SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-14765
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 251811499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
148 SHERATON DRIVE, BOX A
NEW CUMBERLAND, PENNSYLVANIA 17070
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (717) 770-2405
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 31, 2004, the number of outstanding Priority Class A Common
Shares of Beneficial Interest outstanding was 13,571,665.
HERSHA HOSPITALITY TRUST
TABLE OF CONTENTS FOR FORM 10-Q REPORT
ITEM NO. PAGE
- -------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HERSHA HOSPITALITY TRUST
Balance Sheets as of March 31, 2004 [Unaudited]
and December 31, 2003 (Restated). . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003 [Unaudited] . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 [Unaudited] . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 5
HERSHA HOSPITALITY MANAGEMENT, L.P.
Balance Sheets as of March 31, 2004 [Unaudited] and
December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Statements of Operations for the three months ended
March 31, 2004 and 2003 [Unaudited] . . . . . . . . . . . . . . . . . . 23
Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 [Unaudited] . . . . . . . . . . . . . . . . . . 24
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . 25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . 37
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . 38
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . 38
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 38
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 38
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
==========================================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
==========================================================================================================
UNAUDITED RESTATED
MARCH 31, DECEMBER 31,
2004 2003
----------- --------------
ASSETS:
Cash and cash equivalents $ 8,469 $ 40,707
Investment in Hotel Properties, net
of Accumulated Depreciation 153,792 121,076
Notes Receivable - Related Party 15,000 15,000
Notes Receivable 3,200 200
Escrow Deposits 2,057 2,160
Accounts Receivable 1,509 223
Lease Payments Receivable - Related Party - 2,590
Intangibles, net of Accumulated Amortization of $1,142 and $893 1,683 1,322
Due from Related Party 8,164 5,768
Investment in Joint Ventures 6,984 6,576
Other Assets 1,715 946
----------- --------------
TOTAL ASSETS $ 202,573 $ 196,568
=========== ==============
LIABILITIES AND SHAREHOLDERSEQUITY:
Mortgages Payable $ 78,875 $ 70,837
Notes Payable 1,000 1,000
Line of Credit 1,230 -
Capital Lease Payable 500 -
Common Partnership Unit Redemption Payable - 8,951
Advance Deposits 130 -
Deferred Income 96 -
Dividends and Distributions Payable 3,454 3,407
Due to Related Party 4,298 419
Accounts Payable and Accrued Expenses 4,607 1,523
----------- --------------
TOTAL LIABILITIES 94,190 86,137
----------- --------------
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST:
Series A Preferred Units 17,080 17,080
Common Units 15,773 21,891
Joint Venture Interest in Logan Hospitality 2,338 -
Minority Interest - HHMLP (2,648) -
----------- --------------
TOTAL MINORITY INTEREST 32,543 38,971
----------- --------------
SHAREHOLDERSEQUITY:
Preferred Shares - Series A, $.01 Par Value, 350,000 Shares Authorized,
None Issued and Outstanding - -
Common Shares - Priority Class A, $.01 Par Value, 50,000,000 Shares 31, 2004
Authorized, 13,571,665 and 12,355,075 Shares Issued and Outstanding at March
and December 31, 2003, Respectively (Aggregate Liquidation Preference $-0-
and $74,130, respectively) 136 124
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized,
None Issued and Outstanding - -
Additional Paid-in Capital 84,133 76,217
Additional Paid-in Capital - Stock Options - 279
Distributions in Excess of Net Earnings (8,429) (5,160)
----------- --------------
TOTAL SHAREHOLDERS' EQUITY 75,840 71,460
----------- --------------
TOTAL LIABILITIES AND SHAREHOLDERSEQUITY $ 202,573 $ 196,568
=========== ==============
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
=======================================================================================
MARCH 31, MARCH 31,
2004 2003
----------- -----------
REVENUE:
Percentage Lease Revenues - HHMLP $ 1,884 $ 2,534
Percentage Lease Revenues - Other - 700
Hotel Operating Revenues 5,470 -
Interest 74 -
Interest - Secured Loans Related Party 353 25
Interest - Secured Loans 39 -
Other Revenue 94 19
----------- -----------
TOTAL REVENUE 7,914 3,278
----------- -----------
EXPENSES:
Interest expense 1,465 1,268
Hotel Operating Expenses 4,185 -
Land Lease 129 -
Real Estate and Personal Property Taxes and Insurance 574 265
General and Administrative 499 240
Depreciation and Amortization 1,602 1,087
----------- -----------
TOTAL EXPENSES 8,454 2,860
----------- -----------
LOSS FROM UNCONSOLIDATED JOINT VENTURE INVESTMENTS (19) -
----------- -----------
(LOSS) INCOME BEFORE DISTRIBUTION TO PREFERRED UNITHOLDERS,
AND MINORITY INTEREST (559) 418
DISTRIBUTIONS TO PREFERRED UNITHOLDERS (499) -
LOSS (INCOME) ALLOCATED TO MINORITY INTERESTS 229 (114)
----------- -----------
NET (LOSS) INCOME (829) 304
=========== ===========
(LOSS) EARNINGS PER SHARE DATA:
- ------------------------------
Basic (Loss) Earnings Per Common Share $ (0.07) $ 0.12
=========== ===========
Diluted (Loss) Earnings Per Common Share $ (0.07) $ 0.05
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
==============================================================================
MARCH 31, MARCH 31,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net (Loss) Income Allocated to Common Shareholders $ (829) $ 304
Adjustments to Reconcile Net (Loss) Income to
Net Cash Provided by Operating Activities:
Depreciation 1,564 1,062
Amortization 38 25
(Loss) Income Allocated to Minority Interest (229) 114
Loss from Investment in Joint Ventures (19) -
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (938) -
Escrow and Lease Deposits 103 (247)
Lease Payments Receivable - Related Party 706 28
Other Assets (644) 19
Due from Related Party (735) (1,045)
Increase (Decrease):
Advance Deposits 130 -
Deferred Income 96 -
Due to Related Party 669 3
Accounts Payable and Accrued Expenses 1,935 (180)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,847 83
----------- -----------
INVESTING ACTIVITIES:
Purchase of Hotel Property Assets (19,544) (295)
Investment in Notes Receivable (3,000) -
Purchase of Intangible Assets (65) -
Issuance costs of Joint Venture Interests (321) -
Purchase of Joint Venture Interests (3,000) -
Consolidation of Variable Interest Entities 734 -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (25,196) (295)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from Borrowings Under Line of Credit 2,652 2,213
Repayment of Borrowings Under Line of Credit (1,422) (815)
Principal Repayment of Mortgages Payable (273) (306)
Proceeds from Mortgages Payable - 427
Redemption of Common Partnership Units (8,951) -
Cash received from Stock Sales 2,013 -
Dividends Paid on Common Shares (2,224) (458)
Distributions Paid on Limited Partnership Units (684) (918)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (8,889) 143
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,238) (69)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 40,707 140
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 8,469 $ 71
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
4
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hersha Hospitality Trust (the "Company") was formed in May 1998 as a
self-administered, Maryland real estate investment trust ("REIT") for
Federal income tax purposes.
The Company owns a controlling general partnership interest in Hersha
Hospitality Limited Partnership (the "Partnership"), which owns a 99%
limited partnership interest in various subsidiary partnerships. Hersha
Hospitality, LLC ("HHLLC"), a Virginia limited liability company, owns a 1%
general partnership interest in the subsidiary partnerships and the
Partnership is the sole member of HHLLC.
On January 16, 2003, the Partnership formed a wholly owned taxable REIT
subsidiary, 44 New England Management Company ("44 New England" or "TRS
Lessee"), to lease certain of the Company's hotels.
On April 21, 2003, May 21, 2003 and August 29, 2003, CNL Hospitality
Partnership, LP ("CNL") purchased $10,000, $5,000 and $4,027, respectively,
of convertible preferred units of limited partnership interest in the
Partnership (the "Series A Preferred Units"). Net of offering expenses, the
Partnership received proceeds of $17,080. On April 16, 2004, CNL exercised
their conversion right and redeemed all of their convertible preferred
units into 2,816,460 shares of class A common shares. CNL sold 2,500,000 of
these shares in a public offering as of April 23, 2004.
On October 21, 2003, we completed a public offering of 9,775,000 class A
common shares at $8.50 per share. Proceeds to the Company, net of
underwriting discounts and commissions, structuring fees and expenses, were
approximately $77,262. Immediately upon closing of the offering, the
Company contributed all of the net proceeds to the Partnership. Of the net
offering proceeds, approximately $10,400 was used to fund limited partner
redemptions and approximately $24,000 was used to repay indebtedness. The
remaining net proceeds were used principally to fund acquisitions and for
general corporate purposes.
As of March 31, 2004, the Company, through the Partnership and subsidiary
partnerships, owned 22 limited and full service hotels and a joint venture
interest in three properties. The Company leased eight of the hotel
facilities to Hersha Hospitality Management, LP ("HHMLP"), a Pennsylvania
limited partnership. In addition, 14 of the hotel facilities were leased to
a TRS, 44 New England. The Hampton Inn - Chelsea, owned in a joint venture
with CNL, is leased to Hersha/CNL TRS Inc., a TRS wholly-owned by that
joint venture. The Hilton Garden Inn - Glastonbury, owned in a joint
venture, is leased to Hersha PRA TRS, Inc., a TRS wholly-owned by that
joint venture. The Sheraton Four Points - Revere, owned in a joint venture,
is leased to Revere Hotel Group, LLC, a TRS owned by that joint venture.
HHMLP serves as the manager for all of the joint venture assets. HHMLP is
owned in part by three of the Company's executive officers, two of its
trustees and other third party investors. HHMLP, 44 New England and the
joint venture TRS Lessees operate and/or lease the hotel properties
pursuant to separate percentage lease agreements (the "Percentage Leases")
that provide for initial fixed rents or percentage rents based on the
revenues of the hotels. The hotels are located principally in the
Mid-Atlantic region of the United States.
As of March 31, 2004 we own a 70.6% interest in the Partnership.
