UNITED
STATES
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 September 30, 2006
OR
|
o
|
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.)
|
|
|
44
Hersha Drive
|
|
Harrisburg,
Pennsylvania
|
17102
|
(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 (i) 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 (ii) has been subject to such filing requirements
for
the past 90 days.
x
Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
oYes
x
No
As
of
September 30, 2006, the number of Class A common shares of beneficial interest
outstanding was 32,391,287.
Table
of Contents for Quarterly Report on Form 10-Q
Item
1. Financial Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS AS OF
SEPTEMBER
30, 2006 [UNAUDITED] AND DECEMBER 31, 2005
[IN
THOUSANDS, EXCEPT SHARE AMOUNTS]
|
|
(UNAUDITED)
|
|
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Assets:
|
|
|
|
|
|
|
|
Investment
in Hotel Properties, net of Accumulated Depreciation
|
|
$
|
642,459
|
|
$
|
317,980
|
|
Investment
in Joint Ventures
|
|
|
51,985
|
|
|
55,981
|
|
Development
Loan Receivables
|
|
|
34,516
|
|
|
32,450
|
|
Cash
and Cash Equivalents
|
|
|
16,273
|
|
|
8,780
|
|
Escrow
Deposits
|
|
|
11,902
|
|
|
7,329
|
|
Hotel
Accounts Receivable, net
|
|
|
6,437
|
|
|
2,211
|
|
Deferred
Costs, net of Accumulated Amortization of $1,417 and
$1,437
|
|
|
6,777
|
|
|
4,131
|
|
Due
from Related Parties
|
|
|
6,767
|
|
|
2,799
|
|
Intangible
Assets, net of Accumulated Amortization of $574 and $478
|
|
|
5,569
|
|
|
4,681
|
|
Other
Assets
|
|
|
9,824
|
|
|
15,606
|
|
Hotel
Assets Held for Sale
|
|
|
17,160
|
|
|
3,407
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
809,669
|
|
$
|
455,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
Line
of Credit
|
|
$
|
37,768
|
|
$
|
-
|
|
Mortgages
and Notes Payable, net of unamortized discount of $812 and
$0
|
|
|
449,808
|
|
|
256,146
|
|
Accounts
Payable, Accrued Expenses and Other Liabilities
|
|
|
14,648
|
|
|
7,099
|
|
Dividends
and Distributions Payable
|
|
|
7,494
|
|
|
5,151
|
|
Due
to Related Parties
|
|
|
7,420
|
|
|
4,655
|
|
Liabilities
Related to Hotel Assets Held for Sale
|
|
|
10,201
|
|
|
375
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
527,339
|
|
|
273,426
|
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS AS OF
SEPTEMBER
30, 2006 [UNAUDITED] AND DECEMBER 31, 2005
[IN
THOUSANDS, EXCEPT SHARE AMOUNTS]
|
|
(UNAUDITED)
|
|
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Minority
Interests:
|
|
|
|
|
|
Common
Units
|
|
$
|
29,697
|
|
$
|
15,147
|
|
Interest
in Consolidated Joint Ventures
|
|
|
2,963
|
|
|
2,079
|
|
|
|
|
|
|
|
|
|
Total
Minority Interests
|
|
|
32,660
|
|
|
17,226
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Shares - 8% Series A, $.01 Par Value, 10,000,000 Shares Authorized,
2,400,000 Shares Issued and Outstanding at September 30, 2006 and
December
31, 2005 (Aggregate Liquidation Preference $60,000 at September 30,
2006
and December 31, 2005, Respectively)
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Common
Shares - Class A, $.01 Par Value, 50,000,000 Shares Authorized, 32,391,287
and 20,302,752 Shares Issued and Outstanding at September 30, 2006
and
December 31, 2005, Respectively
|
|
|
324
|
|
|
203
|
|
|
|
|
|
|
|
|
|
Common
Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, None
Issued and Outstanding
|
|
|
-
|
|
|
-
|
|
Accumulated
Other Comprehensive Income
|
|
|
356
|
|
|
327
|
|
Additional
Paid-in Capital
|
|
|
290,801
|
|
|
193,228
|
|
Distributions
in Excess of Net Income
|
|
|
(41,835
|
)
|
|
(29,079
|
)
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
249,670
|
|
|
164,703
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
809,669
|
|
$
|
455,355
|
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
[UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Hotel
Operating Revenues
|
|
$
|
40,733
