SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QA
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-14765
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 251811499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
148 SHERATON DRIVE, BOX A
NEW CUMBERLAND, PENNSYLVANIA 17070
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (717) 770-2405
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 2002, the number of outstanding Priority Class A Common
Shares of Beneficial Interest outstanding was 2,575,000.
HERSHA HOSPITALITY TRUST
INDEX
FORM 10-Q
REPORT
ITEM NO. PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HERSHA HOSPITALITY TRUST
Report of Independent Accountant . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets as of March 31, 2002 [Unaudited]
and December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 [Unaudited]. . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 [Unaudited]. . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 7
HERSHA HOSPITALITY MANAGEMENT, L.P.
Report of Independent Accountant . . . . . . . . . . . . . . . . . . . 15
Balance Sheets as of March 31, 2002 [Unaudited] and
December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Statements of Operations for the three months ended
March 31, 2002 and 2001 [Unaudited]. . . . . . . . . . . . . . . . . . 17
Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 [Unaudited]. . . . . . . . . . . . . . . . . . 18
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . 19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 21
Results of Operations, Three Months Ended March 31, 2002 and 2001. . . 22
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . 23
Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Subsequent Events. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 25
(a) Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 25
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 25
REPORT OF INDEPENDENT ACCOUNTANT
To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Hersha
Hospitality Trust and subsidiaries as of March 31, 2002, and the related
consolidated statements of operations and consolidated statements of cash flows
for the three months ended March 31, 2002 and 2001. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet as of December 31,
2001, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended [not presented herein]; and in
our report dated March 8, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2001, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
May 2, 2002
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
MARCH 31, DECEMBER 31,
---------------- --------------
2002 2001
---------------- --------------
ASSETS: [UNAUDITED]
----------------
Cash and cash equivalents $ 168 $ 167
Investment in Hotel Properties, Net of Accumulated
Depreciation 90,342 88,100
Escrow and Lease Deposits 1,725 1,647
Lease Payments Receivable - Related Party 2,528 2,376
Intangibles, Net of Accumulated Amortization 843 1,515
Due from Related Party 3,196 1,884
Other Assets 593 328
---------------- --------------
TOTAL ASSETS $ 99,395 $96,017
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Lines of Credit $ 9,639 $ 7,058
Deposits Payable 1,000 1,000
Mortgages Payable 53,628 54,477
Dividends Payable 1,364 1,325
Due to Related Party 2,717 1,093
Accounts Payable and Accrued Expenses 624 418
---------------- --------------
TOTAL LIABILITIES 68,972 65,371
---------------- --------------
MINORITY INTEREST 19,778 20,436
---------------- --------------
Shareholders' Equity:
Preferred Shares, $.01 par value, 10,000 Shares authorized, None
Issued and Outstanding -- --
Common Shares - Priority Class A, $.01 Par Value, 50,000,000 26 23
Shares Authorized, 2,575,000 and 2,275,000 Shares Issued and
Outstanding at March 31, 2002 and December 31, 2001,
Respectively (Aggregate Liquidation Preference $15,450 and
$13,650, respectively)
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares
Authorized, -0- Shares Issued and Outstanding at March 31, 2002
and December 31, 2001, Respectively -- --
Subscriptions Receivable (1,129) --
Additional Paid-in Capital 13,665 11,968
Distributions in Excess of Net Earnings (1,917) (1,781)
---------------- --------------
TOTAL SHAREHOLDERS' EQUITY 10,645 10,210
---------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 99,395 $96,017
================ ==============
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
2
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
MARCH 31, MARCH 31,
2002 2001
------------ ------------
REVENUE:
Percentage Lease Revenues - HHMLP $ 2,219 $ 2,054
Percentage Lease Revenues - Other 700 700
Other Revenue 52 38
------------ ------------
TOTAL REVENUE 2,971 2,792
EXPENSES:
Interest expense 1,240 1,303
Land Lease - Related Party - 4
Real Estate and Personal Property
Taxes and Property Insurance 244 214
General and Administrative 152 134
Depreciation and Amortization 1,021 1,045
------------ ------------
TOTAL EXPENSES 2,657 2,700
------------ ------------
INCOME BEFORE MINORITY INTEREST AND 314 92
DISCONTINUED OPERATIONS
INCOME ALLOCATED TO MINORITY INTEREST 4 -
INCOME FROM DISCONTINUED OPERATIONS - 24
------------ ------------
NET INCOME $ 310 $ 116
============ ============
EARNINGS PER SHARE DATA:
------------------------
Basic - before discontinued operations $ 0.13 $ 0.04
Discontinued Operations $ - $ 0.01
BASIC $ 0.13 $ 0.05
Diluted - before discontinued operations $ 0.04 $ 0.01
Discontinued Operations $ - $ 0.01
DILUTED $ 0.04 $ 0.02
WEIGHTED AVERAGE SHARES:
Basic 2,347,722 2,275,000
Diluted 7,447,444(1) 7,247,555(1)
============ ============
(1) Includes 5,099,722 and 4,972,555 units at March 31, 2002 and 2001,
respectively, that are redeemable on a one-for-one basis for Class B common
shares
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
3
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
MARCH 31, MARCH 31,
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net Income $ 310 $ 116
----------- -----------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,021 1,135
Income Allocated to Minority Interest 4
Change in Assets and Liabilities:
(Increase) Decrease in:
Lease and Escrow Deposits (78) (127)
Lease Payments Receivable - Related Party (152) 1,138
Other Assets (264) (18)
Due from Related Party (1,312) (348)
Increase (Decrease):
Due to Related Parties 1,624 (164)
Accounts Payable and Accrued Expenses 204 (81)
----------- -----------
Total Adjustments 1,047 1,535
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,357 1,651
INVESTING ACTIVITIES:
Purchase of Hotel Property Assets (1,859) (103)
Purchase of Intangible Assets - (88)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,859) (191)
FINANCING ACTIVITIES:
Repayment of Borrowings Under Line of Credit (2,686) (80)
Borrowings from Mortgages Payable 5,267 -
Principal Repayment of Mortgages Payable (224) (171)
Cash received from Stock Sales 600 -
Subscriptions Receivable (1,129) -
Dividends Paid (410) (410)
Limited Partnership Unit Distribution Paid (915) (799)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 503 (1,460)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1 -
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 167 124
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 168 $ 124
=========== ===========
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
4
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
MARCH 31, MARCH 31,
2002 2001
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
CASH PAID DURING THE PERIOD:
Interest $ 1,127 $1,350
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As of January 1, 2001, we issued an additional 531,559 units of limited
partnership interest in connection with the repricing of the Holiday Inn
Express, Hershey, Hampton Inn, Carlisle, Holiday Inn Express, New Columbia and
the Comfort Inn, Harrisburg. The total number of units outstanding as of
January 1, 2001 was 4,972,555.
