration of Trust to increase or decrease the aggregate
number of shares of beneficial interest or the number of shares of beneficial
interest of any class that we have the authority to issue,
(ii) cause us to issue additional authorized but unissued priority common
shares, Class B common shares or preferred shares and
(iii) classify or reclassify any unissued common or preferred shares and to
set the preferences, rights and other terms of such classified or reclassified
shares, including the issuance of additional priority common shares or preferred
shares that have preference rights over the priority common shares with respect
to dividends, liquidation, voting and other matters.
Future equity offerings may cause the purchasers of the priority common
shares sold in this offering to experience further dilution.
OUR BOARD OF TRUSTEES MAY ISSUE PREFERRED SHARES WITH TERMS THAT MAY
DISCOURAGE A THIRD PARTY FROM ACQUIRING US.
Our Board of Trustees can establish one or more series of preferred shares
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control of the us that might involve a premium price
for the priority common shares or otherwise not be in the best interest of
holders of priority common shares.
TAX RISKS
IF WE FAIL TO QUALIFY AS A REIT, OUR DIVIDENDS WILL NOT BE DEDUCTIBLE TO
US, AND OUR INCOME WILL BE SUBJECT TO TAXATION.
We have and intend to continue to operate so as to qualify as a REIT for
federal income tax purposes. Our continued qualification as a REIT will depend
on our continuing ability to meet various requirements concerning, among other
things, the ownership of our outstanding shares of beneficial interest, the
nature of our assets, the sources of our income, and the amount of our
distributions to our shareholders. If we were to fail to qualify as a REIT in
any taxable year, we would not be allowed a deduction for distributions to our
shareholders in computing our taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates. Unless entitled to relief under certain Code
provisions, we also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost. As a
result, amounts available for distribution to shareholders would be reduced for
each of the years involved. Although we currently intend to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the trustees, with the consent of
two-thirds of the shareholders, to revoke the REIT election.
FAILURE TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT US TO TAX.
In order to qualify as a REIT, each year we must distribute to our
shareholders at least 90% (95% for taxable years before 2001) of our taxable
income, other than any net capital gain. To the extent that we satisfy the
distribution requirement, but distribute less than 100% of our taxable income,
we will be subject to federal corporate income tax on our undistributed income.
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In addition, we will incur a 4% nondeductible excise tax on the amount, if any,
by which our distributions in any year are less than the sum of:
- 85% of our ordinary income for that year;
- 95% of our capital gain net income for that year; and
- 100% of our undistributed taxable income from prior years.
We have paid out, and intend to continue to pay out, our income to our
shareholders in a manner intended to satisfy the distribution requirement and to
avoid corporate income tax and the 4% excise tax. Differences in timing between
the recognition of income and the related cash receipts or the effect of
required debt amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% tax in a particular
year. In the past we have borrowed, and in the future we may borrow, to pay
distributions to our shareholders and the limited partners of our operating
partnership. Such borrowings subject us to risks from borrowing as described
herein.
HOTEL INDUSTRY RISKS
THE VALUE OF OUR HOTELS DEPENDS ON CONDITIONS BEYOND OUR CONTROL.
Our hotels are subject to varying degrees of risk generally incident to the
ownership of hotels. The underlying value of our hotels, our income and ability
to make distributions to our shareholders are dependent upon the ability of our
lessees to operate the hotels in a manner sufficient to maintain or increase
revenues in excess of operating expenses to enable our lessees to make rent
payments. Hotel revenues may be adversely affected by adverse changes in
national economic conditions, adverse changes in local market conditions due to
changes in general or local economic conditions and neighborhood
characteristics, competition from other hotels, changes in interest rates and in
the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of terrorism, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured losses), acts of war, adverse changes in zoning laws, and
other factors that are beyond our control. In particular, general and local
economic conditions may be adversely affected by the recent terrorist incidents
in New York and Washington, D.C. Our management is unable to determine the
long-term impact, if any, of these incidents or of any acts war or terrorism in
the United States or worldwide, on the U.S. economy, on us or our hotels or on
the market price of our priority common shares.