|
|
$
|
24,573
|
|
$
|
102,817
|
|
$
|
54,643
|
|
Hotel
Lease Revenue
|
|
|
137
|
|
|
-
|
|
|
137
|
|
|
-
|
|
Land
Lease Revenue
|
|
|
408 |
|
|
- |
|
|
408 |
|
|
- |
|
Total
Revenues
|
|
|
41,278
|
|
|
24,573
|
|
|
103,362
|
|
|
54,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
Operating Expenses
|
|
|
22,627
|
|
|
14,034
|
|
|
59,977
|
|
|
32,987
|
|
Land
Lease
|
|
|
222
|
|
|
108
|
|
|
600
|
|
|
325
|
|
Real
Estate and Personal Property Taxes and Property Insurance
|
|
|
1,672
|
|
|
1,153
|
|
|
4,619
|
|
|
2,764
|
|
General
and Administrative
|
|
|
1,350
|
|
|
1,096
|
|
|
4,326
|
|
|
3,209
|
|
Depreciation
and Amortization
|
|
|
5,256
|
|
|
2,853
|
|
|
13,661
|
|
|
6,605
|
|
Total
Operating Expenses
|
|
|
31,127
|
|
|
19,244
|
|
|
83,183
|
|
|
45,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
10,151
|
|
|
5,329
|
|
|
20,179
|
|
|
8,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
443
|
|
|
156
|
|
|
923
|
|
|
257
|
|
Interest
Income - Development Loans
|
|
|
839
|
|
|
1,163
|
|
|
1,562
|
|
|
3,074
|
|
Other
Revenue
|
|
|
228
|
|
|
121
|
|
|
652
|
|
|
380
|
|
Interest
Expense
|
|
|
6,965
|
|
|
4,284
|
|
|
18,506
|
|
|
8,543
|
|
Loss
on Debt Extinguishment
|
|
|
-
|
|
|
-
|
|
|
1,163
|
|
|
-
|
|
Income
before income from Unconsolidated Joint Venture Investments, Minority
Interests and Discontinued Operations
|
|
|
4,696
|
|
|
2,485
|
|
|
3,647
|
|
|
3,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Unconsolidated Joint Venture Investments
|
|
|
1,773
|
|
|
522
|
|
|
1,432
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Minority Interests and Discontinued
Operations
|
|
|
6,469
|
|
|
3,007
|
|
|
5,079
|
|
|
4,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
allocated to Minority Interests in Continuing
Operations
|
|
|
868
|
|
|
370
|
|
|
543
|
|
|
526
|
|
Income
from Continuing Operations
|
|
|
5,601
|
|
|
2,637
|
|
|
4,536
|
|
|
4,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations (Note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on Disposition of Hotel Properties
|
|
|
-
|
|
|
-
|
|
|
436
|
|
|
1,161
|
|
Income
(Loss) from Discontinued Operations
|
|
|
179
|
|
|
(176
|
)
|
|
300
|
|
|
(171
|
)
|
Income
(loss) from Discontinued Operations
|
|
|
179
|
|
|
(176
|
)
|
|
736
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
5,780
|
|
|
2,461
|
|
|
5,272
|
|
|
5,235
|
|
Preferred
Distributions
|
|
|
1,200
|
|
|
720
|
|
|
3,600
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to Common Shareholders
|
|
$
|
4,580
|
|
$
|
1,741
|
|
$
|
1,672
|
|
$
|
4,515
|
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations applicable to common
shareholders
|
|
$
|
0.15
|
|
$
|
0.10
|
|
$
|
0.04
|
|
$
|
0.17
|
|
Income
(loss) from Discontinued Operations
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
0.03
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to common shareholders
|
|
$
|
0.16
|
|
$
|
0.09
|
|
$
|
0.07
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations applicable to common
shareholders
|
|
$
|
0.15
|
* |
$
|
0.10
|
* |
$
|
0.04
|
* |
$
|
0.17
|
|
Income
(loss) from Discontinued Operations
|
|
$
|
0.01
|
* |
$
|
(0.01
|
)* |
$
|
0.03
|
* |
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to common shareholders
|
|
$
|
0.16
|
* |
$
|
0.09
|
* |
$
|
0.07
|
* |
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,413,553
|
|
|
20,293,827
|
|
|
24,760,185
|
|
|
20,292,737
|
|
Diluted
|
|
|
28,556,303
|
* |
|
20,364,827
|
* |
|
24,863,249
|
* |
|
20,324,466
|
|
*
|
Income
allocated to minority interest in the Partnership has been excluded
from
the numerator and Partnership units have been omitted from the denominator
for the purpose of computing diluted earnings per share for the three
and
nine months ended September 30, 2006 since the effect of including
these
amounts in the numerator and denominator would have no
impact.