On April 1, 2001, we sold the Best Western, Indiana for $2,200 to some of our
executive officers, trustees and their affiliates. In conjunction with this
transaction, we received cash proceeds of $400 and redeemed 76,252 limited
partnership units valued at $457. The buyer also assumed the outstanding
mortgage balance of $1,342.
On May 1, 2001, we sold the Comfort Inn, Denver for $2,100 to an unrelated third
party. Net of settlement fees and other costs, we received $1,868. In
conjunction with this transaction, we received cash proceeds of $460 and have
paid down the outstanding mortgage balance of $1,408 to Shreenathji Enterprises,
Ltd., a related party.
On June 1, 2001, we sold the Comfort Inn, JFK for $7,000 to an unrelated third
party. Net of settlement fees and other costs, we received cash proceeds of
$6,613. Based upon the initial repricing formula, we issued an additional
175,538 limited partnership units in conjunction with this transaction.
On June 1, 2001, we purchased the Mainstay Suites and Sleep Inn in King of
Prussia from some of our executive officers, trustees and their affiliates. We
purchased these assets for $9,445 plus settlement costs and leased them to
Hersha Hospitality Management, LP ("HHMLP"). In conjunction with this
transaction, we assumed the mortgage indebtedness of $6,738, assumed $1,000 of
related party debt and funded the remainder of the proceeds of $1,768 from our
available cash and outstanding line of credit.
On November 1, 2001, we purchased the Holiday Inn Express hotel located in Long
Island City, New York. We purchased this asset for $8,500 plus settlement costs
of approximately $100 and leased it to HHMLP. In conjunction with this
transaction, we assumed the mortgage indebtedness of approximately $5,445,
assumed $1,000 of related party debt, issued additional units for $459 and paid
cash of approximately $1,600.
On November 1, 2001, we sold the Comfort Inn, McHenry, MD to some of our
executive officers, trustees and their affiliates for approximately $1,800,
including the assumption of approximately $1,180 in indebtedness, redemption of
55,175 limited partnership units valued at approximately $331 and cash proceeds
of approximately $300.
On November 1, 2001, we sold the Comfort Inn, Riverfront, Harrisburg, PA to some
of our executive officers, trustees and their affiliates for $3,400 net of
selling costs, including the assumption of approximately $2,500 in indebtedness
and approximately $900 in cash.
5
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
================================================================================
On November 1, 2001, we sold the Holiday Inn, Milesburg, PA to a third party
owner operator for approximately $4,700 less broker fees, settlement and
transfer costs of $617. Net of these fees and expenses we received cash
proceeds of $3,926 and paid down a related party loan receivable of $157.
As of January 1, 2002, we issued an aggregate of 333,541 additional operating
partnership units in connection with the re-pricing of the Holiday Inn Express &
Suites, Harrisburg, the Hampton Inn, Danville and the Hampton Inn & Suites,
Hershey, Pennsylvania. The total number of units outstanding as of January 1,
2002 was 5,099,722.
The Board of Trustees approved the purchase of the Mainstay Suites, Frederick,
Maryland, on February 27, 2002 to be effective January 1, 2002. We purchased
this asset for $5,500 plus settlement costs of approximately $21 and leased it
to HHMLP. In conjunction with this transaction, we assumed mortgage
indebtedness of approximately $3.1 million, assumed $800 of related party debt,
and paid cash of approximately $1,600. The financial position and results of
operations related to the Mainstay Suites, Frederick, Maryland are included in
the accompanying financial statements as of and for the three months ended March
31, 2002.
Further, on February 27, 2002, the Board of Trustees also approved the sale of
the Sleep Inn, Corapolis, Pennsylvania to some of our executive officers,
trustees and their affiliates to be effective as of January 1, 2002. We sold
this asset for $5,500, including the assumption of approximately $3,500 in
indebtedness and the redemption of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property from these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500,
including 327,038 limited partnership units. This transaction has been
accounted for as of January 1, 2002.
During the quarter ended March 31, 2002, we issued an additional 300,000
Priority Class A Common Shares. We received gross proceeds of $1,800. We
received net proceeds of $1,700 after selling and offering expenses. As of
March 31, 2002, we have received $600 and have a Subscriptions Receivable
balance of $1,129.
The quarterly dividend distribution pertaining to the Class A Priority Common
Shares and limited partnership units for the first quarter of 2002 was paid on
April 26, 2002, at the rate of $0.18 per share, which represents an annualized
rate of $0.72 per annum.
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
6
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Hersha Hospitality Trust was formed in May 1998 to acquire equity interests in
ten existing hotel properties. We are a self-administered, Maryland real estate
investment trust for federal income tax purposes. On January 26, 1999, we
completed an initial public offering of 2,275,000 shares of $.01 par value
Priority Class A Common Shares. The offering price per share was $6, resulting
in gross proceeds of $13,650. Net of underwriters discount and offering
expenses, we received proceeds of $11,991. During the quarter ended March 31,
2002, we issued 300,000 shares of $.01 par value Priority Class A Common Shares.
The offering price per share was $6, resulting in gross proceeds of $1,800. Net
of selling and offering expenses, we received proceeds of $1,700.
Upon completion of the initial public offering, we contributed substantially all
of the net proceeds to Hersha Hospitality Limited Partnership [the
"Partnership"] in exchange for a 36.1% general partnership interest in the
Partnership. The Partnership used these proceeds to acquire an equity interest
in ten hotels [the "Initial Hotels"] through subsidiary partnerships, and to
retire certain indebtedness relating to these hotels. The Partnership acquired
these hotels in exchange for (i) units of limited partnership interest in the
Partnership, which are redeemable, subject to certain limitations, for an
aggregate of 4,032,431 Priority Class B Common Shares, with a value of
approximately $24.2 million based on the initial public offering, and (ii) the
assumption of approximately $23.3 million of indebtedness of which approximately
$6.1 million was repaid immediately after the acquisition of the hotels. Some
of our executive officers, trustees and their affiliates received units of
limited partnership interests in the Partnership aggregating a 63.9% equity
interest in the Partnership. The Partnership owns a 99% limited partnership
interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability
company, owns a 1% general partnership interest in the subsidiary partnerships.
The Partnership is the sole member of HHLLC.