5
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation and Presentation
--------------------------------------------
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include all of
our accounts as well as accounts of the Partnership, subsidiary
Partnerships and our wholly owned TRS Lessee. All significant inter-company
amounts have been eliminated.
Consolidated properties are either wholly owned or owned less than 100% by
the Partnership and are controlled by the Company as general partner of the
Partnership. Properties owned in joint ventures are also consolidated if
the determination is made that we maintain control of the asset through our
voting interest in the entity. Control is demonstrated by the ability of
the general partner to manage day-to-day operations, refinance debt and
sell the assets of the partnerships without the consent of the limited
partners and the inability of the limited partners to replace the general
partner. The minority interest balance in the accompanying balance sheets
represents the limited partners' interest in the net assets of the
Partnership and the joint venture partner's ownership interests in the
consolidated assets. Net operating results of the Partnership are allocated
after preferred distributions based on their respective partners' ownership
interests. Our ownership interest in the Partnership as of March 31, 2004
and 2003 was 70.6% and 33.6%, respectively.
The Financial Accounting Standards Board issued FASB Interpretation No. 46,
("FIN 46") "Consolidation of Variable Interest Entities (VIE's), an
interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in
January 2003 and a further interpretation of FIN 46 in December 2003 ("FIN
46-R" and FIN 46, collectively "FIN 46"). FIN 46 addresses how a business
enterprise should evaluate whether it has a controlling financial interest
in any variable interest entity ("VIE") through means other than voting
rights, and accordingly, should include the VIE in its consolidated
financial statements. We have adopted FIN 46 effective as of March 31,
2004.
In accordance with FIN 46, we have evaluated our investments and
contractual relationships with HHMLP, Logan Hospitality Associates, LLC,
HT/CNL Metro Hotels, LP, PRA Glastonbury, LLC, and Metro Ten Hotels, LLC to
determine whether these entities meet the guidelines of consolidation per
FIN 46. Our examination consisted of reviewing the sufficiency of equity at
risk, controlling financial interests, voting rights, obligation to absorb
expected losses and expected gains, including residual returns.
Based upon our review, HHMLP is considered a variable interest entity of
which we have been determined to be the primary beneficiary. Therefore we
have consolidated the financial statements of HHMLP with ours effective as
of March 31, 2004. The minority interest in HHMLP represents 100% of the
deficit since we have no ownership interest but consolidate under FIN 46.
The partners in HHMLP have committed to funding the deficits. Because the
consolidation was not effective until March 31, 2004, it does not impact
our Statement of Operations or Statement of Cash Flows included herein. In
addition, we own a 55% joint venture interest in Logan Hospitality
Associates, LLC, the owner of the Sheraton Four Points - Revere. We have
determined that we have a majority voting interest in this joint venture
and that it qualifies for consolidation.
All other investments in partnerships and joint ventures represent
noncontrolling ownership interests in properties. These investments are
accounted for using the equity method of accounting. These investments are
recorded initially at cost and subsequently adjusted for net equity in
income (loss), which is allocated in accordance with the provisions of the
applicable partnership or joint venture agreements.
We will continue to evaluate each of our investments and contractual
relationships to determine if consolidation is required based upon the
provisions of FIN 46.
Recent Developments
-------------------
On January 14, 2004, we acquired the 96 room Holiday Inn Express, Hartford,
Connecticut for approximately $3.5 million and assumed the ground lease for
the underlying property.
6
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
On February 23, 2004, we acquired a 55% joint venture interest in the 180
room Four Points by Sheraton Boston/Logan International Airport for
approximately $3.0 million.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On March 26, 2004 we acquired the 125 room Residence Inn, Framingham,
Massachusetts for approximately $15.6 million plus settlement costs of
$350.
All of these hotels have been or will be leased to a TRS and managed by
HHMLP.
During March of 2004, we provided a first mortgage financing commitment of
$10 million for the newly constructed Hilton Garden Inn - JFK Airport, New
York to Metro Ten Hotels, LLC, a third party owner of the asset. We have
also acquired an option to purchase a 50% interest in this asset at fair
value. As of March 31, 2004, $3,000 of the mortgage has been drawn and is
recorded in our Notes Receivable.
On January 26, 2004, the HHMLP leases for the following hotels expired, and
each of these hotels was leased to 44 New England (our TRS) on the same
date:
Comfort Inn, Harrisburg, PA
Holiday Inn, Harrisburg, PA
Holiday Inn Express, Hershey, PA
Holiday Inn Express, New Columbia, PA
Hampton Inn, Selinsgrove, PA
Hampton Inn, Carlisle, PA
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Investment in Hotel Properties
------------------------------
Investment in hotel properties is stated at cost. Depreciation for
financial reporting purposes is principally based upon the straight-line
method.
The estimated lives used to depreciate the hotel properties are as follows:
Building and Improvements 15 to 40 Years
Furniture and Fixtures 5 to 7 Years
Revenue Recognition
-------------------
We directly recognize revenue and expense for all hotels leased through 44
New England as "Hotel Operating Revenue" and "Hotel Operating Expense" when
earned and incurred.
Percentage lease income is recognized when hotel operating or other
revenues exceed the minimum thresholds required for percentage rent under
terms of the lease agreements. Fixed lease income is recognized under fixed
rent agreements ratably over the lease term. All leases between us and the
lessees are operating leases.
Earnings Per Common Share
-------------------------
We compute earnings per share in accordance with Statement of Financial
Accounting Standards ["SFAS"] No. 128, "Earnings Per Share."
7
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Minority Interest
-----------------
Minority Interest in the Partnership represents the limited partner's
proportionate share of the equity of the Partnership. Income (Loss) is
allocated to minority interest in accordance with the weighted average
percentage ownership of the partnership during the period. At the end of
each reporting period the appropriate adjustments to the income (loss) are
made based upon the weighted average percentage ownership of the
partnership during the period.
We also maintain minority interests for the 45% equity interest in Logan
Hospitality Associates, LLC ("Logan") owned by a third party and HHMLPWe
purchased a 55% joint venture in Logan during March 2004 and have
consolidated the operations of this entity. We allocate this joint
venture's income (loss) to this minority interest account based upon the
provisions of the agreement. The minority interest in HHMLP represents 100%
of the deficit since we have no ownership interest but consolidate under
FIN 46. The partners in HHMLP have committed to funding the deficits.
Impairment of Long Lived Assets
-------------------------------
We review the carrying value of each hotel property in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144 to determine
if circumstances exist indicating an impairment in the carrying value of
the investment in the hotel property or if depreciation periods should be
modified. Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. We perform undiscounted cash flow
analyses to determine if impairment exists. If impairment is determined to
exist, any related impairment loss is calculated based on fair value. Hotel
properties held for sale are presented at the lower of carrying amount or
fair value less cost to sell.
Income Taxes
------------
The Company qualifies and intends to continue to qualify as a REIT under
applicable provisions of the Internal Revenue Code, as amended. In general,
under such provisions, a trust which has made the required election and, in
the taxable year, meets certain requirements and distributes to its
shareholders at least 90% of its REIT taxable income will not be subject to
Federal income tax to the extent of the income which it distributes.
Earnings and profits, which determine the taxability of dividends to
shareholders, differ from net income reported for financial reporting
purposes due primarily to differences in depreciation of hotel properties
for Federal income tax purposes.
Deferred income taxes relate primarily to the TRS Lessee and are accounted
for using the asset and liability method. Under this method, deferred
income taxes are recognized for temporary differences between the financial
reporting bases of assets and liabilities of the TRS Lessee and their
respective tax bases and for their operating loss and tax credit carry
forwards based on enacted tax rates expected to be in effect when such
amounts are realized or settled. However, deferred tax assets are
recognized only to the extent that it is more likely than not that they
will be realized based on consideration of available evidence, including
tax planning strategies and other factors.
Under the REIT Modernization Act ("RMA"), which became effective January 1,
2001, the Company is permitted to lease hotels to a wholly owned taxable
REIT subsidiary ("TRS") and may continue to qualify as a REIT provided the
TRS enters into management agreements with an "eligible independent
contractor" who will manage the hotels leased by the TRS. The Company
formed the TRS Lessee in 2003. The TRS Lessee currently leases 14
properties from the Partnership. The TRS Lessee is subject to taxation as a
C-Corporation. The TRS Lessee had an operating loss for financial reporting
purposes for the period ended March 31, 2004. Although the TRS Lessee is
expected to operate at a profit for Federal income tax purposes in future
periods, the value of the deferred tax asset is not able to be quantified
with certainty. Therefore, no deferred tax assets
8
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
have been recorded as we have not concluded that it is more likely than not
that these deferred tax assets will be realizable.
9
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
-----------------
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
NOTE 2 - INVESTMENT IN HOTEL PROPERTIES
Hotel Properties consist of the following at March 31, 2004 and December
31, 2003
3/31/2004 12/31/2003
----------- ------------
Land $ 13,105 $ 11,710
Buildings and Improvements 135,470 105,615
Furniture, Fixtures and Equipment 26,660 21,797
----------- ------------
175,235 139,122
Less Accumulated Depreciation (21,924) (18,046)
----------- ------------
$ 153,311 $ 121,076
=========== ============
In addition, $481 of Property, Plant and Equipment, for HHMLP was
reconsolidated within our financial statements as of March 31, 2004.
NOTE 3 - NOTES RECEIVABLE
Joint Venture
-------------
On November 11, 2003 we provided financing to HT/CNL Metro Hotels, our
joint venture with CNL, in the amount of $15,000. The terms of the note
call for interest only payments at 5.0% per annum through maturity on
November 10, 2004 when the outstanding balance and any accrued interest are
due. The note is secured by a first priority lien on HT/CNL's sole hotel
asset, The Hampton Inn - Chelsea, New York. For the three months ended
March 31, 2004, we earned interest income of $182, which is included in
"Interest - Secured Loans Related Party" on the statement of operations.