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
[UNAUDITED]
[IN
THOUSANDS]
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Operating
activities:
|
|
|
|
|
|
Net
Income
|
|
$
|
5,272
|
|
$
|
5,235
|
|
Adjustments
to reconcile net income to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
Gain
on disposition of hotel assets
|
|
|
(497
|
)
|
|
(1,323
|
)
|
Depreciation
|
|
|
13,798
|
|
|
7,451
|
|
Amortization
|
|
|
719
|
|
|
377
|
|
Loss
on Debt Extinguishment
|
|
|
1,163
|
|
|
-
|
|
Income
allocated to minority interests
|
|
|
643
|
|
|
659
|
|
Equity
in income of unconsolidated joint ventures
|
|
|
(1,432
|
)
|
|
(850
|
)
|
Distributions
from unconsolidated joint ventures
|
|
|
1,834
|
|
|
974
|
|
Gain
recognized on change in fair value of derivative
instrument
|
|
|
(68
|
)
|
|
(11
|
)
|
Stock
based compensation expense
|
|
|
198
|
|
|
57
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Hotel
accounts receivable
|
|
|
(3,560
|
)
|
|
(1,784
|
)
|
Escrow
deposits
|
|
|
(757
|
)
|
|
(3,164
|
)
|
Other
assets
|
|
|
(3,235
|
)
|
|
(3,138
|
)
|
Due
from related parties
|
|
|
(3,968
|
)
|
|
(5,580
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Due
to related parties
|
|
|
2,646
|
|
|
2,945
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
5,263
|
|
|
1,942
|
|
Net
cash provided by operating activities
|
|
|
18,019
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Purchase
of hotel property assets
|
|
|
(225,857
|
)
|
|
(135,488
|
)
|
Capital
expenditures
|
|
|
(8,029
|
)
|
|
(2,063
|
)
|
Proceeds
from disposition of hotel assets held for sale
|
|
|
3,665
|
|
|
7,656
|
|
Purchase
of franchise fees
|
|
|
(48
|
)
|
|
(346
|
)
|
Investment
in common stock of Trust entities
|
|
|
-
|
|
|
(1,548
|
)
|
Investments
in notes receivable and interest bearing deposits
|
|
|
-
|
|
|
(4,429
|
)
|
Repayment
of notes receivable and interest bearing deposits
|
|
|
1,843
|
|
|
1,762
|
|
Investment
in development loans to related parties
|
|
|
(35,616
|
)
|
|
(23,369
|
)
|
Repayment
of development loans to related parties
|
|
|
33,550
|
|
|
4,550
|
|
Distributions
from unconsolidated joint venture
|
|
|
3,227
|
|
|
-
|
|
Advances
and capital contributions to unconsolidated joint ventures
|
|
|
(4,042
|
)
|
|
(38,098
|
)
|
Net
cash used in investing activities
|
|
|
(231,307
|
)
|
|
(191,373
|
)
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
[UNAUDITED]
[IN
THOUSANDS]
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Financing
activities:
|
|
|
|
|
|
Proceeds
from borrowings under line of credit
|
|
$
|
172,802
|
|
$
|
133,580
|
|
Repayment
of borrowings under line of credit
|
|
|
(135,034
|
)
|
|
(134,468
|
)
|
Principal
repayment of mortgages and notes payable
|
|
|
(66,701
|
)
|
|
(5,765
|
)
|
Proceeds
from mortgages and notes payable
|
|
|
165,012
|
|
|
150,191
|
|
Proceeds
from settlement of interest rate derivative
|
|
|
79
|
|
|
-
|
|
Cash
paid for deferred financing costs
|
|
|
(796
|
)
|
|
(2,319
|
)
|
Proceeds
from issuance of common stock, net
|
|
|
103,357
|
|
|
-
|
|
Proceeds
from issuance of preferred stock, net
|
|
|
-
|
|
|
57,855
|
|
Distributions
to consolidated joint venture interest
|
|
|
(221
|
)
|
|
(327
|
)
|
Contributions
to consolidated joint venture interest
|
|
|
-
|
|
|
198
|
|
Dividends
paid on common shares
|
|
|
(12,350
|
)
|
|
(10,953
|
)
|
Dividends
paid on preferred shares
|
|
|
(3,600
|
)
|
|
-
|
|
Distributions
paid on common partnership units
|
|
|
(1,767
|
)
|
|
(1,548
|
)
|
Net
cash provided by financing activities
|
|
|
220,781
|
|
|
186,444
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
7,493
|
|
|
(1,139
|
)
|
Cash
and cash equivalents - beginning of year
|
|
|
8,780
|
|
|
20,614
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of quarter
|
|
$
|
16,273
|
|
$
|
19,475
|
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hersha
Hospitality Trust (“we” or 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.