We lease 14 of our hotel facilities to HHMLP, a limited partnership owned by
certain members of some of our executive officers, trustees and their
affiliates. HHMLP operates and leases the hotel properties pursuant to separate
percentage lease agreements that provide for initial fixed rents or percentage
rents based on the revenues of the hotels. The hotels are located principally
in the Mid-Atlantic region of the United States. We have also entered into
percentage leases with Noble Investment Group, Ltd. ("Noble"), an independent
third party management company, to lease and manage four hotels in the
metropolitan Atlanta market.
Since the completion of the initial public offering, we have issued an
additional 173,539 units of limited partnership interest in connection with the
acquisition of the Hampton Inn, Danville, PA and 76,555 units in connection with
the acquisition of the Holiday Inn Express, Long Island City. We also issued an
additional 1,275,662 units of limited partnership interest in connection with
final settlement of the purchase prices of several hotels and redeemed 458,465
units of limited partnership interest in connection with the sale of certain
hotels. The total number of units of limited partnership interest outstanding
as of March 31, 2002 and March 31, 2001, was 5,099,722 and 4,972,555,
respectively.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - Percentage lease income is recognized when earned from the
Lessees, under the agreements, from the date of acquisition of each hotel
property. Lease income is recognized under fixed rent agreements ratably over
the lease term. All leases between us and the lessees are operating leases.
We recognize lease revenue for interim and annual reporting purposes on an
accrual basis pursuant to the terms of the respective percentage leases and on
an interim basis in accordance with the Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." Under the provisions of SAB 101, which we adopted in the
fourth quarter of 2000, a portion of our percentage lease revenues, which
historically were recognized in the first, second, and third quarters, are
deferred and recognized in the fourth quarter. The adoption of SAB 101 impacts
the interim reporting of revenues related to our leases, but has no impact on
its interim cash flow or year-end results of operations.
7
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
MINORITY INTEREST - Minority interest in the Partnership represents the limited
partners proportionate share of the equity of the Partnership. Income is
allocated to minority interest based on weighted average percentage ownership
throughout the year.
EARNINGS PER COMMON SHARE - We compute earnings per share in accordance with
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per
Share."
INCOME TAXES - We qualify as a real estate investment trust under Section 856
and 860 of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been reflected in the financial statements.
IMPAIRMENT OF LONG LIVED ASSETS - We review the carrying value of each hotel
property in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144 to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel property or if depreciation
periods should be modified. Long-lived assets are reviewed for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. We perform undiscounted cash
flow analyses to determine if impairment exists. If an impairment is determined
to exist, any related impairment loss is calculated based on fair value. Hotel
properties held for sale are presented at the lower of carrying amount or fair
value less cost to sell.
RECENT ACCOUNTING PRONOUNCEMENTS -On August 15, 2001, the FASB issued SFAS No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 will be effective for
financial statements issued for fiscal years beginning after June 15, 2002. An
entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a
change in accounting principle. We are not currently affected by this
Statement's requirements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", collectively referred to as the
"Standards". SFAS No. 141 supersedes Accounting Principles Board Opinion ("APB")
No. 16, "Business Combinations". SFAS No. 141 (1) requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001; (2) provides specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill; and (3) requires that
unamortized negative goodwill be written off immediately as an extraordinary
gain. SFAS No. 142 supersedes APB 17, "Intangible Assets," and is effective for
fiscal years beginning after December 15, 2001.
8
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their initial recognition. SFAS No. 142 (1) prohibits the
amortization of goodwill and indefinite-lived intangible assets; (2) requires
testing of goodwill and indefinite-lived intangible assets on an annual basis
for impairment (and more frequently if the occurrence of an event or
circumstance indicates an impairment); (3) requires that reporting units be
identified for the purpose of assessing potential future impairments of
goodwill; and (4) removes the forty-year limitation on the amortization period
of intangible assets that have finite lives. The provisions of the Standards
also apply to equity-method investments made both before and after June 30,
2001. SFAS No. 141 requires that the unamortized deferred credit, related to an
excess over cost arising from an investment acquired prior to July 1, 2001,
accounted for using the equity method (equity-method negative goodwill), must be
written-off immediately and recognized as the cumulative effect of a change in
accounting principle. Equity-method negative goodwill arising from equity
investments made after June 30, 2001 must be written-off immediately and
recorded as an extraordinary gain. We adopted SFAS No. 142 on January 1, 2002.
Going forward, we will test goodwill for impairment annually or more frequently
if the occurrence of an event or circumstance indicate potential impairment.
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Priority Class A Common Shares have priority as to the payment of dividends
until dividends equal $0.72 per share on a cumulative basis, and share equally
in additional dividends after the Class B Common Shares have received $0.72 per
share in each annual period. The Priority Class A Common Shares carry a
liquidation preference of $6.00 per share plus unpaid dividends and vote with
the Class B Common Shares on a one vote per share basis. The Priority period of
the Class A Shares will commence on the date of the closing of the initial
public offering and end on the earlier of (i) five years after the initial
public offering of the Priority Common Shares, or (ii) the date that is 15
trading days after we send notice to the holders of the Priority Common Shares,
provided that the closing bid price of the Priority Common Shares is at least $7
on each trading day during such 15-day period.
Pursuant to the Partnership agreement, the limited partners have certain
redemption rights that enable them to cause the Partnership to redeem their
units of limited partnership interest in exchange for Class B Common Shares or
for cash at our election. In the event that the Class B Common Shares are
converted into Priority Class A Common Shares prior to redemption of the units,
the units will be redeemable for Priority Class A Common Shares. If we do not
exercise our option to redeem the units for Class B Common Shares, then the
limited partner may make a written demand that we redeem the units for Class B
Common Shares. These redemption rights may be exercised by the limited
partners. At March 31, 2002 and March 31, 2001, the aggregate number of Class B
Common Shares issuable to the limited partners upon exercise of the redemption
rights is 5,099,722 and 4,972,555, respectively. The number of shares issuable
upon exercise of the redemption rights will be adjusted upon the occurrence of
stock splits, mergers, consolidation or similar pro rata share transactions,
that otherwise would have the effect of diluting the ownership interest of the
limited partners or our shareholders.
We are the sole general partner in the Partnership, which is the sole general
partner in the subsidiary partnerships and, as such, are liable for all recourse
debt of the Partnership to the extent not paid by the subsidiary partnerships.
In the opinion of management, we do not anticipate any losses as a result of our
obligations as general partner.
9
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
In conjunction with the initial public offering, we acquired the Initial Hotels
and entered into percentage lease agreements with HHMLP. We have acquired
twelve properties from some of our executive officers, trustees and their
affiliates that were subsequently leased to HHMLP and acquired four properties
from Noble that were leased back to Noble, subsequent to our public offering.