During March of 2004 we provided a first mortgage financing commitment of
$10 million for the newly constructed Hilton Garden Inn - JFK Airport, New
York to Metro Ten Hotels, LLC, a third party owner of the asset. We have
also acquired an option to purchase a 50% interest in this venture at fair
value. As of March 31, 2004, $3,000 of the mortgage has been drawn and is
recorded in our Notes Receivable balance. For the three months ended March
31, 2004, we earned interest income of $39, which is included in "Interest
- Secured Loans" on the statement of operations.
Seller Financing
----------------
On September 26, 2000, in connection with the sale of the Clarion Suites,
Philadelphia, PA, we provided financing in the amount of $200. The terms of
the note call for accrued interest at 10% per annum through maturity on
December 31, 2003, when the outstanding balance and accrued interest were
due. The note is unsecured. During 2003, we extended the due date of the
note through July 31, 2004. We have not recorded interest income on the
note since inception due to its contingent nature.
10
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
On August 29, 2003, HT/CNL Metro Hotels, LP purchased the Hampton Inn,
Manhattan (Chelsea), New York. We own a one third equity interest in this
joint venture partnership while CNL Hospitality Partners LP owns the
remaining equity interests. HT/CNL Metro Hotels purchased this asset for
$28,000 plus settlement costs of approximately $480 and leased it to Hersha
CNL TRS, Inc., a taxable REIT subsidiary wholly owned by HT/CNL Metro
Hotels. In conjunction with this transaction, HT/CNL Metro Hotels executed
mortgage indebtedness of approximately $15,400 payable to the Partnership
and paid cash of approximately $14,080.
On November 13, 2003, we purchased a 40% joint venture interest in PRA
Glastonbury, LLC. The only asset owned by PRA Glastonbury LLC is the Hilton
Garden Inn, Glastonbury, CT. We purchased our joint venture interest in
this asset for $2,680 including settlement costs of approximately $250 and
leased it to Hersha PRA TRS, Inc., a taxable REIT subsidiary wholly owned
by PRA Glastonbury, LLC. In conjunction with this transaction, PRA
Glastonbury, LLC assumed mortgage indebtedness of approximately $9,900.
As of March 31, 2004 and December 31, 2003 our investment in unconsolidated
joint ventures consists of the following:
Percent
Owned 3/31/2004 12/31/2003
-------- ---------- -----------
HT/CNL Metro Hotels, LP 33.33% $ 4,430 $ 4,098
PRA Glastonbury, LLC 40.00% 2,554 2,478
---------- -----------
$ 6,984 $ 6,576
========== ===========
The following table sets forth the total assets, liabilities, equity and
components of net income (loss), including Hersha's share, related to the
unconsolidated joint ventures discussed above as of March 31, 2004 and December
31, 2003. We did not have any interests in unconsolidated joint ventures for the
period ended March 31, 2003.
11
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
3/31/2004 12/31/2003
----------- -----------
Balance Sheet
Assets
Investment in hotel property, net $ 44,233 $ 44,459
Other assets 1,437 1,335
----------- -----------
Total assets $ 45,670 $ 45,794
=========== ===========
Liabilities and Equity
Mortgages and notes payable $ 26,051 $ 26,158
Other liabilities 926 941
Equity
Hersha Hospitality Trust 6,984 6,576
Other 11,709 12,119
----------- -----------
Total liabilities and equity $ 45,670 $ 45,794
=========== ===========
Three Months Ended
3/31/2004 3/31/2003
----------- -----------
Statement of Operations
Room revenue $ 2,139 $ -
Other revenue 169 -
Operating expenses (1,571) -
Interest expense (334) -
Depreciation, amortization and other (444) -
----------- -----------
Net income (loss) $ (41) $ -
=========== ===========
Equity Income (Loss) recognized during the quarter ended March 31, 2004
for our Equity Investments in Unconsolidated Joint Ventures:
HT/CNL Metro Hotels, LP $ 12
PRA Glastonbury, LLC (31)
-----------
(Loss) from Unconsolidated JV Investments $ (19)
-----------
12
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 5 - DEBT
Mortgages
---------
The total mortgages payable balance at March 31, 2004 and December 31, 2003
was $78,875 and $70,837, respectively, and consisted of mortgages with
fixed and variable interest rates ranging from 4.75% to 9.43%. The
maturities for the outstanding mortgages ranged from June 2006 to December
2012. Aggregate interest expense incurred under the mortgages payable
totaled $1,465, and $1,268 during the period ended March 31, 2004 and 2003,
respectively. The mortgages are secured by various hotel properties and
leasehold improvements with a combined net book value of $153,311 and
$121,076 as of March 31, 2004 and December 31, 2003, respectively.
Revolving Line of Credit
------------------------
The Company has a revolving line of credit from Sovereign Bank (the "Line
of Credit") in the maximum amount of $11,500. In April 2004, the Company
entered into an agreement with Sovereign Bank to increase this Line of
Credit to $35,000. Outstanding borrowings under the Line of Credit bear
interest at the bank's prime rate and the Line of Credit is collateralized
by the Holiday Inn Express and Suites, Harrisburg. The interest rate on
borrowings under the Line of Credit at March 31, 2004 and December 31, 2003
was 4.0%. The Line of Credit expires in December 2004. The outstanding
principal balance on the Line of Credit was $1,230 and $-0- at March 31,
2004 and December 31, 2003, respectively.
Note Payable
------------
The Company received seller financing of $1,000 from Inn America at
Aviation Plaza, L.L.C. (the "Inn America note") related to the purchase of
our Hampton Inn - Linden, NJ and Hilton Garden Inn - Edison, NJ. The
principal amount of this note is due on December 31, 2004 and there is no
interest expense related to this note.
Capital Lease Payable
---------------------
The Company assumed a $500 capital lease obligation as part of its
acquisition of the Holiday Inn Express - Hartford. The lease is secured by
furniture, fixtures and equipment and the hotel property and is amortized
over a six year period from the acquisition at a fixed rate of 7.75%.
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
We are the sole general partner in the Partnership, which is indirectly the
sole general partner of the subsidiary partnerships. In the opinion of
management, we do not anticipate any losses as a result of our obligations
as general partner.
Percentage Leases
-----------------
Eight of our hotels are leased to HHMLP pursuant to percentage leases. Each
percentage lease with HHMLP has an initial non-cancelable term of five
years. HHMLP has agreed not to exercise its option to extend the current
lease term with respect to any of the eight hotels it currently leases. The
percentage leases are subject to early termination upon the occurrence of
defaults thereunder and certain other events described therein. Pursuant to
the terms of the percentage leases, HHMLP is required to pay initial fixed
rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment
of certain specified operating expenses.
13
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
We have annual lease commitments from HHMLP through November 1, 2007.
Minimum annual rental revenue under these non-cancelable operating leases
is as follows:
December 31, 2004 $ 5,513
2005 4,889
2006 3,074
2007 623
-------
$14,099
=======
For the period ended March 31, 2004, we earned fixed rents of $1,222 and
earned percentage rents of $662. For the period ended March 31, 2003, we
earned fixed rents of $1,923 and earned percentage rents of $1,311.
The Company had previously entered into leases with Noble Investment Group
Ltd. ("Noble"), an independent third party management company, to lease and
manage four hotels in the metropolitan Atlanta market. Noble elected not to
renew these leases upon expiration of the initial terms. The leases for the
Hampton Inn Newman, GA and Hampton Inn Peachtree City, GA expired on April
20, 2003 and the leases for the Comfort Suites Duluth, GA and Holiday Inn
Express Duluth, GA expired on May 20, 2003.
On the respective lease termination dates, the Company leased the four
properties to 44 New England and engaged HHMLP to operate the hotels under
management contracts. Therefore, the consolidated financial statements as
of March 31, 2004 include the operating results of these four hotels under
the TRS structure, Previously, revenues on the consolidated financial
statements were derived primarily from lease payments which were made out
of the net operating income of the properties pursuant to the Percentage
Leases. Under the TRS structure, total revenues from the hotel properties
and the related operating expenses are also being reported in the
consolidated statements of operations.
Management Agreements
---------------------
Beginning in April 2003, 44 New England, our TRS, engaged HHMLP as the
property manager for hotels it leased from us pursuant to management
agreements. Each management agreement provides for a five year term and is
subject to early termination upon the occurrence of defaults and certain
other events described therein. As required under the REIT qualification
rules, HHMLP must qualify as an "eligible independent contractor" during
the term of the management agreements. Under the management agreements,
HHMLP generally pays the operating expenses of our hotels. All operating
expenses or other expenses incurred by HHMLP in performing its authorized
duties are reimbursed or borne by our TRS to the extent the operating
expenses or other expenses are incurred within the limits of the applicable
approved hotel operating budget. HHMLP is not obligated to advance any of
its own funds for operating expenses of a hotel or to incur any liability
in connection with operating a hotel.
As of March 31, 2004, HHMLP managed the fourteen hotels leased to our TRS
and consolidated in these financial statements. For its services, HHMLP
receives a base management fee, and if a hotel meets and exceeds certain
thresholds, an additional incentive management fee. The base management fee
for a hotel is due monthly and is equal to 3% of gross revenues associated
with each hotel managed for the related month. The incentive management
fee, if any, for a hotel is due annually in arrears on the sixtieth day
following the end of each fiscal year and is equal to an amount determined
by our TRS and HHMLP prior to the commencement of each fiscal year
beginning in 2004, generally based upon the financial performance of the
hotel. For the period ended March 31, 2004 and March 31, 2003, management
fees incurred totaled $150 and $0, respectively and are recorded in Hotel
Operating Expenses.
14
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Administrative Services Agreement
---------------------------------
We have executed an administrative services agreement with HHMLP to provide
accounting and securities reporting services for the Company. The terms of
the agreement provide for us to pay HHMLP an annual fee of $10 per property
(prorated from the time of acquisition) for each hotel in our portfolio.
For the period ending March 31, 2004 and 2003 $60 and $44, respectively,
and are included in General and Administrative expenses.