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.
As
of
September 30, 2006, the Company, through the Partnership and subsidiary
partnerships, owned forty-five limited and full service hotels. Forty-four
of
the owned hotel facilities are leased to the Company’s taxable REIT subsidiary
(“TRS”), 44 New England. One owned hotel facility is leased to an unrelated
party under a fixed lease agreement.
In
addition to the wholly owned hotel properties, as of September 30, 2006, the
Company owned joint venture interests in another eighteen properties. The
properties owned by the joint ventures are leased to a TRS owned by the joint
venture or to an entity owned by the joint venture partners and 44 New England.
The following table lists the properties owned by these joint
ventures:
Joint
Venture
|
|
Ownership
|
|
Property
|
|
Location
|
|
Lessee
|
|
|
|
|
|
|
|
|
|
Unconsolidated
Joint Ventures
|
|
|
|
|
|
|
|
|
Inn
America Hospitality at Ewing, LLC
|
|
50.0%
|
|
Courtyard
|
|
Ewing/Princeton,
NJ
|
|
Hersha
Inn America TRS Inc.
|
PRA
Glastonbury, LLC
|
|
40.0%
|
|
Hilton
Garden Inn
|
|
Glastonbury,
CT
|
|
Hersha
PRA TRS, Inc
|
PRA
Suites at Glastonbury, LLC
|
|
40.0%
|
|
Homewood
Suites
|
|
Glastonbury,
CT
|
|
Hersha
PRA LLC
|
Mystic
Partners, LLC
|
|
66.7%
|
|
Marriott
|
|
Mystic,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
8.8%
|
|
Hilton
|
|
Hartford,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
66.7%
|
|
Courtyard
|
|
Norwich,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
66.7%
|
|
Courtyard
|
|
Warwick,
RI
|
|
Mystic
Partners Leaseco, LLC
|
|
|
66.7%
|
|
Residence
Inn
|
|
Danbury,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
66.7%
|
|
Residence
Inn
|
|
Mystic,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
44.7%
|
|
Residence
Inn
|
|
Southington,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
66.7%
|
|
Springhill
Suites
|
|
Waterford,
CT
|
|
Mystic
Partners Leaseco, LLC
|
|
|
15.0%
|
|
Marriott
|
|
Hartford,
CT
|
|
Mystic
Partners Leaseco, LLC
|
Hiren
Boston, LLC
|
|
50.0%
|
|
Courtyard
|
|
South
Boston, MA
|
|
South
Bay Boston, LLC
|
SB
Partners, LLC
|
|
50.0%
|
|
Holiday
Inn Express
|
|
South
Boston, MA
|
|
South
Bay Sandeep, LLC
|
|
|
|
|
|
|
|
|
|
Consolidated
Joint Ventures
|
|
|
|
|
|
|
|
|
Logan
Hospitality Associates, LLC
|
|
55.0%
|
|
Four
Points - Sheraton
|
|
Revere/Boston,
MA
|
|
Revere
Hotel Group, LLC
|
LTD
Associates One, LLC
|
|
75.0%
|
|
Springhill
Suites
|
|
Williamsburg,
VA
|
|
HT
LTD Williamsburg One LLC
|
LTD
Associates Two, LLC
|
|
75.0%
|
|
Residence
Inn
|
|
Williamsburg,
VA
|
|
HT
LTD Williamsburg Two LLC
|
Affordable
Hospitality Associates, LP
|
|
80.0%
|
|
Hampton
Inn
|
|
Philadelphia,
PA
|
|
Philly
One TRS, LLC
|
Hersha
Inn America TRS Inc; Hersha PRA TRS, Inc; South Bay Sandeep, LLC; and Revere
Hotel Group, LLC, are each a TRS wholly-owned by their respective joint
ventures. Mystic Partners, LLC owns an interest in nine hotel properties. Our
interest in Mystic Partners, LLC is relative to our interest in each of the
nine
properties owned by the joint venture as defined in the joint venture’s
governing documents. Each of the nine properties owned by Mystic Partners,
LLC
is leased to a separate entity that is consolidated in Mystic Partners Leaseco,
LLC which is owned by 44 New England and our joint venture partner in Mystic
Partners, LLC. Hersha PRA LLC, South Bay Boston, LLC; HT LTD Williamsburg One
LLC; HT LTD Williamsburg Two LLC, Philly One TRS, LLC, lease properties
from each respective joint venture and are owned by 44 New England and our
joint
venture partner in each venture.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1
- ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
44
New
England and the joint venture TRS lessees lease the hotel properties pursuant
to
separate percentage lease agreements (the “Percentage Leases”) that provide for
percentage rents based on the revenues of the hotels. Hersha Hospitality
Management, LP (“HHMLP”) serves as the manager of the wholly owned assets and
joint venture assets, except for the Courtyard, Alexandria, Virginia and the