Under the percentage leases, the Partnership is obligated to pay the costs of
certain capital improvements, real estate and personal property taxes and
property insurance, and to make available to the lessee an amount equal to 4%
[6% for some hotels] of room revenues per quarter, on a cumulative basis, for
the periodic replacement or refurbishment of furniture, fixtures and equipment
at these hotels.
We have currently entered into percentage leases relating to 14 hotels with
HHMLP. Each percentage lease has an initial non-cancelable term of five years.
All, but not less than all, of the percentage leases for these 14 hotels may be
extended for an additional five-year term at HHMLP's option. At the end of the
first extended term, HHMLP, at its option, may extend some or all of the
percentage leases for these hotels for an additional five-year term. Pursuant
to the terms of the percentage leases, HHMLP is required to pay either initial
fixed rent, base rent or percentage rent and certain other additional charges
and is entitled to all profits from the operations of the hotels after the
payment of certain specified operating expenses.
We have future lease commitments from HHMLP through November 2006. Minimum
future rental income under these noncancellable operating leases at March 31,
2002, is as follows:
December 31, 2002 $ 5,065
December 31, 2003 5,601
December 31, 2004 2,497
December 31, 2005 1,166
December 31, 2006 716
Thereafter 0
-------
TOTAL $15,045
=======
We have entered into percentage leases relating to four hotels with Noble. Each
percentage lease has an initial non-cancelable term of three years. All, but
not less than all, of the percentage leases for these four hotels may be
extended for an additional three-year term at Noble's option. At the end of the
first extended term, we or Noble may extend all, but not less than all, of the
percentage leases for these hotels for an additional three-year term. Pursuant
to the terms of the percentage leases, Noble is required to pay either initial
fixed rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses.
We have future lease commitments from Noble through May 19, 2003. Minimum
future rental income under these noncancellable operating leases at March 31,
2002, is as follows:
December 31, 2002 $2,101
December 31, 2003 946
------
TOTAL $3,047
======
10
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
For the period January 1, 2002 through March 31, 2002, we earned initial fixed
rents of $1,528 and earned percentage rents of $1,391. For the period January
1, 2001 through March 31, 2001, we earned initial fixed rents of $1,742 and
earned percentage rents of $1,222.
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 lessee.
We have acquired, and expect to acquire in the future, from affiliates of
certain of our executive officers and trustees, newly-developed or
newly-renovated hotels that do not have an operating history that would allow us
to make purchase price decisions based on historical performance. In buying
these hotels, we have utilized, and expect to continue to utilize, a
"re-pricing" methodology that, in effect, adjusts the initial purchase price for
the hotel, one or two years after we initially purchase the hotel, based on the
actual operating performance of the hotel during the previous twelve months.
All purchase price adjustments are approved by a majority of our independent
trustees.
The initial purchase price for each of these hotels was based upon management's
projections of the hotel's performance for one or two years following our
purchase. The leases for these hotels provide for fixed initial rent for the
one- or two-year adjustment period that provides us with a 12% annual yield on
the initial purchase price, net of certain expenses. At the end of the one or
two-year period, we calculate a value for the hotel, based on the actual net
income during the previous twelve months, net of certain expenses, such that it
would have yielded a 12% return. We then apply the percentage rent formula to
the hotel's historical revenues for the previous twelve months on a pro forma
basis. If the pro forma percentage rent formula would not have yielded a pro
forma annual return to us of 11.5% to 12.5% based on this calculated value, this
value is adjusted either upward or downward to produce a pro forma return of
either 11.5% or 12.5%, as applicable. If this final purchase price is higher
than the initial purchase price, then the seller of the hotel will receive
consideration in an amount equal to the increase in price. If the final
purchase price is lower than the initial purchase price, then the sellers of the
hotel will return to us consideration in an amount equal to the difference. Any
purchase price adjustment will be made either in operating partnership units or
cash as determined by our Board of Trustees, including the independent trustees.
Any operating partnership units issued by us or returned to us as a result of
the purchase price adjustment historically have been valued at $6.00 per unit.
Any future adjustments will be based upon a value per unit approved by our Board
of Trustees, including our independent trustees. The sellers are entitled to
receive quarterly distributions on the operating partnership units prior to the
units being returned to us in connection with a downward purchase price
adjustment.
Before we implemented the current pricing methodology in December 2000, our
pricing methodology provided for re-pricing of a hotel if there was any variance
from our initial forecasted 12% return. We repriced three hotels under this
previous pricing methodology. As of January 1, 2000, the purchase prices for
the Holiday Inn, Milesburg, Comfort Inn, Denver and the Holiday Inn Express,
Riverfront were adjusted based upon the financial results of the hotels for the
twelve months ended December 31, 1999. Based upon the financial results of
these hotels and their respective cash flows, the properties were repriced at
higher aggregate values of $588, $471 and $351, respectively. Based upon the
$6.00 offering price, some of our executive officers, trustees and their
affiliates received an additional 98,050, 78,427 and 58,549 units of limited
partnership interest for the three hotels, respectively. These hotels gave rise
to an additional investment in hotel properties of $485, $388 and $290,
respectively.
Some of our executive officers, trustees and their affiliates and the
independent trustees have revised the return criteria upon which the repricings
are to occur going forward. The revised pricing methodology has been
established in order to ensure that we receive a minimum return of 11.5% and a
maximum return of 12.5% based upon audited results for the property and the
pre-established percentage lease formulas.
We have acquired four hotels, since the commencement of operations, for prices
that will be adjusted on either December 31, 2002 or 2003.
11
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
Based upon this revised repricing formula, the purchase prices for the Hampton
Inn, Carlisle, Comfort Inn, West Hanover, Holiday Inn Express, New Columbia, and
Holiday Inn Express, Hershey were adjusted based upon the financial results of
the hotels for the twelve months ended December 31, 2000. Based upon the
financial results of these hotels and their respective cash flows, the
properties were repriced at higher aggregate values of $1,083, $694, $200 and
$1,212, respectively. Based upon the $6.00 offering price, some of our
executive officers, trustees and their affiliates received an additional
180,566, 115,657, 33,370 and 201,966 units of limited partnership interest for
the three hotels, respectively. These hotels gave rise to an additional
investment in hotel properties of $1,017, $651, $188 and $1,137, respectively.
We also issued 175,538 operating partnership units at a value equal to
approximately $1,000 in connection with the repricing of the Comfort Inn,
Jamaica, New York located at John F. Kennedy International Airport prior to its
sale in June 2001.