OUR HOTELS ARE SUBJECT TO GENERAL HOTEL INDUSTRY OPERATING RISKS, WHICH MAY
IMPACT LESSEES' ABILITY TO MAKE RENT PAYMENTS AND ON OUR ABILITY TO MAKE
DISTRIBUTIONS TO SHAREHOLDERS.
Our hotels are subject to all operating risks common to the hotel industry.
The hotel industry has experienced volatility in the past, as have our hotels,
and there can be no assurance that such volatility will not occur in the future.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry that could adversely affect hotel revenues;
increases in operating costs due to inflation and other factors, which may not
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be offset by increased room rates; reduction in business and commercial travel
and tourism; strikes and other labor disturbances of hotel employees; increases
in energy costs and other expenses of travel; adverse effects of general and
local economic conditions; and adverse political conditions. These factors could
reduce revenues of the hotels and adversely affect the lessees' ability to make
rent payments, and therefore, our ability to make distributions to our
shareholders.
COMPETITION FOR GUESTS IS HIGHLY COMPETITIVE.
The hotel industry is highly competitive. Our hotels compete with other
existing and new hotels in their geographic markets. Many of our competitors
have substantially greater marketing and financial resources than we do. If
their marketing strategies are effective, our lessees may be unable to make rent
payments and we may be unable to make distributions to our shareholders.
OUR INVESTMENTS ARE CONCENTRATED IN A SINGLE INDUSTRY.
Our current business strategy is to own and acquire hotels primarily in the
mid-scale segment of the hotel industry. We are subject to risks inherent in
concentrating investments in a single industry and in a specific market segment
within that industry. The adverse effect on rent under the percentage leases and
amounts available for distribution to shareholders resulting from a downturn in
the hotel industry in general or the mid-scale segment in particular could be
more pronounced than if we had diversified our investments outside of the hotel
industry or in additional hotel market segments.
THE HOTEL INDUSTRY IS SEASONAL IN NATURE.
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
Our hotels' operations historically reflect this trend. We believe that we will
be able to make distributions necessary to maintain REIT status through cash
flow from operations; but if we are unable to do so, we may not be able to make
the necessary distributions or we may have to generate cash by a sale of assets,
increasing indebtedness or sales of securities to make the distributions.
RISKS OF OPERATING HOTELS UNDER FRANCHISE LICENSES, WHICH MAY BE TERMINATED
OR NOT RENEWED, MAY IMPACT OUR LESSEES' ABILITY TO MAKE RENT PAYMENTS AND
OUR ABILITY TO MAKE DISTRIBUTIONS TO SHAREHOLDERS.
The continuation of the franchise licenses is subject to specified
operating standards and other terms and conditions. All of the franchisors of
our hotels periodically inspect our hotels to confirm adherence to their
operating standards. The failure of our partnership or our lessees to maintain
such standards or to adhere to such other terms and conditions could result in
the loss or cancellation of the applicable franchise license. It is possible
that a franchisor could condition the continuation of a franchise license on the
completion of capital improvements that the trustees determine are too expensive
or otherwise not economically feasible in light of general economic conditions,
the operating results or prospects of the affected hotel. In that event, the
trustees may elect to allow the franchise license to lapse or be terminated.
There can be no assurance that a franchisor will renew a franchise license
at each option period. If a franchisor terminates a franchise license, we, our
partnership and our lessees may be unable to obtain a suitable replacement
franchise, or to successfully operate the hotel independent of a franchise
license. The loss of a franchise license could have a material adverse effect
upon the operations or the underlying value of the related hotel because of the
loss of associated name recognition, marketing support and centralized
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reservation systems provided by the franchisor. Although the percentage leases
require our lessees to maintain the franchise licenses for each hotel, our
lessees' loss of a franchise license for one or more of the hotels could have a
material adverse effect on our partnership's revenues and our amounts available
for distribution to shareholders.
OPERATING COSTS AND CAPITAL EXPENDITURES FOR HOTEL RENOVATION MAY BE
GREATER THAN FORECASTED AND MAY ADVERSELY IMPACT RENT PAYMENTS BY OUR
LESSEES' AND OUR ABILITY TO MAKE DISTRIBUTIONS TO SHAREHOLDERS.