Franchise Agreements
--------------------
The hotel properties are operated under franchise agreements assumed by the
lessee that have 10 to 20 year lives but may be terminated by either the
franchisee or franchisor on certain anniversary dates specified in the
agreements. The agreements require annual payments for franchise royalties,
reservation, and advertising services, which are based upon percentages of
gross room revenue. These fees are paid by the lessees and charged to
expenses as incurred.
Acquisitions from Affiliates
----------------------------
We have acquired from affiliates of certain of our executive officers and
trustees, newly-developed or newly-renovated hotels that do not have an
operating history that would allow us to make purchase price decisions
based on historical performance. In buying these hotels, we have utilized,
a "re-pricing" methodology that, in effect, adjusts the initial purchase
price for the hotel, one or two years after we initially purchase the
hotel, based on the actual operating performance of the hotel during the
previous twelve months. All purchase price adjustments are approved by a
majority of our independent trustees.
The initial purchase price for each of these hotels was based upon
management's projections of the hotel's performance for one or two years
following our purchase. The leases for these hotels provide for fixed
initial rent for the one- or two-year adjustment period that provides us
with a 12% annual yield on the initial purchase price, net of certain
expenses. At the end of the one or two-year period, we calculate a value
for the hotel, based on the actual net income during the previous twelve
months, net of certain expenses, such that it would have yielded a 12%
return. We then apply the percentage rent formula to the hotel's historical
revenues for the previous twelve months on a pro forma basis. If the pro
forma percentage rent formula would not have yielded a pro forma annual
return to us of 11.5% to 12.5% based on this calculated value, this value
is adjusted either upward or downward to produce a pro forma return of
either 11.5% or 12.5%, as applicable. If this final purchase price is
higher than the initial purchase price, then the seller of the hotel will
receive consideration in an amount equal to the increase in price. If the
final purchase price is lower than the initial purchase price, then the
sellers of the hotel will return to us consideration in an amount equal to
the difference. Any purchase price adjustment will be made either in
operating partnership units or cash as determined by our Board of Trustees,
including the independent trustees. Any operating partnership units issued
by us or returned to us as a result of the purchase price adjustment
historically have been valued at $6.00 per unit. Any future adjustments
will be based upon a value per unit approved by our Board of Trustees,
including our independent trustees. The sellers are entitled to receive
quarterly distributions on the operating partnership units prior to the
units being returned to us in connection with a downward purchase price
adjustment.
15
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 6 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Five hotel acquisitions since January 1, 2001 -- the Doubletree, Jamaica,
New York (JFK Airport), the Mainstay Suites, Frederick, Maryland, the
Holiday Inn Express, Long Island City, New York, the Mainstay Suites and
Sleep Inn Hotel, King of Prussia, Pennsylvania -- are subject to future
re-pricing. We originally purchased these hotels with anticipated repricing
dates from December 31, 2002 to December 31, 2004. Due to the operating
environment, the ramp up and stabilization for these newly-built properties
is expected to take longer than initially projected. As a result, effective
January 1, 2003, we entered into an agreement with the sellers of these
five hotels to extend the repricing periods for these hotels. The revised
pricing dates range from June 1, 2006 to October 1, 2007. At the same time,
we amended the percentage leases with HHMLP for these hotels to extend the
initial fixed rent period to coincide with the extension period of the
repricing and to delay the transition to percentage rent. In addition, we
have the right to sell each of these properties back to the entities that
initially sold the hotels to us at the end of the applicable repricing
period if adequate stabilization has not occurred during the repricing
period for a price not less than the purchase price of the asset.
In the future, we do not intend to use any re-pricing methodology in
acquisitions from entities controlled by our officers and trustees.
We have entered into an option agreement with each of our officers and
trustees such that we obtain a first right of refusal to purchase any hotel
owned or developed in the future by these individuals or entities
controlled by them regardless of proximity to our hotels. This right of
first refusal would apply to each party until one year after such party
ceases to be an officer or trustee of our Company. Of the 23 hotel
properties purchased by us since our initial public offering, 13 were
acquired from affiliates, 12 of which were newly-constructed or
substantially renovated.
Hotel Supplies
--------------
For the period ended March 31, 2004 and 2003, we incurred $241 and $-0- for
hotel supplies from Hersha Hotel Supply, an unconsolidated related party,
which are included in Hotel Operating Expenses. Approximately $22 is
included in accounts payable at March 31, 2004. These expenses relate to
the hotels operated by the TRS and consolidated in these financial
statements.
Advances to/from Affiliates
---------------------------
We have approved the lending of up to $10,000 to entities in which our
executive officers and trustees own an interest to construct hotels and
related improvements on specific hotel projects at interest rates ranging
from 10.0% to 12.0%. As of March 31, 2004 and December 31, 2003 amounts due
from these entities totaled $5,700, respectively. Interest income from
these advances included in "Interest - Secured Loans Related Party," was
$171 and $25 for the periods ended March 31, 2004 and 2003, respectively.
The remainder of the balance of approximately $2,464 consists of management
fees and operating expenses due to HHMLP from other related parties of
HHMLP as well as interest income owed from related parties. Amounts due to
related parties as of March 31, 2004 and December 31, 2003 totaled $4,298
and $419, respectively. The majority of the due to related parties balance
consisted of monies owed to affiliates of HHMLP for general working capital
purposes. The b alance due at December 31, 2003 consists of $95 payable to
HHMLP for administrative and management fees and $324 payable to HHMLP for
FF&E reserves.
16
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of the income (numerator) and weighted
average shares (denominator) used in the calculation of basic earnings per
common share and diluted earnings per common share in accordance with SFAS
No. 128, Earnings Per Share:
Our earnings per share calculation presents only basic earnings per share
in cases where the inclusion of the Common Partnership Units and Series A
Preferred Units are deemed to be anti-dilutive to earnings per share.
2004 2003
------------ -----------
NUMERATOR:
(Loss) Income Before Distribution to Preferred Unitholders $ (559) $ 418
and Minority Interest
Distributions to Preferred Unitholders (499) -
Allocation of Loss (Income) to Minority Interest 229 (114)
------------ -----------
(Loss) Income Applicable to Common Shareholders (829) 304
------------ -----------
Numerator for Basic (Loss) Earnings Per Share - Income
available to Common Shareholders (829) 304
Effect of Dilutive Securities:
Minority Interest (229) 114
------------ -----------
Numerator for Diluted EPS - (Loss) Income Available to $ (1,058) $ 418
============ ===========
Common Shareholders - After Assumed Conversion
DENOMINATOR:
Denominator for basic (loss) earnings per share - weighted
average shares 12,716,456 2,577,785
Effect of Dilutive Securities:
Stock Options - -
Minority Interest - Common Partnership Units 3,515,693 5,099,722
------------ -----------
Dilutive Potential Common Shares 3,515,693 5,099,722
------------ -----------
Denominator for diluted (loss) earnings per share - weighted
average shares and assumed conversion 16,232,149 7,677,507
============ ===========
Basic (Loss) Earnings Per Share $ (0.07) $ 0.12
Diluted (Loss) Earnings Per Share $ (0.07) $ 0.05
17
NOTE 8 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING ACTIVITIES
Interest paid during the periods ended March 31, 2004 and 2003 totaled
$1,414 and $1,004, respectively.
Based upon our evaluation of HHMLP in the context of FIN 46, we have
consolidated the balance sheets and consolidated statement of cash flows of
HHMLP as of March 31, 2004. In conjunction with this consolidation, the
following assets and liabilities were assumed on our financial statements:
Current Assets $ 96
Building and Equipment, Net 481
Intangible Assets, Net 228
--------
Total Assets $ 805
Current Liabilities $ 4,186
--------
Total Liabilities $ 4,186
Minority Interest in HHMLP $(2,648)
On March 11, 2004, we acquired a 55% joint venture interest in Logan
Hospitality Associates, LLC, the owner of the Four Points Sheraton -
Revere, MA for $3,000. We own a controlling interest in the venture and we
have consolidated the operations of the hotel in our financial statements.
In conjunction with this consolidation, the following assets and
liabilities were assumed on our financial statements:
Current Assets $ 844
Land 70
Building and Equipment, Net 13,487
Intangible Assets, Net 103
--------
Total Assets $14,504
Current Liabilities $ 783
Mortgages Payable 8,312
--------
Total Liabilities $ 9,095
Minority Interest in Logan $ 2,338
We acquired the Holiday Inn Express - Hartford in January 2004. In
conjunction with the acquisition we assumed a $500 capital lease obligation
secured by the furniture, fixtures and equipment of this hotel.
18
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 8 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES (CONTINUED)
The following additional non-cash investing and financing activities
occurred during the periods ended March 31, 2004 and 2003:
MARCH 31, MARCH 31,
2004 2003
---------- ----------
Adjustment to minority interest as result of the redemption of
common LP Units $ 137 $ -0-
Common shares issued as part of the Dividend
Reinvestment Plan $ 6 $ 9
Dividends and distributions payable $ 3,454 $ 1,382
Redemption of common LP Units $ 5,498 $ -0-
Asset additions upon conversion of percentage leases to TRS leases $ 697 $ -0-
19
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which is effective for certain
transactions arising on or after June 30, 2003. SFAS No. 149 will have no
impact on the Company.
The FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which is
effective for interim financial periods beginning after June 15, 2003. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57,
and 107 and rescission of FASB Interpretation No. 34," was issued in
November 2002. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. FIN 45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the related
guarantee. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year end. The disclosure requirements in FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company has not made any guarantees of indebtedness to others.
The Financial Accounting Standards Board issued FASB Interpretation No. 46,
("FIN 46") "Consolidation of Variable Interest Entities (VIE's), an
interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in
January 2003 and a further interpretation of FIN 46 in December 2003 ("FIN
46-R" and FIN 46, collectively "FIN 46"). FIN 46 addresses how a business
enterprise should evaluate whether it has a controlling financial interest
in any variable interest entity ("VIE") through means other than voting
rights, and accordingly, should include the VIE in its consolidated
financial statements. We have adopted FIN 46 as of March 31, 2004. See
Notes 1 and 8.