The purchase prices for the Holiday Inn Express and Suites, Harrisburg, Hampton
Inn, Danville, and Hampton Inn and Suites, Hershey were adjusted based upon the
financial results of the hotels for the twelve months ended December 31, 2001.
Based upon the financial results of these hotels and their respective cash
flows, the properties were repriced at higher aggregate values of $880, $1,086
and $35, respectively. Based upon the $6.00 offering price, some of our
executive officers, trustees and their affiliates received an additional
146,649, 181,049 and 5,843 units of limited partnership interest for the three
hotels, respectively. These hotels gave rise to an additional investment in
hotel properties of $808, $997 and $32, respectively.
On February 27, 2002, the Board of Trustees approved the purchase of the
Mainstay Suites, effective as of January 1, 2002, based upon an agreed upon
procedures report to be completed by an independent third party accounting firm.
Upon receipt of this report, the Board of Trustees certified the transaction on
May 15, 2002. We purchased this asset for $5,500 plus settlement costs of
approximately $21 and leased it to HHMLP. In conjunction with this transaction,
we assumed mortgage indebtedness of approximately $3.1 million, assumed $800 of
related party debt, and paid cash of approximately $1,600. The consideration
for this transaction and all applicable revenue and expense recognition has been
accounted for as of January 1, 2002.
On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn,
Corapolis, Pennsylvania to some of our executive officers, trustees and their
affiliates for $5,500, including the assumption of approximately $3,500 in
indebtedness and the cancellation of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property form these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500
including 327,038 limited partnership units. The sale of the Sleep Inn,
Corapolis, Pennsylvania was approved effective as of January 1, 2002, based upon
an agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. The consideration for this transaction and all
applicable revenue and expense recognition has been accounted for as of January
1, 2002.
On January 26, 1999, we executed an administrative services agreement with HHMLP
to provide accounting and securities reporting services for the Company. The
terms of the agreement provided for us to pay HHMLP a fixed fee of $55 with an
additional $10 per property (prorated from the time of acquisition) for each
hotel added to our portfolio. HHMLP has reduced the administrative services fee
by $75 pursuant to the revised repricing methodology discussed above. As of
March 31, 2002 and 2001, $44 and $48 has been charged to operations,
respectively.
We have approved the lending of up to $3,000 to some of our executive officers,
trustees and their affiliates to construct hotels and related improvements on
specific hotel projects at an interest rate of 12.0%. As of March 31, 2002 and
2001, some of our executive officers, trustees and their affiliates owed us
$2,000 and $800, respectively. Interest income from these advances was $25 and
$0 for the three months ended March 31, 2001 and 2000, respectively.
Our Due from Related Party balance was $3,196 as of March 31, 2002. The March
31, 2002 balance consisted primarily of $2,000 of development line funding, as
mentioned above, in addition to a deposit of $1,000 held by a related party for
the purchase of the Mainstay Suites, Frederick.
12
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]
The remainder of the balance of approximately $196 consisted primarily of
outstanding payments related to property acquisitions and dispositions between
the related parties and interest receivable.
We have borrowed additional funds from Shreenathji Enterprises, Ltd. ("SEL"), an
affiliated company, during the three months ended March 31, 2002 and 2001 of
$1,600 and 0, respectively. Our total borrowings outstanding from SEL at March
31, 2002 and 2001 were $2,600 and $1,407. We incurred interest expense of
approximately $31 related to these borrowings from SEL. We borrow from SEL at a
fixed rate of 9% per annum.
[4] DEBT
Debt is comprised of the following at March 31, 2002 and December 31, 2001:
MARCH 31 DECEMBER 31,
2002 2001
------------- -------------
Mortgages Payable $ 53,628 $54,477
Revolving Credit Facility 9,639 7,058
------------- -------------
Total Long Term Debt $ 63,267 $61,450
Substantially all of our long term debt is collateralized by property and
equipment and in certain situations is personally guaranteed by some of our
executive officers, trustees and their affiliates. During March 2000, we
completed a portfolio refinancing of $22,050 with Lehman Brothers Bank. We have
repaid $15,450 of mortgages payable and $2,000 of related party debt with
proceeds from the refinancing. The remainder of the funds was utilized for
acquisition of hotel properties and general corporate purposes. These funds are
collateralized by seven of our hotel properties. Outstanding borrowings under
the refinancing bear interest at a annual interest rate of 8.94% and have a
total loan amortization period of 23.5 years. The first eighteen months of the
loan period is structured to be interest only financing with no principal payoff
during the period. We have incurred one-time early prepayment penalties of $107
in connection with the portfolio refinancing.
[5] EARNINGS PER SHARE
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2002 2001
---------- ----------
Income Before Minority Interest and
Discontinued Operations $ 314 $ 92
Add: Discontinued Operations -- 24
Less: Income Attributable to Minority Interest 4 --
---------- ----------
NET INCOME FOR BASIC EARNINGS PER SHARE $ 310 $ 116
--------------------------------------- ---------- ----------
Add: Income Attributable to Minority Interest 4 --
---------- ----------
NET INCOME FOR DILUTED EARNINGS PER SHARE $ 314 $ 116
----------------------------------------- ========== ==========
Weighted Average Shares for Basic Earnings Per Share 2,347,722 2,275,000
Dilutive Effect of Limited Partnership Units 5,099,722 4,972,555
WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE 7,447,444 7,247,555
------------------------------------------------------
13
================================================================================
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
================================================================================
[5] EARNINGS PER SHARE [CONTINUED]
Options to purchase 534,000 shares of Class B common shares for the three months
ended March 31, 2002 and March 31, 2001, respectively, were outstanding but were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
[6] DISCONTINUED OPERATIONS
On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn,
Corapolis, Pennsylvania to some of our executive officers, trustees and their
affiliates for $5,500, including the assumption of approximately $3,500 in
indebtedness and the cancellation of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property form these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500
including 327,038 limited partnership units. The sale of the Sleep Inn,
Corapolis, Pennsylvania was approved effective as of January 1, 2002, based upon
an agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. The consideration for this transaction and all
applicable revenue and expense recognition has been accounted for as of January
1, 2002. We did not recognize any gain or loss on the sale of this asset.
Total lease revenues related to the asset of $210 and income from discontinued
operations of $24 for the three months ended March 31, 2001, are included in
discontinued operations.
[7] UNAUDITED INTERIM INFORMATION
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and as such do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with our customary accounting
practices. In the opinion of management, the information presented reflects all
adjustments [consisting of normal recurring accruals] considered necessary for a
fair presentation of our financial position as of March 31, 2002, and the
results of our operations for the three months ended March 31, 2002 and 2001.