properties owned by Mystic Partners, LLC; Hiren Boston, LLC; SB Partners, LLC;
LTD Associates One, LLC; and LTD Associates Two, LLC. The Courtyard, Alexandria,
Virginia is managed by Marriott International, Inc. and the remaining properties
are managed by parties related to our partners in those joint ventures. HHMLP
is
owned in part by four of the Company’s executive officers, two of its trustees
and other third party investors.
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.
Certain information and footnote disclosures included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or consolidated pursuant to the
rules and regulations of the Securities and Exchange Commission. The unaudited
interim consolidated financial statements should be read in conjunction with
the
audited financial statements and the notes thereto included in the Company’s
annual report on Form 10-K for the year ended December 31, 2005. In management’s
opinion, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position of the Company
and the consolidated results of their operations and their cash flows, are
included. The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
Consolidated
properties are either wholly owned or owned less than 100% by the Partnership
and are controlled by the Company as general partner of the Partnership.
Properties owned in joint ventures are also consolidated if the determination
is
made that we are the primary beneficiary in a variable interest entity or we
maintain control of the asset through our voting interest in the entity. Control
could also be 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.
We
follow
the provisions of Financial Accounting Standards Board FASB Interpretation
No.
46, “Consolidation of Variable Interest Entities (VIE’s), an interpretation of
Accounting Research Bulletin No. 51 (ARB No. 51),” as revised.(“FIN 46R”). FIN
46R 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.
In
July
of 2005, the Emerging Issues Task Force (EITF) agreed on a framework for
evaluating whether a general partner or a group of general partners controls
a
limited partnership and therefore should consolidate it. EITF Issue 04-5,
“Investor’s Accounting for an Investment in a Limited Partnership When the
Investor Is the Sole General Partner and the Limited Partners Have Certain
Rights” (EITF 04-5), in conjunction with FASB Staff Position SOP 78-9-1:
Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-05, amends
the guidance in AICPA Statement of Position No. 78-9, “Accounting for
Investments in Real Estate Ventures” (SOP 78-9) and states that the presumption
of general-partner control would be overcome only when the limited partners
have
either of two types of rights. The first type—referred to as “kick-out
rights”—is the right to dissolve or liquidate the partnership or otherwise
remove the general partner “without cause.” The second type—referred to as
“participating rights”—is the right to effectively participate in significant
decisions made in the ordinary course of the partnership’s business. The
kick-out rights and the participating rights must be substantive in order to
overcome the presumption of general-partner control. EITF 04-5’s guidance was
effective immediately for all newly formed limited partnerships and for existing
limited partnership agreements that are modified. Otherwise, the guidance is
effective for existing limited-partnership agreements no later than the
beginning of the first reporting period in fiscal years beginning after December
15, 2005. As of January 1, 2006, the Company has adopted EITF 04-5 for all
partnerships. The adoption of EITF 04-5 did not have a material effect on its
consolidated financial statements.
In
June
2006, the FASB issued Interpretation No. 48, “Uncertainty in Income Taxes - an
interpretation of FASB No. 109,” which defines a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. It also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure and transition. It is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
effect of this Interpretation, but does not believe it will have a material
effect on its financial position or results of operations.