In accordance with FIN 46, we have evaluated our investments and
contractual relationships with HHMLP, Logan Hospitality Associates, LLC,
HT/CNL Metro Hotels, LP, PRA Glastonbury, LLC, and Metro Ten Hotels, LLC to
determine whether these entities meet the guidelines of consolidation per
FIN 46. Our examination consisted of reviewing the sufficiency of equity at
risk, controlling financial interests, voting rights, obligation to absorb
expected losses and expected gains, including residual returns.
Based upon our review, HHMLP is considered a variable interest entity of
which we have been determined to be the primary beneficiary. Therefore we
have consolidated the financial statements of HHMLP with ours effective as
of March 31, 2004. Because the consolidation was not effective until March
31, 2004, it does not impact our Statement of Operations or Statement of
Cash Flows included herein. In addition, we own a 55% joint venture
interest in Logan Hospitality Associates, LLC, the owner of the Sheraton
Four Points - Revere. We have determined that we have a majority voting
interest in this joint venture and that it qualifies for consolidation.
All other investments in partnerships and joint ventures represent
noncontrolling ownership interests in properties. These investments are
accounted for using the equity method of accounting. These investments are
recorded initially at cost and subsequently adjusted for net equity in
income (loss), which is allocated in accordance with the provisions of the
applicable partnership or joint venture agreements.
We will continue to evaluate each of our investments and contractual
relationships to determine if consolidation is required based upon the
provisions of FIN 46.
20
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 10 - FINANCIAL STATEMENT RESTATEMENT
We have restated our consolidated balance sheet as of December 31, 2003 in
order to present the Minority Interest balances outside of Shareholders'
Equity. Previously, we had presented Minority Interest as a separate
component within Shareholders' Equity. The presentation below shows the
Consolidated Balance Sheet as presented and restated as of December 31,
2003.
AS PREVIOUSLY
PRESENTED AS RESTATED
DECEMBER 31, DECEMBER 31,
2003 ADJUSTMENTS 2003
--------------- ------------- --------------
TOTAL ASSETS $ 196,568 $ 196,568
=============== ==============
TOTAL LIABILITIES 86,137 86,137
--------------- --------------
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST:
Common Units 21,891 21,891
Series A Preferred Units 17,080 17,080
------------- --------------
TOTAL MINORITY INTEREST 38,971 38,971
------------- --------------
SHAREHOLDERSEQUITY:
Preferred Shares - Series A, $.01 Par Value, 350,000 Shares Authorized,
None Issued and Outstanding - -
Common Shares - Priority Class A, $.01 Par Value, 50,000,000 Shares
Authorized, 12,355,075 and 2,576,863 Shares Issued and Outstanding at
December 31, 2003 and December 31, 2002, Respectively (Aggregate
Liquidation Preference $74,130 and $15,457, respectively 124 124
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized,
None Issued and Outstanding - -
Additional Paid-in Capital 76,217 76,217
Additional Paid-in Capital - Stock Options 279 279
Distributions in Excess of Net Earnings (5,160) (5,160)
--------------- --------------
71,460
---------------
MINORITY INTEREST:
Common Units 21,891 (21,891)
Series A Preferred Units 17,080 (17,080)
--------------- -------------
38,971 (38,971)
--------------- -------------
TOTAL SHAREHOLDERS' EQUITY 110,431 71,460
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERSEQUITY $ 196,568 $ - $ 196,568
=============== ============= ==============
NOTE 11 - SUBSEQUENT EVENTS
The quarterly dividend pertaining to the first quarter of 2004 was paid on
April 16, 2004 at the rate of $0.18 per share and limited partnership unit,
which represents an annualized rate of $0.72 per annum.
On April 16, 2004 a distribution of $499 pertaining to the first quarter of
2004 was also paid to CNL pertaining to the distributions on the 10.5%
Series A Preferred Units
On April 16, 2004, CNL exercised their exchange right and redeemed all of
their convertible preferred units into 2,816,460 common shares.
21
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
UNAUDITED
MARCH 31, DECEMBER 31,
----------- --------------
2004 2003
----------- --------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 734 $ 395
Accounts Receivable, less allowance for doubtful accounts
of $83 and $83 348 703
Prepaid Expenses 21 320
Due from Related Party - HHLP 808 17
Due from Related Party - 44 New England 366 78
Due from Related Party - HT/CNL Metro - 500
Due from Related Party - HHLP FF&E Reserves - 324
Due from Related Party - Other 1,537 458
Other Assets 80 225
----------- --------------
TOTAL CURRENT ASSETS 3,894 3,020
Franchise Licenses, Net of accumulated amortization of $210
and $201 for 3/31/04 and 12/31/03, respectively 228 237
Property and Equipment, net of accumulated depreciation 481 677
----------- --------------
TOTAL ASSETS $ 4,603 $ 3,934
=========== ==============
LIABILITIES AND PARTNERS' (DEFICIT):
CURRENT LIABILITIES:
Accounts Payable $ 384 $ 1,514
Accrued Expenses 393 617
Due to Related Parties 4,312 376
Lease Payments Payable Related Party - HHLP 1,884 2,590
----------- --------------
TOTAL CURRENT LIABILITIES 6,973 5,097
COMMITMENTS - -
ACCRUED CONTINGENT LEASE PAYABLE 277 -
PARTNERS' (DEFICIT) (2,647) (1,163)
----------- --------------
TOTAL LIABILITIES AND PARTNERS' (DEFICIT) $ 4,603 $ 3,934
=========== ==============
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
22
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
MARCH 31, MARCH 31,
2004 2003
----------- -----------
REVENUES FROM HOTEL OPERATIONS
Room Revenue $ 3,408 $ 4,804
Restaurant Revenue 294 630
Other Revenue 469 280
----------- -----------
TOTAL REVENUES FROM HOTEL OPERATIONS 4,171 5,714
----------- -----------
EXPENSES:
Hotel Operating Expenses 1,848 2,659
Restaurant Operating Expenses 235 542
Advertising and Marketing 331 513
Depreciation and Amortization 41 62
General and Administrative 1,066 1,100
Lease Expense - HHLP 2,161 3,263
----------- -----------
TOTAL EXPENSES 5,682 8,139
----------- -----------
NET LOSS $ (1,511) $ (2,425)
=========== ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
23
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 [UNAUDITED] (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
MARCH 31, MARCH 31,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net (Loss) $ (1,511) $ (2,425)
Adjustments to Reconcile Net (Loss) to
Net Cash Provided by (Used in) Operating Activities:
Depreciation 32 53
Amortization 9 9
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 355 (180)
Prepaid Expenses 299 (18)
Other Assets 145 25
Due from Related Parties - HHLP (791) (3)
Due from Related Party - 44 New England (288) -
Due from Related Party - HT/CNL Metro 500 -
Due from Related Party - HHLP FF&E Reserve 324 -
Due from Related Parties - Other (1,079) -
Increase (Decrease):
Accounts Payable (1,130) 1,010
Accrued Contingent Lease Payable 277 730
Lease Payments Payable - HHLP (706) (1,251)
Due to Related Parties 3,931 1,844
Accrued Expenses (224) 232
Other Liabilities 5 (1)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 148 25
INVESTING ACTIVITIES
Purchase Property and Equipment - (17)
Sale of Property and Equipment 164 -
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 164 (17)
FINANCING ACTIVITIES
Capital Contributed by Partners 27 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27 -
NET INCREASE IN CASH AND CASH EQUIVALENTS 339 8
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 395 217
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 734 $ 225
=========== ===========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
24
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 1 - ORGANIZATION
Hersha Hospitality Management, L.P., ("HHMLP" or the "Lessee"), was
organized under the laws of the State of Pennsylvania in May, 1998 to lease
and operate ten existing hotel properties, principally in the Harrisburg
and Central Pennsylvania area, from Hersha Hospitality Limited Partnership
("HHLP" or the "Partnership"). The Lessee is owned by some of Hersha
Hospitality Trust's executive officers, trustees and their affiliates, some
of whom have ownership interests in the Partnership. We also manage certain
other properties owned by some of Hersha Hospitality Trust's executive
officers, trustees and their affiliates that are not owned by the
Partnership. HHMLP commenced operations on January 1, 1999 and as of March
31, 2004 leased 8 hotel properties from the Partnership and managed 17
properties in which the Partnership had an ownership interest. HHMLP
currently manages two hotels not owned by HHLP.
NOTE 2 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
We have assumed the rights and obligations under the terms of existing
franchise licenses relating to the hotels upon acquisition of the hotels by
the Partnership. The franchise licenses generally specify certain
management, operational, accounting, reporting and marketing standards and
procedures with which the franchisee must comply and provide for annual
franchise fees based upon percentages of gross room revenue.
We have entered into percentage lease agreements ("Percentage Leases") with
HHLP. Each Percentage Lease has an initial non-cancelable term of five
years and may be extended for two additional five-year terms at HHMLP's
option. HHMLP has made the determination not to exercise their option to
renew any of the leases. Pursuant to the terms of the Percentage Leases, we
are required to pay the greater of the base rent or the percentage rent for
hotels with established operating histories. The base rent is 6.5 percent
of the purchase price assigned to each hotel. The percentage rent for each
hotel is comprised of (i) a percentage of room revenues up to a certain
threshold amount for each hotel up to which we receive a certain percentage
of room revenues as a component of percentage rent, (ii) a percentage of
room revenues in excess of the threshold amount, but not more than a
certain incentive threshold amount for each hotel in excess of the
threshold amount up to which we receive a certain percentage of the room
revenues in excess of the threshold amount as a component of percentage
rent, (iii) a percentage for room revenues in excess of the incentive
threshold amount, and (iv) a percentage of revenues other than room
revenues. For hotels with limited operating histories, the leases provide
for the payment of an initial fixed rent for certain periods as specified
in the leases and the greater of base rent or percentage rent thereafter.
25
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 2 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Minimum annual lease payments due during the noncancellable portion of the
leases are as follows:
December 31, 2004 $ 5,513
2005 4,889
2006 3,074
2007 623
----------
Total $ 14,099
==========
For the three months ended March 31, 2004 and 2003, we incurred lease
expense of $2,161 and $3,263, respectively. As of March 31, 2004 and
December 31, 2003 the amount due to the Partnership for lease payments was
$1,884 and $2,590, respectively.