The results of operations for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in
Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 2001.
[8] SUBSEQUENT EVENTS
The quarterly dividend pertaining to the Class A Priority Common Shares for the
first quarter of 2002 was paid on April 26, 2002 at the rate of $0.18 per share,
which represents an annualized rate of $0.72 per annum.
. . . . . . . .
14
REPORT OF INDEPENDENT ACCOUNTANT
To the Partners of
Hersha Hospitality Management L.P.
New Cumberland, Pennsylvania
We have reviewed the accompanying balance sheet of Hersha Hospitality Management
L.P. as of March 31, 2002, and the related statements of operations and
statements of cash flows for the three months ended March 31, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet as of December 31, 2001, and
the related statements of operations, partners' capital, and cash flows for the
year then ended [not presented herein]; and in our report dated March 8, 2002,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying balance sheet as of
December 31, 2001, is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
May 2, 2002
15
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS
[IN THOUSANDS]
================================================================================
MARCH 31, DECEMBER 31,
------------- --------------
2002 2001
------------- --------------
CURRENT ASSETS: [UNAUDITED]
Cash and Cash Equivalents $ 262 $ 222
Accounts Receivable, less allowance for doubtful
accounts of $230 and $230 at March 31, 2002 and
December 31, 2001, respectively 625 698
Prepaid Expenses 11 34
Due from Related Party - HHLP 83 63
Due from Related Parties 1,167 1,097
Other Assets 173 252
------------- --------------
TOTAL CURRENT ASSETS 2,322 2,366
FRANCHISE LICENSES [NET OF ACCUMULATED AMORTIZATION OF
$145 AND $145 AT MARCH 31, 2002 AND DECEMBER 31,
2001, RESPECTIVELY] 284 293
PROPERTY AND EQUIPMENT 1,033 1,079
CONSTRUCTION IN PROGRESS 8 8
------------- --------------
TOTAL ASSETS $ 3,647 $ 3,746
============= ==============
LIABILITIES AND PARTNERS' CAPITAL:
CURRENT LIABILITIES:
Accounts Payable $ 910 $ 1,278
Accrued Expenses 523 268
Other Liabilities 229 -
Advance FF&E from HHLP 317 -
Due to Related Party - HHLP 929 310
Lease Payments Payable - Related Party - HHLP 2,294 2,376
------------- --------------
TOTAL CURRENT LIABILITIES 5,202 4,232
COMMITMENTS - -
ACCRUED CONTINGENT LEASE 726 -
PARTNERS' CAPITAL (2,280) (486)
------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 3,647 $ 3,746
============= ==============
The Accompanying Notes Are an Integral Part of This Financial Statement.
16
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS]
================================================================================
MARCH 31, MARCH 31,
2002 2001
----------- -----------
REVENUES FROM HOTEL OPERATIONS
Room Revenue $ 4,732 $ 5,430
Restaurant Revenue 596 440
Other Revenue 284 421
----------- -----------
TOTAL REVENUES FROM HOTEL OPERATIONS $ 5,612 $ 6,291
EXPENSES:
Hotel Operating Expenses 2,351 2,906
Restaurant Operating Expenses 472 351
Advertising and Marketing 519 453
Bad Debts 4 -
Depreciation and Amortization 65 59
General and Administrative 1,053 868
General and Admin. - Related Parties - 425
Lease Expense - HHLP 2,943 3,009
----------- -----------
TOTAL EXPENSES $ 7,407 $ 8,071
----------- -----------
NET LOSS $ (1,795) $ (1,780)
=========== ===========
The Accompanying Notes Are an Integral Part of This Financial Statement.
17
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 AND 2001 [UNAUDITED]
[IN THOUSANDS]
================================================================================
MARCH 31, MARCH 31,
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net (Loss) $ (1,795) $ (1,780)
----------- -----------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 64 59
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 73 (195)
Prepaid Expenses 23 (102)
Other Assets 79 (2)
Due from Related Parties (90) 1,201
Increase (Decrease):
Accounts Payable (368) (689)
Accounts Payable - Related Party - (60)
Accrued Contingent Lease 726
Lease Payments Payable - HHLP (82) 166
Advance FF&E Related Party - HHLP 317 348
Due to Related Parties 619 362
Accrued Expenses 255 456
Other Liabilities 229 (2)
----------- -----------
Total Adjustments 1,845 1,542
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 50 (238)
INVESTING ACTIVITIES
Property and Equipment (10) (125)
Franchise Licenses - -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (10) (125)
NET DECREASE IN CASH AND CASH EQUIVALENTS 40 (363)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 222 623
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 262 $ 260
=========== ===========
The Accompanying Notes Are an Integral Part of This Financial Statement.
18
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]
================================================================================
[1] ORGANIZATION
Hersha Hospitality Management, L.P., ["HHMLP" or the "Lessee"], was organized
under the laws of the State of Pennsylvania in May, 1998 to lease and operate
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 our executive officers, trustees
and their affiliates, some of whom have ownership interests in the Partnership.
We also manage certain other properties owned by some of our executive officers,
trustees and their affiliates that are not owned by the Partnership. HHMLP
commenced operations on January 1, 1999 and as of March 31, 2002 leased 14 hotel
properties from the Partnership.
[2] COMMITMENTS AND CONTINGENCIES
We have assumed the rights and obligations under the terms of existing franchise
licenses relating to the hotels upon acquisition of the hotels by the
partnership. The franchise licenses generally specify certain management,
operational, accounting, reporting and marketing standards and procedures with
which the franchisee must comply and provide for annual franchise fees based
upon percentages of gross room 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 an additional five-year term at our option. Pursuant to
the terms of the Percentage Leases, we are required to pay the greater of the
base rent or the percentage rent for hotels with established operating
histories. The base rent is 6.5 percent of the purchase price assigned to each
hotel. The percentage rent for each hotel is comprised of (i) a percentage of
room revenues up to a certain threshold amount for each hotel up to which we
receive a certain percentage of room revenues as a component of percentage rent,
(ii) a percentage of room revenues in excess of the threshold amount, but not
more than a certain incentive threshold amount for each hotel in excess of the
threshold amount up to which we receive a certain percentage of the room
revenues in excess of the threshold amount as a component of percentage rent,
(iii) a percentage for room revenues in excess of the incentive threshold
amount, and (iv) a percentage of revenues other than room revenues. For hotels
with limited operating histories, the leases provide for the payment of an
initial fixed rent for certain periods as specified in the leases and the
greater of base rent or percentage rent thereafter. The leases commenced on
January 26, 1999.