In
September 2006, the SEC’s staff issued Staff Accounting Bulletin (SAB) No. 108
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” This Bulletin provides
guidance on the consideration of the effects of prior year misstatements
in
quantifying current year misstatements for the purpose of a materiality
assessment. The guidance in this Bulletin must be applied to financial reports
covering the first fiscal year ending after November 15, 2006. The Company
is
currently evaluating the guidance in this Bulletin.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1
- ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Our
investments and contractual relationships with the following entities have
been
evaluated to determine whether they meet the guidelines of consolidation in
accordance with FIN 46: HHMLP; Logan Hospitality Associates, LLC; PRA
Glastonbury, LLC; PRA Suites at Glastonbury, LLC; Hersha PRA LLC; Inn America
Hospitality at Ewing, LLC; Mystic Partners, LLC; Mystic Partners Leaseco, LLC;
Hiren Boston, LLC; South Bay Boston, LLC, SB Partners, LLC; LTD Associates
One,
LLC; HT LTD Williamsburg One LLC; LTD Associates Two, LLC; HT LTD Williamsburg
Two LLC; Hersha Statutory Trust I; Hersha Statutory Trust II; Affordable
Hospitality Associates, LP; Philly One TRS, LLC; and Risingsam Hospitality,
LLC,
Risingsam Union Square, LLC, and Brisam Management, LLC.
Our
examination consisted of reviewing the sufficiency of equity at risk,
controlling financial interests, voting rights, and the obligation to absorb
expected losses and expected gains, including residual returns. Based on our
examination, the following entities were determined to be VIE’s: Mystic
Partners, LLC; Mystic Partners Leaseco, LLC; Hersha PRA LLC; South Bay Boston,
LLC; HT LTD Williamsburg One LLC; HT LTD Williamsburg Two LLC; Philly One
TRS, LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II. Mystic
Partners, LLC is a VIE entity, however because we are not the primary
beneficiary it is not consolidated by the Company. Also, Mystic Partners
Leaseco, LLC; Hersha PRA LLC; South Bay Boston, LLC; HT LTD Williamsburg One
LLC; HT LTD Williamsburg Two LLC; and Philly One TRS, LLC lease hotel
properties from our joint venture interests and are variable interest entities.
These entities are consolidated by the lessors, the primary beneficiaries of
each entity. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs
but
HHLP is not the primary beneficiary in these entities. The accounts of Hersha
Statutory Trust I and Hersha Statutory Trust II are not consolidated with and
into HHLP.
We
have
consolidated the operations of the Logan Hospitality Associates, LLC; LTD
Associates One, LLC; LTD Associates Two, LLC; and Affordable Hospitality
Associates, LP joint ventures because each entity is a voting interest entity
and the Company owns a majority voting interest in the venture.
Our
investments in PRA Glastonbury, LLC; PRA Suites at Glastonbury, LLC; Inn America
Hospitality at Ewing, LLC; Hiren Boston, LLC; and SB Partners, LLC represent
non-controlling ownership interests in the ventures. All of these entities
are
voting interest entities. These investments are accounted for using the equity
method of accounting. These investments are recorded initially at cost and
subsequently adjusted for our share of equity in income (loss), which is
allocated in accordance with the provisions of the applicable partnership or
joint venture agreements, and subsequent contributions or distributions in
these
entities.
We
hold
an investment in development loan receivables with Risingsam Union Square,
LLC,
Risingsam Hospitality, LLC, and Brisam Management, LLC. We have determined
that
each borrower has sufficient equity at risk, a controlling financial interest
and an obligation to absorb expected losses and expected gains, including
residual returns of the entity. These entities are voting interest entities
and
because we have no voting interest they are not consolidated.
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.
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.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1
- ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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,
Fixtures and Equipment
|
5
to 7 Years
|
Revenue
Recognition
We
directly recognize revenue and expense for all consolidated hotels as “Hotel
Operating Revenue” and “Hotel Operating Expense” when earned and incurred.
Included in hotel operating revenues is primarily room revenues and revenue
from
other hotel operating departments. These revenues are recorded net of any sales
or occupancy taxes collected from our guests. All revenues are recorded on
an
accrual basis, as earned. We participate in frequent guest programs sponsored
by
the brand owners of our hotels and we expense the charges associated with those
programs, as incurred.