Beginning in 2003, we entered into management agreements with affiliates to
manage hotels for Taxable REIT Subsidiaries owned by Hersha Hospitality
Limited Partnership ("HHLP"). Each management agreement provides for a five
year term and is subject to early termination upon the occurrence of
defaults and certain other events described therein. Under the management
agreements, we generally pay the operating expenses of the hotels. All
operating expenses or other expenses incurred by us in performing our
authorized duties are reimbursed or borne by the affiliates to the extent
the operating expenses or other expenses are incurred within the limits of
the applicable approved hotel operating budget. We are not obligated to
advance any of our own funds for operating expenses of a hotel or to incur
any liability in connection with operating a hotel.
We receive a base management fee, and if a hotel meets and exceeds certain
thresholds, an additional incentive management fee. The base management fee
for a hotel is due monthly and is 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 sixtieth day
following the end of each fiscal year and is equal to an amount determined
by us and the affiliates prior to the commencement of each fiscal year
beginning in 2004, generally based upon the financial performance of the
hotel. For the three months ended March 31, 2004 and 2003, management fees
earned totaled $150 and $0 and is recorded as Other Revenues.
We have executed an agreement with HHLP to provide accounting and
securities reporting services. The terms of the agreement provides for a
fee of $10 per property (prorated from the time of acquisition) for each
hotel added to the HHLP's portfolio. As of March 31, 2004 and 2003, $60 and
$44 has been earned from operations in each period and is recorded as Other
Revenues.
26
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 2 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Due from Related Party
----------------------
HHLP balance was $808 and $17 as of March 31, 2004 and December 31, 2003,
respectively. The March 31, 2004 balance consisted of $731 receivable from
HHLP in connection with acquisition of working capital items of the six
leases expiring on January 29, 2004 and a receivable of $77 related to
administrative services fees. The December 31, 2003 balance consisted
primarily of $17 related to administrative services fees.
Due from 44 New England Associates was $366 and $78 as of March 31, 2004
and December 31, 2003, respectively. These balances consisted of management
fees owed to us.
Due from HT/CNL Metro balance was $0 and $500 as of March 31, 2004 and
December 31, 2003, respectively. The December 31, 2003 balance consisted
primarily of $464 of payroll and related operating expenses paid on behalf
of HT/CNL Metro and $36 in management fees.
Due from other related parties consists of receivables from affiliates of
HHMLP, excluding HHLP. The March 31, 2004 and December 31, 2003 balance was
$1,537 and $458, respectively. The Due from Related Party balance for both
periods consisted primarily of loans to unconsolidated partnerships created
by cash flow deficits existing at certain properties owned by affiliates of
HHMLP.
Due to Related Parties balance was $4,312 and $376 as of March 31, 2004 and
December 31, 2003, respectively. The Due to Related Parties balance
consists primarily of monies owed to Shreenathji Enterprises, Ltd. ("SEL")
an affiliate of HHMLP. These payables relate to borrowings by HHMLP
utilized for general working capital purposes of HHMLP.
Hotel Supplies
---------------
For the periods ended March 31, 2004 and 2003, we paid to Hersha Hotel
Supply, an unconsolidated related party, $106 and $242, respectively, for
hotel supplies. These expenses are recorded as Hotel Operating Expenses. $1
and $24 was in accounts payable as of March 31, 2004 and December 31, 2003,
respectively.
During the periods ended March 31, 2004 and 2003, we had advances to
related parties of $4,241 and $2,544, respectively. These advances were
inclusive of repayments from related parties of $310 and $700,
respectively. Interest income of $0 and $0, respectively, was recorded on
these loans.
27
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
NOTE 3 - NEW AUTHORITATIVE ANNOUNCEMENTS
FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57,
and 107 and rescission of FASB Interpretation No. 34," was issued in
November 2002. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. FIN 45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the related
guarantee. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year end. The disclosure requirements in FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company has made the disclosures required by FIN 45. The Company has not
made any guarantees of indebtedness to others.
The Financial Accounting Standards Board issued FASB Interpretation No. 46,
("FIN 46") "Consolidation of Variable Interest Entities (VIE's), an
interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in
January 2003 and a further interpretation of FIN 46 in December 2003 ("FIN
46-R" and FIN 46, collectively "FIN 46"). FIN 46 addresses how a business
enterprise should evaluate whether it has a controlling financial interest
in any entity through means other than voting rights and accordingly should
consolidate the entity. In accordance with FIN 46, we have evaluated our
investments, contractual relationships and joint ventures to determine if
any of these entities is considered a VIE and if we are the primary
beneficiary of economic interests in these VIE's. We will continue to
evaluate each of our investments and contractual relationships to determine
if consolidation is required based upon the provisions of FIN 46.
HHLP has performed an evaluation of their relationship with HHMLP and has
concluded that HHMLP does qualify as a VIE and HHLP has been determined to
be the primary beneficiary as of March 31, 2004. Therefore, HHLP has
consolidated the financial statements of HHMLP effective as of March 31,
2004.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained in this section that are not historical facts are
based on current expectations. Words such as "believes", "expects",
"anticipate", "intends", "plans" and "estimates" and variations of such words
and similar words also identify forward-looking statements. Our actual results
may differ materially. We caution you not to place undue reliance on any such
forward-looking statements. We assume no obligation to update any
forward-looking statements as a result of new information, subsequent events or
any other circumstances.
GENERAL
As of March 31, 2004, we owned interests in 25 hotels in the eastern United
States. For purposes of the REIT qualification rules, we cannot directly operate
any of our hotels. Instead, we must lease our hotels. As of March 31, 2004,
eight of our hotels were leased to an eligible independent contractor, HHMLP, as
required by the REIT qualification rules in effect prior to 2001. In 2001, those
rules were modified, allowing a hotel REIT to lease its hotels to a taxable REIT
subsidiary, or TRS, provided that the TRS engages an eligible independent
contractor to manage the hotels. Accordingly, we have leased fourteen of our
hotels to a wholly-owned TRS, which will pay qualifying rent, and the TRS has in
turn entered into management contracts with HHMLP with respect to those hotels.
We intend to eventually lease all our hotels to a TRS, whether upon the
acquisition of new hotels or upon expiration of the leases for the eight hotels
currently leased to HHMLP. We also own three hotels through our joint ventures,
and those hotels are leased to TRSs that are wholly owned by those joint
ventures. The joint ventures' hotels are managed by HHMLP.
As more of our hotels are leased to our TRS, we will participate more
directly in the operating performance of our hotels. Rather than receiving base
and percentage lease payments from HHMLP, which funded its own hotel operating
expenses, our TRS will directly receive all revenue from, and be required to
fund all expenses relating to, hotel operations. Our TRS will also be subject to
income tax on its earnings.
Our current revenue is derived from lease payments from HHMLP and revenues
from our TRS.
OPERATING RESULTS
The following table outlines operating results for the company's full
portfolio, including all wholly owned hotels and those owned through a joint
venture interest for the three months ended March 31, 2004 and 2003.
Percent
Increase
March 31, 2004 March 31, 2003 (Decrease)
Occupancy 55.7% 56.2% (.9%)
Average Daily Rate $ 87.62 $ 72.27 21.2%
RevPAR $ 48.80 $ 40.60 20.2%
Rooms Revenue $ 10,229,321 $ 5,766,614 77.3%
Total Revenue $ 11,622,570 $ 6,578,310 76.6%
The increase in revenue per available room ("RevPAR") was due primarily to
the company's broadened strategic portfolio focus on stronger central business
districts and primary suburban office parks. This, coupled with the size of the
recent acquisitions as a percentage of the portfolio, as well as franchise
affiliations with stronger brands, such as Hilton Garden Inn, Residence Inn and
29
Four Points by Sheraton, also positively impacted RevPAR. The increase in both
rooms and total revenue can be attributed primarily to the seven hotels acquired
since March 31, 2003.
COMPARISON OF PERIOD ENDED MARCH 31, 2004 TO MARCH 31, 2003.
HERSHA HOSPITALITY TRUST
REVENUE
Our total revenues for the three-month period ended March 31, 2004 consisted
substantially of percentage lease revenue recognized pursuant to percentage
leases with HHMLP and hotel operating revenues for hotels leased to our wholly
owned TRS, 44 New England. Our total revenues were approximately $7,914,000, an
increase of $4,636,000 or 141.4% compared to total revenues of $3,278,000 for
the three-month period ended March 31, 2003. The increase in revenue is
primarily attributable to the direct recording of hotel operating revenues for
hotels leased to our TRS. Under the TRS structure we recognize gross hotel
operating revenues and gross hotel operating expenses for hotels leased to 44
New England. Under the percentage lease structure we record only percentage
lease revenues that are calculated as a percentage of a hotel's revenues per the
lease agreements.
Hotel operating revenues increased by approximately $5,470,000 as hotels
previously leased to HHMLP through percentage leases were converted to a TRS
structure and were subsequently leased to our TRS, 44 New England.
Additionally, since March 31, 2003, the Company has acquired four hotels and a
joint venture interest in three additional hotels. Revenue for all four
purchases and one joint venture was recorded from the date of acquisition as
Hotel Operating Revenues. The remaining two joint ventures are accounted for
utilizing the equity method of accounting and our portion of the net loss from
these two joint ventures is recorded as "Loss from Unconsolidated Joint Venture
Investments" in our Statement of Operations.
Percentage lease revenue decreased from approximately $2,534,000 in 2003 to
$1,884,000 in 2004. This decrease is due to the expiration of six percentage
leases on January 31, 2004. The properties are now leased to 44 New England,
our wholly owned TRS.
Interest and other revenue increased to approximately $560,000 in 2004 from
$44,000 in 2003. The company recorded interest revenue of $411,000 on its
secured and unsecured development lines for three hotels and a loan to HT/CNL
Metro Hotels, LP in 2004. Additionally, the company earned interest on short
term investments and escrow accounts of $74,000 in 2004. Other revenue,
primarily related to an asset management fees received for the Hampton Inn
Chelsea, increased by approximately $31,000.