Minimum future lease payments due during the noncancellable portion of the
leases as of March 31, 2002 are as follows:
December 31, 2002 $ 5,065
December 31, 2003 5,601
December 31, 2004 2,497
December 31, 2005 1,166
December 31, 2006 716
Thereafter 0
--------
Total $ 15,045
========
On January 26, 1999, we executed an agreement with HHLP to provide accounting
and securities reporting services. The terms of the agreement provided for a
fixed fee of $55 with an additional $10 per property (prorated from the time of
acquisition) for each hotel added to the Company's portfolio. We have reduced
the administrative services fee by $75 pursuant to a revised repricing
methodology between some of our executive officers, trustees and their
affiliates and the Partnership. As of March 31, 2002 and 2001, $44 and $48 have
been earned from operations, respectively.
For the three months ended March 31, 2002 and 2001, we incurred lease expense of
$2,943 and $3,009, respectively. As of March 31, 2002 and 2001 the amount due to
the Partnership for lease payments was $2,294 and $2,810, respectively.
19
================================================================================
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]
================================================================================
[4] UNAUDITED INTERIM INFORMATION
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with the Lessee's customary
accounting practices. In the opinion of management, the information presented
reflects all adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation of our financial position as of March 31, 2002
and the results of our operations for the three months ended March 31, 2002 and
2001. The results of operations for the three months ended March 31, 2002, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2002. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in
Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 2001.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained in this section that are not historical facts are based
on current expectations. This includes statements regarding our 2002
anticipated revenues, expenses and returns, and future capital requirements.
Words such as "believes", "expects", "anticipates", "intends", "plans" and
"estimates" and variations of such words and similar words also identify
forward-looking statements. Such statements are forward-looking in nature and
involve a number of risks and uncertainties, including the risks described under
the caption "Risk Factors" in our registration statement on Form S-11 (File No.
333-56087). Our actual results may differ materially. We caution you not to
place undue reliance on any such forward-looking statements. We assume no
obligation to update any forward-looking statements as a result of new
information, subsequent events or any other circumstances.
Hersha Hospitality Trust was formed in May 1998 to own initially ten hotels in
Pennsylvania and to continue the hotel acquisition and development strategies of
Hasu P. Shah, Chairman of the board of trustees and Chief Executive Officer of
our Company. We are a self-advised Maryland real estate investment trust for
federal income tax purposes.
We completed an initial public offering of two million of our Class A Priority
Common Shares at $6.00 per share and commenced operations on January 26, 1999.
On February 5, 1999, we sold an additional 275,000 Class A Priority Common
Shares pursuant to an over allotment option granted to the underwriter in our
initial public offering. During the quarter ended March 31, 2002, we sold an
additional 300,000 Class A Priority Common Shares. Our Priority Class A Common
Shares are traded on the American Stock Exchange under the symbol "HT."
We contributed substantially all of the net proceeds from our initial public
offering to our operating partnership subsidiary, Hersha Hospitality Limited
Partnership, of which we are the sole general partner. We currently own a 31.6%
partnership interest in that partnership. With the proceeds of our initial
public offering, we caused the partnership to acquire ten hotels in exchange for
(i) 4,032,431 subordinated units of limited partnership interest in the
partnership that are redeemable for the same number of Class B Common Shares
with a value of approximately $24.2 million based on the initial public offering
price, and (ii) the assumption of approximately $23.3 million of indebtedness of
which approximately $6.1 million was repaid immediately after the acquisition of
the hotels.
Since the completion of the initial public offering, we have issued an
additional 173,539 units of limited partnership interest in connection with the
acquisition of the Hampton Inn, Danville, PA and 76,555 units in connection with
the acquisition of the Holiday Inn Express, Long Island City. We have also
issued an additional 1,275,662 units of limited partnership interest in
connection with final settlement of the purchase prices of several hotels and
have redeemed 458,465 units of limited partnership interest in connection with
the sale of certain hotels. The total number of units of limited partnership
interest outstanding as of March 31, 2002 and 2001 was 5,099,722 and 4,972,555,
respectively.
We have acquired four hotels, since the commencement of operations, for prices
that will be adjusted at either December 31, 2002 or 2003.
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
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consideration in an amount equal to the increase in price. If the final
purchase price is lower than the initial purchase price, then the sellers of the
hotel will return to us consideration in an amount equal to the difference. Any
purchase price adjustment will be made either in operating partnership units or
cash as determined by our Board of Trustees, including the independent trustees.
Any operating partnership units issued by us or returned to us as a result of
the purchase price adjustment historically have been valued at $6.00 per unit.
Any future adjustments will be based upon a value per unit approved by our Board
of Trustees, including our independent trustees. The sellers are entitled to
receive quarterly distributions on the operating partnership units prior to the
units being returned to us in connection with a downward purchase price
adjustment.
On February 27, 2002, the Board of Trustees approved the purchase of the
Mainstay Suites, effective as of January 1, 2002, based upon an agreed upon
procedures report to be completed by an independent third party accounting firm.
Upon receipt of this report, the Board of Trustees certified the transaction on
May 15, 2002. We purchased this asset for $5,500 plus settlement costs of
approximately $21 and leased it to HHMLP. In conjunction with this transaction,
we assumed mortgage indebtedness of approximately $3.1 million, assumed $800 of
related party debt, and paid cash of approximately $1,600. The consideration
for this transaction and all applicable revenue and expense recognition has been
accounted for as of January 1, 2002.
On February 27, 2002, the Board of Trustees approved the sale of the Sleep Inn,
Corapolis, Pennsylvania to some of our executive officers, trustees and their
affiliates for $5,500, including the assumption of approximately $3,500 in
indebtedness and the cancellation of 327,038 limited partnership units valued at
approximately $2,000. We initially purchased this property form these executive
officers, trustees and their affiliates as of October 1, 2000 for $5,500
including 327,038 limited partnership units. The sale of the Sleep Inn,
Corapolis, Pennsylvania was approved effective as of January 1, 2002, based upon
an agreed upon procedures report to be completed by an independent third party
accounting firm. Upon receipt of this report, the Board of Trustees certified
the transaction on May 15, 2002. The consideration for this transaction and all
applicable revenue and expense recognition has been accounted for as of January
1, 2002.
As of May 1, 2002, we owned five Hampton Inn hotels, one Hampton Inn & Suites
hotel, one Holiday Inn hotel, one Holiday Inn Express and Suites hotel, four
Holiday Inn Express hotels, one Comfort Inn hotel, one Comfort Suites hotel, two
Mainstay Suites hotels, one Sleep Inn hotel and one Clarion Suites hotel, which
contain an aggregate of 1,580 rooms.