Hotels generally have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
of furniture, fixtures and equipment. Under the terms of the leases, we are
obligated to pay the cost of expenditures for items that are classified as
capital items under generally accepted accounting principles that are necessary
for the continued operation of our hotels. If these expenses exceed our
estimate, the additional cost could have an adverse effect on amounts available
for distribution to shareholders. In addition, we may acquire hotels in the
future that require significant renovation. Renovation of hotels involves
certain risks, including the possibility of environmental problems, construction
cost overruns and delays, uncertainties as to market demand or deterioration in
market demand after commencement of renovation and the emergence of
unanticipated competition from hotels.
THE MARKET VALUE OF OUR PRIORITY COMMON SHARES COULD DECREASE BASED ON OUR
PERFORMANCE AND MARKET PERCEPTION AND CONDITIONS.
The market value of our priority common shares may be based primarily upon
the market's perception of our growth potential and current and future cash
dividends, and may be secondarily based upon the real estate market value of our
underlying assets. The market price of our priority common shares is influenced
by the dividend on our priority common shares relative to market interest rates.
Rising interest rates may lead potential buyers of our priority common shares to
expect a higher dividend rate, which would adversely affect the market price of
our priority common shares. In addition, rising interest rates would result in
increased interest expense on variable rate debt, thereby adversely affecting
cash flow and our ability to service our indebtedness and pay dividends.
REAL ESTATE INVESTMENT RISKS
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD SIGNIFICANTLY IMPEDE OUR
ABILITY TO RESPOND TO ADVERSE CHANGES IN THE PERFORMANCE OF OUR PROPERTIES
AND HARM OUR FINANCIAL CONDITION.
Real estate investments are relatively illiquid. Our ability to vary our
portfolio in response to changes in economic and other conditions will be
limited. No assurances can be given that the fair market value of any of our
hotels will not decrease in the future.
IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR THAT ARE IN EXCESS
OF OUR INSURANCE COVERAGE LIMITS, WE COULD LOSE INVESTMENT CAPITAL AND
ANTICIPATED PROFITS.
Each lease specifies comprehensive insurance to be maintained on each of
the our hotels, including liability and fire and extended coverage in amounts
sufficient to permit the replacement of the hotel in the event of a total loss,
subject to applicable deductibles. Leases for hotels subsequently acquired by us
will contain similar provisions. However, there are certain types of losses,
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generally of a catastrophic nature, such as earthquakes, floods, hurricanes and
acts of terrorism, that may be uninsurable or not economically insurable.
Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it impracticable to use
insurance proceeds to replace the applicable hotel after such applicable hotel
has been damaged or destroyed. Under such circumstances, the insurance proceeds
received by us might not be adequate to restore our economic position with
respect to the applicable hotel. If any of these or similar events occur, it may
reduce the return from the attached property and the value of our investment.
REITS ARE SUBJECT TO PROPERTY TAXES.
Each hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which we invest may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. If property taxes increase, our ability to
make expected distributions to our shareholders could be adversely affected.
ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT OUR RESULTS.
Operating costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of future legislation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
complying with environmental laws could materially adversely affect amounts
available for distribution to shareholders. Phase I environmental assessments
have been obtained on all of our hotels. The Phase I environmental assessment
reports have not revealed any environmental contamination that we believe would
have a material adverse effect on our business, assets, results of operations or
liquidity, nor are we aware of any such liability. Nevertheless, it is possible
that these reports do not reveal all environmental liabilities or that there are
material environmental liabilities of which we are unaware.
COST ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS.
Under the Americans with Disabilities Act of 1993 (ADA), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While we believe that our hotels are
substantially in compliance with these requirements, a determination that we are
not in compliance with the ADA could result in imposition of fines or an award
of damages to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels, including changes to building codes and fire and life-safety codes, may
occur. If we were required to make substantial modifications at the hotels to
comply with the ADA or other changes in governmental rules and regulations, our
ability to make expected distributions to our shareholders could be adversely
affected.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HERSHA HOSPITALITY TRUST
Date: December 7, 2001 By: Hasu P. Shah
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Hasu P. Shah
Chief Executive Officer
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