EXPENSES
Total expenses increased 195.5% to approximately $8,454,000 for the quarter
ended March 31, 2004 from $2,860,000 for the quarter ended March 31, 2003.
Hotel operating expenses increased to approximately $4,185,000 in 2004 from $0
in 2003 due to the direct recognition of hotel operating expenses for hotels
leased to 44 New England. Under the TRS structure we recognize gross hotel
operating revenues and gross hotel operating expenses for hotels leased to 44
New England. In addition, we recorded expenses for four acquisitions and one
joint venture from the date of acquisition either directly or indirectly through
equity income (loss) in equity method investments.
Depreciation and amortization increased from approximately $1,087,000 in 2003 to
$1,602,000 in 2004, an increase of $515,000, due to additional depreciation
expense incurred for additional property acquisitions.
Interest expense increased approximately $197,000 from $1,268,000 in 2003 to
$1,465,000 in 2004. The increase is related to addition financings due to the
acquisition of additional property acquisitions.
30
Real estate and personal property taxes and insurance increased by approximately
$309,000 from $265,000 in 2003 to $574,000 in 2004. The increase is primarily
related to additional property taxes incurred at our hotels acquired since March
31, 2003.
General and administrative expense increased by approximately $259,000 from
$240,000 in 2003 to $499,000 in 2004. The increase is primarily related to the
establishment of a formal management compensation plan in 2004. These expenses
were incurred by HHMLP for the quarter ended March 31, 2003.
The Company assumed land leases on the Hilton Garden Inn Edison and the Holiday
Inn Express Hartford since March 31, 2003, causing land lease expense to
increase by approximately $129,000.
NET INCOME (LOSS)
Net loss for the period was approximately $829,000, compared to first quarter
2003 net income of $304,000. As mentioned above, we converted several of our
hotels to a TRS structure, in which we recognize both gross hotel operating
revenues and gross hotel operating expenses. Excluding unconsolidated joint
ventures, we own or have a consolidated joint venture interest in 23 hotels, 15
of which are leased to a wholly owned TRS.
Due to the seasonality of the hospitality industry in general and our business
in particular, we recognized increased expenses during the three months ended
March 31, 2004 due to the direct recognition of expenses from the hotels
converted to a TRS structure. We also realized additional expenses from
recently purchased hotels that are relatively new and continue to incur
stabilization costs. Our net loss was also impacted by distributions to
preferred unitholders which increased from $0 in 2003 to approximately $499,000
in 2004.
HHMLP
REVENUE
HHMLP's revenues decreased by approximately $1,543,000 for the three-month
period ended March 31, 2004, or 27.0%, to approximately $4,171,000 as compared
to $5,714,000 for the three-month period ended March 31, 2003.
Room revenue and restaurant revenue decreased to approximately $3,702,000 in
2004 from $5,434,000 in 2003, a net decrease of $1,732,000. The decrease in
revenue is primarily due to the expiration of hotel leases with HHMLP. Prior to
the expiration of the leases, HHMLP recognized room and restaurant revenue from
these hotels. These hotels are now managed by HHMLP and HHMLP only records it
portion of the management fee income earned from these hotels.
Other revenues increased by approximately $189,000 from $280,000 in 2003 to
$469,000 in 2004. The primary reason for the increase is collection of
management fees for the hotels previously leased to HHMLP. The hotels are now
leased to 44 New England and HHMLP receives a management fee of 3% of total
revenues.
EXPENSES
Expenses decreased by approximately $2,457,000 to $5,682,000 for the quarter
ended March 31, 2004 as compared to $8,139,000 for the quarter ended March 31,
2003, a 30.2% decrease. The decrease in expenses is primarily attributable to
the expiration of hotel leases from HHLP.
Hotel and restaurant operating expenses have decreased by approximately
$1,118,000 from $3,201,000 in 2003 to $2,083,000 in 2004. As mentioned above,
HHMLP recognized hotel and restaurant operating expenses from these hotels while
they were leased from HHLP.
Advertising and marketing, depreciation and amortization, general and
administrative, and lease expense are all lower because of the leases
transferred from HHMLP to 44 New England.
31
NET INCOME (LOSS)
HHMLP's net loss for the period decreased to approximately $1,511,000 from a
loss of $2,425,000 for the first quarter of 2003. The decrease in our net loss
was primarily a result of decreased operating, advertising and marketing, and
lease expenses. The overall losses incurred at HHMLP are primarily due to the
fact that HHMLP absorbs significant start up expenses related to newly built
properties that have either commenced operations or are currently in the
development stage. These properties are developed by the principal owners of
HHMLP and are managed by HHMLP upon commencement of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity is rent payments from the Lessees under the
Percentage Leases and hotel operating and lease revenue from our TRS Lessees.
We are dependent on the Lessees to make such rent payments and earn revenue to
provide cash for debt service, distributions, capital expenditures at its
hotels, and working capital.
We expect to meet our short-term liquidity requirements generally through net
cash provided by operations, existing cash balances and, if necessary,
short-term borrowings under our line of credit. We believe that our net cash
provided by operations will be adequate to fund operating requirements, debt
service and our payment of dividends in accordance with REIT requirements of the
federal income tax laws. We expect to meet our long-term liquidity
requirements, such as scheduled debt maturities and property acquisitions,
through long-term secured and unsecured borrowings, the issuance of additional
equity securities or, in connection with acquisitions of hotel properties, the
issuance of units of operating partnership interest in our operating partnership
subsidiary.
In October, 2003, we completed an equity offering of 9,775,000 common shares.
Net proceeds from the offering were $77,262 after deducting underwriting
discounts, commissions, and offering expenses paid by us. Net proceeds were
used to reduce debt; fund the redemption of limited partnership units; pay
dividends and operating expenses; and fund acquisitions. Due to this equity
offering in October 2003, we maintained a significant cash balance of $40,707 at
December 31, 2003.
Additional proceeds from our October equity offering have been used since
December 31, 2003. We redeemed 1,300,000 limited partnership units for a total
of $10,400 in cash as of October 21, 2003. Of this $10,400, we paid
approximately $1,450 to the limited partners in 2003. The limited partners, at
their discretion, had not elected to receive $8,951 of proceeds from us as of
December 31, 2003 and we have paid this amount as of January 4, 2004.
Notwithstanding this delayed receipt of the redemption proceeds, the units were
retired effective October 21, 2003. In addition to the redemption of the
limited partnership units, as mentioned above, since December 31, 2003, we have
invested approximately $3,540, plus settlement costs, in the acquisition of the
Holiday Inn Express, Hartford, and $3,000 in our joint venture acquisition of
the Sheraton Four Points, Revere. We also invested approximately $15,600, plus
settlement costs, in the acquisition of the Residence Inn, Framingham, MA as of
March 26, 2004.
We currently maintain an $11,500 line of credit with Sovereign Bank and in April
2004 entered into an agreement with Sovereign Bank to increase this line of
credit to $35,000. We may use the line of credit to fund future acquisitions
and for working capital. Outstanding borrowings under the line of credit bear
interest at the bank's prime rate and are collateralized by certain of our
properties. In the future, we may seek to increase the amount of the line of
credit, negotiate additional credit facilities or issue corporate debt
instruments. Any debt incurred or issued by us may be secured or unsecured,
long-term or short-term, fixed or variable interest rate and may be subject to
such other terms as we deem prudent. As of March 31, 2004, we had an
outstanding balance of $1,230 on our line of credit and the interest rate on
the borrowings was 4.00%.
We have a debt policy that limits our consolidated indebtedness to less than 67%
of the aggregate purchase prices for the hotels in which we have invested and
our current level is approximately 49.9%. However, our organizational documents
do not limit the amount of indebtedness that we may incur and our Board of
Trustees may modify our debt policy at any time without shareholder approval.
We intend to repay indebtedness incurred under the line of credit from time to
time, for acquisitions or otherwise, out of cash flow and from the proceeds of
issuances of additional common shares and other securities.
32
We intend to invest in additional hotels only as suitable opportunities arise
and adequate sources of financing are available. Our bylaws require the
approval of a majority of our Board of Trustees, including a majority of the
independent trustees, to acquire any additional hotel in which one of our
trustees or officers, or any of their affiliates, has an interest (other than
solely as a result of his status as our trustee, officer or shareholder). We
expect that future investments in hotels will depend on and will be financed by,
in whole or in part, the proceeds from additional issuances of common shares,
issuances of operating partnership units or other securities or borrowings. We
currently have no agreement or understanding to invest in any hotel and there
can be no assurance that we will make any investments in any other hotels that
meet our investment criteria.
Pursuant to our leases, we are required to make available to the lessees of our
hotels 4% (6% for full service properties) of gross revenues per quarter, on a
cumulative basis, for periodic replacement or refurbishment of furniture,
fixtures and equipment at each of our hotels. We believe that a 4% (6% for full
service hotels) reserve is a prudent estimate for future capital expenditure
requirements. We intend to spend amounts in excess of the obligated amounts if
necessary to comply with the reasonable requirements of any franchise license
under which any of our hotels operate and otherwise to the extent we deem such
expenditures to be in our best interests. We are also obligated to fund the
cost of certain capital improvements to our hotels. We believe that amounts
required to be set aside in our leases will be sufficient to meet required
expenditures for furniture, fixtures and equipment during the term of the
leases. We will use undistributed cash or borrowings under credit facilities to
pay for the cost of capital improvements and any furniture, fixture and
equipment requirements in excess of the set aside referenced above.