Stock
Compensation
We
apply
Statement of Financial Accounting Standards No. 123R, “Share-Based Payments”
(SFAS 123R) whereby we measure the cost of employee service received in exchange
for an award of equity instruments based on the grant-date fair value of the
award. The cost is recognized over the period during which an employee is
required to provide service in exchange for the award.
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. Our ownership
interest in the Partnership as of September 30, 2006 and 2005 was 89.3 % and
87.8%, respectively.
We
also
maintain minority interests for the equity interest owned by third parties
in
Logan Hospitality Associates, LLC; LTD Associates One, LLC; LTD Associates
Two,
LLC; and Affordable Hospitality, LP. Third parties own a 45% interest in Logan
Hospitality Associates, LLC; a 25% interest in each of LTD Associates One LLC
and LTD Associates Two, LLC; and a 20% interest in Affordable Hospitality
Associates, LP. We allocate the income (loss) of these joint ventures to the
minority interest in consolidated joint venture account based upon the ownership
of the entities, preferences in distributions of cash available and the terms
of
each ventures liquidation.
Shareholders’
Equity
On
September 19, 2006, we completed a public offering of 3,775,000 common shares
at
$9.75 per share. On September 28, 2006, the underwriter exercised its
over-allotment option with respect to that offering, and we issued an additional
566,250 common shares at $9.75 per share. Proceeds to us, net of underwriting
discounts and commissions and expenses, were approximately $39,960. Immediately
upon closing the offering, we contributed all of the net proceeds of the
offering to the Partnership in exchange for additional Partnership interests.
The net offering proceeds were used to repay indebtedness.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1
- ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On
April
28, 2006, we completed a public offering of 6,520,000 common shares at $9.00
per
share. On May 9, 2006, the underwriter exercised its over-allotment option
with
respect to that offering, and we issued an additional 977,500 common shares
at
$9.00 per share. Proceeds to us, net of underwriting discounts and commissions
and expenses, were approximately $63,400. Immediately upon closing the offering,
we contributed all of the net proceeds of the offering to the Partnership in
exchange for additional Partnership interests. Of the net offering proceeds,
approximately $30,000 was used to repay indebtedness and approximately $19,500
was used to fund property acquisitions.
On
August
5, 2005, we completed a public offering of 2,400,000 of 8.00% Series A
Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation
preference $25.00 per share. Net proceeds of the offering, less expenses and
underwriters commissions, were approximately $57,750. Proceeds from the offering
were used to finance the acquisition of the Company’s interests in Mystic
Partners, LLC and SB Partners, LLC. The remaining net proceeds have been
principally allocated to fund secured development loans and for general
corporate purposes.
Impairment
of Long-Lived Assets
We
review
the carrying value of each hotel property in accordance with SFAS No. 144 to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel property. 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 as a REIT under applicable provisions of the Internal Revenue
Code, as amended, and intends to continue to qualify as a REIT. 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 44 properties from the Partnership. The TRS Lessee
is
subject to taxation as a C-Corporation. The TRS Lessee had operating income
for
financial reporting purposes for the period ended September 30, 2006, however
no
income taxes are recorded in the Consolidated Statement of Operations because
net operating loss carryforwards are sufficient to offset tax liabilities
incurred as a result of this operating income.
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 have been
recorded as we have not concluded that it is more likely than not that these
deferred tax assets will be realizable.
Reclassification
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES
Investment
in Hotel Properties consist of the following at September 30, 2006 and December
31, 2005:
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Land
|
|
$
|
106,908
|
|
$
|
32,430
|
|
Buildings
and Improvements
|
|
|
516,604
|
|
|
283,791
|
|
Furniture,
Fixtures and Equipment
|
|
|
70,691
|
|
|
43,528
|
|
Construction
in Progress
|
|
|
3,275
|
|
|
-
|
|
|
|
|
697,478
|
|
|
359,749
|
|
|
|
|
|
|
|
|
|
Less
Accumulated Depreciation
|
|
|
(55,019
|
)
|
|
(41,769
|
)
|
|
|
|
|
|
|
|
|
Total
Investment in Hotel Properties
|
|
$
|
642,459
|
|
$
|
317,980
|
|
2006
Transactions
The
following acquisitions and other transactions were made by HHLP, our operating
partnership.
New
Jersey and Pennsylvania Portfolio.