RESULTS OF OPERATIONS, THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31,
2001 ($'s in thousands)
Our revenues for the three months that ended March 31, 2002 and 2001,
substantially consisted of percentage lease revenues recognized pursuant to the
percentage leases. Percentage lease revenues during the three month period that
ended March 31, 2002 were $2,919, an increase of $165, or 6.0%, as compared to
percentage lease revenues of $2,754 for the same period during 2001. The
increase in lease revenues is primarily attributable to an increase in
percentage leases at several of our properties due to increases room revenues
and total revenues at the owned hotels.
Lease revenues were lower for several properties due to the metholdogy change in
percentage lease revenue recognition versus straight-line revenue recognition.
The Holiday Inn Express and Suites, Harrisburg, Hampton Inn, Danville and
Hampton Inn & Suites, Hershey were repriced on January 1, 2002. These
properties now receive percentage lease revenues based upon a percentage lease
formula. During each quarter of the fiscal year that ended December 31, 2001,
all of these properties received an equivalent amount of fixed lease revenues
although the properties were seasonal in nature. Due to the seasonality of the
hotels that were repriced, we will receive a higher portion of the total lease
payments during the second and third quarters and lower lease revenues during
the first and fourth quarters.
Percentage lease revenues from continuing operations were also slightly higher
for the three months ended March 31, 2002 due to the sale of Sleep Inn,
Corapolis effective January 1, 2002. Total revenues related to the Sleep Inn,
Corapolis of $210 and income from discontinued operations of $24 for the three
months ended March 31, 2001, are included in discontinued operations.
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Net income increased by $194 for the three months that ended March 31, 2002, as
compared to net income of $116 for the same period during 2001. The increase in
net income is primarily attributable to a decrease in interest expense,
depreciation and amortization expense during the quarter ended March 31, 2002.
HHMLP room revenues from the hotels decreased by $698, or 12.9%, to $4,732 for
the three months that ended March 31, 2002, as compared to $5,430 for the same
period in 2001. This decrease in revenues is primarily attributable to the
decrease in the number of hotels from 21 properties to 16 properties. The
decrease in room revenues was slightly offset by a higher occupancy percentage,
average daily rate (ADR) and increases in the revenue per available room
(REVPAR). The Lessee maintains the ability to borrow funds from related
entities, partners and shareholders. The Lessee's borrowing costs range from
8.5% on short-term loans to 10.5% on longer term loans.
The following table shows certain other information for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
2002 2001
----------- -----------
Occupancy rate 49.3% 47.9%
ADR $ 70.04 $ 67.55
REVPAR $ 34.54 $ 32.42
Room revenue 4,731,735 5,430,187
Room nights available 136,980 167,490
Room nights occupied 67,561 80,392
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to shareholders, is our share of the Partnership's cash flow. The
Partnership's principal source of revenue is rent payments under the percentage
leases with HHMLP and Noble. The lessee's obligations under the leases are
unsecured. The lessee's ability to make rent payments, and the Company's
liquidity, including its ability to make distributions to common shareholders,
is dependent on the lessee's ability to generate sufficient cash flow from the
operation of the hotels.
We note that industry analysts and investors use Funds From Operations ("FFO")
as a tool to compare equity REIT performance. In accordance with the resolution
adopted by the Board of Governors of the National Association of Real Estate
Investments Trusts ("NAREIT"), FFO represents net income (loss) (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring or sales of property, plus depreciation, and
after adjustments for unconsolidated partnerships and joint ventures. FFO was
$1,335 in the three months that ended March 31, 2002, which was an increase of
$84, or 6.7% over FFO in the comparable period in 2001, which was $1,251. The
increase in FFO can be attributed to decreases in interest expense.
FFO presented herein is not necessarily comparable to FFO presented by other
real estate companies due to the fact that not all real estate companies use the
same definition. However, the Company's FFO is comparable to the FFO of the
real estate companies that use the current definition of NAREIT.
We expect to meet our short-term liquidity requirements generally through net
cash provided by operations, existing cash balances and, if necessary,
short-term borrowings under a secured line of credit. We believe that our net
cash provided by operations will be adequate to fund both operating requirements
and payment of dividends by us in accordance with REIT requirements.
We expect to meet our long-term liquidity requirements, such as scheduled debt
23
maturities and property acquisitions, through long-term secured and unsecured
borrowing, the issuance of additional equity securities of the Company, or, in
connection with acquisitions of hotel properties, issuance of units in the
Partnership.
We intend to make additional investments in hotel properties and may incur, or
cause the Partnership to incur, indebtedness to make such investments or to meet
distribution requirements imposed on a REIT under the Internal Revenue Code to
the extent that working capital and cash flow from the Company's investments are
insufficient to make such distributions. Our policy is to limit consolidated
indebtedness to less than 67% of the total purchase prices paid by us for the
hotels in which we have invested. However, our organizational documents do not
limit the amount of indebtedness that we may incur and our board of trustees may
modify the debt policy at any time without shareholder approval.
The hotel business is seasonal, with hotel revenue generally greater in the
second and third quarters than in the first and fourth quarters. To the extent
that cash flow from operating activities is insufficient to provide all of the
estimated quarterly distributions, we anticipate that we will be able to fund
any such deficit from future working capital.
INFLATION
Operators of hotels in general possess the ability to adjust room rates quickly.
However, competitive pressures may limit the lessee's ability to raise room
rates in the face of inflation, and annual increases in average daily rates have
failed to keep pace with inflations.
SEASONALITY
Our hotels' operations historically have been seasonal in nature, reflecting
higher occupancy rates during the second and third quarters. This seasonality
can be expected to cause fluctuations in our quarterly lease revenue to the
extent that we receive percentage rent.
SUBSEQUENT EVENTS
The quarterly dividend pertaining to the Class A Priority Common Shares for the
first quarter of 2002 was paid on April 26, 2002 at the rate of $0.18 per share,
which represents an annualized rate of $0.72 per annum.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the general instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to our Company at this time.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter that ended March 31, 2002, we have issued an additional
300,000 Priority Class A Common Shares. We received gross proceeds of $1,800 and
received net proceeds of $1,700 after selling and offering expenses. As of
March 31, 2002, we received $600 and have a Subscriptions Receivable balance of
$1,129.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
We did not file any reports on Form 8-K during the quarter ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHA HOSPITALITY TRUST
May 13, 2002 /s/ Ashish R. Parikh
--------------------
Ashish R. Parikh
Chief Financial Officer
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