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts (NAREIT)
developed Funds from Operations ("FFO ") as a relative non-GAAP financial
measure of performance and liquidity of an equity REIT in order to recognize
that income-producing real estate historically has not depreciated on the basis
determined under GAAP. FFO, as defined under the definition adopted by NAREIT is
net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring or sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. We also adjust FFO for preferred stock distributions to present FFO
applicable to the common shares. FFO does not represent cash flows from
operating activities in accordance with GAAP (which, unlike FFO, generally
reflects all cash effects of transactions and other events in the determination
of net income) and should not be considered an alternative to net income as an
indication of our performance or to cash flow as a measure of liquidity or
ability to make distributions. We consider FFO a meaningful, additional measure
of operating performance because it reflects the funds generated from our
operations, 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. Comparison of our presentation of
FFO to similarly titled measures for other REITs may not necessarily be
meaningful due to possible differences in the calculations used by such REITs.
The following table reconciles FFO for the periods presented to the most
directly comparable GAAP measure, net income, for the same periods.
(In thousands, except per share data)
THREE MONTHS ENDING
3/31/04 3/31/03
------------ ----------
Net Income (Loss) $ (829) $ 304
Add:
Income (Loss) allocated to Minority Interest (229) 114
Distributions to Preferred Unitholders 499 -
Depreciation and Amortization 1,602 1,087
Adjustments for Unconsolidated Joint Ventures 160 -
------------ ----------
FFO applicable to common shareholders $ 1,203 $ 1,505
============ ==========
Fully Diluted Weighted Average Shares and Units Outstanding 19,048,609 7,677,507
33
FFO was $1,203 in the three months ended March 31, 2004, which was a decrease of
$302, or 20.1% over FFO in the comparable period in 2003, which was $1,505.
The decrease in FFO was primarily a result of the fact that all of the hotels
were under fixed and percentage leases for the period ended March 31, 2003.
Under the REIT Modernization Act ("RMA"), which became effective January 1,
2001, the Company is permitted to lease hotels to a wholly owned taxable REIT
subsidiary ("TRS") and may continue to qualify as a REIT provided the TRS enters
into management agreements with an "eligible independent contractor" who will
manage the hotels leased by the TRS. The Company formed the TRS Lessee in 2003.
The TRS currently leases 14 properties from the Partnership, and is subject to
taxation as a C-Corporation. During 2003 and the first quarter of 2004, a large
portion of the fixed and percentage leases have expired, and the Company now
records the hotel operating revenues and expenses directly on its books. Due to
the seasonal nature of our business, the first quarter is historically our
weakest quarter, and the Company realized a larger portion of the expenses
during the period ended March 31, 2004 than during March 31, 2003.
FFO was also impacted by increases in our General and Administrative expenses
during the period ended March 31, 2004 to reflect the implementation of a formal
management compensation plan and additional legal and accounting expenses
incurred during the period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.
On an on-going basis, all estimates are evaluated by us, including those
related to carrying value of investments in hotel properties. All estimates are
based upon historical experience and on various other assumptions we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue Recognition.
We directly recognize revenue and expense for all hotels leased through 44
New England as "Hotel Operating Revenue" and "Hotel Operating Expense" when
earned and incurred.
Percentage lease income is recognized when hotel operating or other
revenues exceed the minimum thresholds required for percentage rent under
terms of the lease agreements. Fixed lease income is recognized under fixed
rent agreements ratably over the lease term. All leases between us and the
lessees are operating leases.
Impairment of Long-Lived Assets. We review the carrying value of each hotel
property in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144 to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel property or if depreciation
periods should be modified. Long-lived assets are reviewed for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. We perform undiscounted cash
flow analyses to determine if an impairment exists. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value. Hotel properties held for sale are presented at the lower of carrying
amount or fair value less cost to sell.
We would record an impairment charge if we believe an investment in hotel
property has been impaired such that future undiscounted cash flows would not
recover the book basis of the investment in the hotel property. Future adverse
34
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's carrying value, thereby
possibly requiring an impairment charge in the future.
IMPACT OF FIN 46
The Financial Accounting Standards Board issued FASB Interpretation No. 46,
("FIN 46") "Consolidation of Variable Interest Entities (VIE's), an
interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in January
2003 and a further interpretation of FIN 46 in December 2003 ("FIN 46-R" and FIN
46, collectively "FIN 46"). FIN 46 addresses how a business enterprise should
evaluate whether it has a controlling financial interest in any variable
interest entity ("VIE") through means other than voting rights, and accordingly,
should include the VIE in its consolidated financial statements. We have
adopted FIN 46 as of March 31, 2004.
In accordance with FIN 46, we have evaluated our investments and contractual
relationships with HHMLP, Logan Hospitality Associates, LLC, HT/CNL Metro
Hotels, LP, PRA Glastonbury, LLC, and Metro Ten Hotels, LLC to determine whether
these entities meet the guidelines of consolidation per FIN 46. Our examination
consisted of reviewing the sufficiency of equity at risk, controlling financial
interests, voting rights, obligation to absorb expected losses and expected
gains, including residual returns.
Based upon our review, HHMLP is considered a variable interest entity of which
we have been determined to be the primary beneficiary. Therefore we have
consolidated the financial statements of HHMLP with ours as of March 31, 2004.
The minority interest in HHMLP represents 100% of the deficit since we have no
ownership interest but consolidate under FIN 46. The partners in HHMLP have
committed to funding the deficits. Because the consolidation is effective as of
March 31, 2004, it does not impact our income statement or statement of cash
flows. In addition, we own a 55% joint venture interest in Logan Hospitality
Associates, LLC, the owner of the Sheraton Four Points - Revere. We have
determined that we have a majority voting interest in this joint venture and
that it qualifies for consolidation.
All other investments in partnerships and joint ventures represent
noncontrolling ownership interests in properties. These investments are
accounted for using the equity method of accounting. These investments are
recorded initially at cost and subsequently adjusted for net equity in income
(loss), which is allocated in accordance with the provisions of the applicable
partnership or joint venture agreements.
We will continue to evaluate each of our investments and contractual
relationships to determine if consolidation is required based upon the
provisions of FIN 46.
INFLATION
Operators of hotels in general possess the ability to adjust room rates.
However, competitive pressures may limit the lessee's ability to raise room
rates in the face of inflation, and annual increases in average daily rates have
failed to keep pace with inflation.
SEASONALITY
Our hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in our hotel operating
revenues earned, cash flows received from operations and our quarterly lease
revenue to the extent that we receive percentage rent.
SUBSEQUENT EVENTS
The quarterly dividend pertaining to the first quarter of 2004 was paid on
April 16, 2004 at the rate of $0.18 per share and limited partnership unit,
which represents an annualized rate of $0.72 per annum.
A distribution of $499 was also paid to CNL pertaining to the dividends on
the 10.5% Series A Preferred Units. This dividend reflected a pro rata
distribution based upon an investment of $4,027 on August 29, 2003, $10,000
on April 21, 2003 and an additional $5,000 on May 21, 2003.
35
On April 16, 2004, CNL exercised their conversion right and redeemed all of
their convertible preferred units into 2,816,460 shares of class A common
shares.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is to changes in interest rates on our variable
rate Line of Credit and other floating rate debt. At March 31, 2004, we
maintained approximately $1,230 of indebtedness under the Line of Credit. The
total floating rate mortgages payable of $16,245 had a current weighted average
interest rate of 5.02%. The total fixed rate mortgages payable of $62,630 had a
current weighted average interest rate of 7.65%.
Our interest rate risk objectives are to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower our overall borrowing
costs. To achieve these objectives, we manage our exposure to fluctuations in
market interest rates for a portion of our borrowings through the use of fixed
rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements. We may enter into derivative financial
instruments such as interest rate swaps or caps and treasury options or locks to
mitigate our interest rate risk on a related financial instrument or to
effectively lock the interest rate on a portion of our variable rate debt.
Currently, we have no derivative financial instruments. We do not enter into
derivative or interest rate transactions for speculative purposes.
Approximately 79.4% of our outstanding mortgages payable are subject to
fixed rates while approximately 20.6% of our outstanding mortgages payable are
subject to floating rates. The total weighted average interest rate on our debt
as of March 31, 2004 was approximately 7.11%. If the interest rate for our Line
of Credit and other variable rate debt was 100 basis points higher or lower
during the three-month period ended March 31, 2004, our interest expense for the
three-month period ended March 31, 2004 would have been increased or decreased
by approximately $40.
We regularly review interest rate exposure on our outstanding borrowings in
an effort to minimize the risk of interest rate fluctuations. For debt
obligations outstanding at March 31, 2004, the following table presents
principal repayments and related weighted average interest rates by expected
maturity dates (in thousands):
2004 2005 2006 2007 2008 THEREAFTER TOTAL
----- ------ ------ ------ ------ ----------- -------
Fixed Rate Debt 656 1,035 9,278 1,344 1,457 48,860 62,630
Average Interest Rate 8.50% 8.31% 6.57% 7.08% 7.11% 7.78% 7.65%
Floating Rate Debt 372 525 561 599 639 13,549 16,245
Average Interest Rate 5.02% 5.02% 5.01% 5.01% 5.01% 5.02% 5.02%
The table incorporates only those exposures that existed as of March 31,
2004 and does not consider exposure or positions that could arise after that
date. As a result, our ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
future period, prevailing interest rates, and our hedging strategies at that
time. In addition, the Company maintains a note payable for seller financing of
$1,000 that is due on October 1, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14(c)) are effective to ensure that the information
required to be disclosed in our filings with the SEC under the Securities
Exchange Act of 1934 is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 16, 2004, CNL Hospitality Properties, L.P. ("CNL LP") redeemed 190,266
Series A convertible preferred units of limited partnership interest in HHLP
("Series A Preferred Units") into 2,816,460 shares of class A common stock. CNL
LP has subsequently liquidated these shares in a secondary offering. Hersha
Hospitality Trust did not receive any proceeds from this secondary offering.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
Item 12 Current Report on Form 8-K filed May 14, 2004
Item 4 Current Report on Form 8-K filed April 22, 2004
Item 12 Current Report on Form 8-K filed March 31, 2004
Item 12 Current Report on Form 8-K filed March 8, 2004
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHA HOSPITALITY TRUST
May 17, 2004 /s/ Ashish R. Parikh
-----------------------
Ashish R. Parikh
Chief Financial Officer
39