On
January 3, 2006, we acquired the 118-room Fairfield Inn & Suites in Mt.
Laurel, New Jersey, the 103-room Fairfield Inn & Suites in Bethlehem,
Pennsylvania, and the 118-room Langhorne Courtyard in Langhorne, Pennsylvania
in
one transaction, for a total purchase price of approximately $41,298 which
included $250 in deposits included in the balance sheet on December 31, 2005.
The total purchase price is subject to a post closing adjustment on June 30,
2007, which may increase the purchase price by an amount of up to
$2,500.
Courtyard,
Scranton, Pennsylvania.
On
February 1, 2006, we acquired the 120-room Courtyard in Scranton, Pennsylvania
for approximately $8,841 in cash.
Residence
Inn, Tyson’s Corner, Virginia.
On
February 2, 2006, we acquired the 96-room Residence Inn in Tyson’s Corner,
Virginia for approximately $20,200 which included the assumption of $9,596
in
debt.
Hampton
Inn, Philadelphia, Pennsylvania.
On
February 15, 2006, we acquired an 80% interest in Affordable Hospitality
Associates, LP, the owner of the land, improvements and certain personal
property of the 250-room Hampton Inn (Center City) in Philadelphia for
approximately $25,067 which included the assumption of a $873 capital lease
and $3,000 in deposits included in the balance sheet on December 31, 2005.
Minority interest of $1,196 was recorded as a result of this
acquisition. Our ownership interest entitles us to a 9.0% participating
preferred return on our capital contribution.
Hilton
Garden Inn, JFK Airport, New York.
On
February 16, 2006, we acquired 100% of the outstanding ownership interests
in
Metro JFK Associates, LLC, the owner of a leasehold interest in the land,
improvements and certain personal property of the Hilton Garden Inn - JFK
Airport, located in Jamaica, New York, for approximately $29,178. The purchase
price includes the assumption of approximately $13,000 in debt, newly issued
units of our operating partnership valued at approximately $6,000, $5,000 in
deposits that were on the balance sheet as of December 31, 2005, and $5,178
in cash.
KW
Portfolio.
On
April 25, 2006 we acquired the 100-room Hawthorn Inn & Suites in Franklin,
Massachusetts for $12,048. On May 1, 2006, we acquired the 96-room Residence
Inn
and the 84-room Comfort Inn in North Dartmouth, Massachusetts for $14,847 and
$4,852, respectively. The purchase price of the Residence Inn includes the
assumption of $9,377 in debt.
Holiday
Inn Express, Cambridge, Massachusetts.
On May
3, 2006, we acquired the 112-room Holiday Inn Express, Cambridge, Massachusetts
for approximately $12,247.
Land-
39th
and
8th
Avenue, New York, New York.
On June
28, 2006, we purchased land at 39th
and
8th
Avenue,
New York City, for $21,774 including closing costs and leased the land to Metro
39th
Street
Associates, LLC.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (Continued)
Residence
Inn, Norwood, Massachusetts. On
July
27, 2006, we purchased the newly constructed 96-room Residence Inn in Norwood,
Massachusetts for approximately $15,144. The purchase price includes the
assumption of $8,000 in debt, newly issued units of our operating partnership
valued at approximately $3,940 and $3,204 in cash.
Holiday
Inn Conference Center, New Cumberland, Pennsylvania.
We
terminated our lease with 44 New England for the Holiday Inn Conference Center
in New Cumberland, Pennsylvania. Effective July 1, 2006, we now lease the hotel
for a fixed lease payment to a third party, who has entered into an
agreement to purchase the property at the end of the five-year lease term.
Land
- 41st
Street, New York, New York.
On July
28, 2006, we
purchased land at 440 West 41st
Street,
New York City, for $21,786 including closing costs and leased the land to Metro
Forty First Street, LLC.
Hampton
Inn, Brookhaven, New York
-
On
September 6, 2006, we acquired the 161-room Hampton Inn, Brookhaven, New York
for approximately $21,689 which included the assumption of $15,455 in
debt.
Holiday
Inn Express, Hauppauge, New York
-
On
September 1, 2006, we acquired the 133-room Holiday Inn Express, Hauppauge,
New
York for approximately $17,644 which included the assumption of $10,623 in
debt.
Courtyard
by Marriott, Alexandria, Virginia
-
On
September 29, 2006, we acquired the 203-room Courtyard Pentagon South,
Alexandria, Virginia for approximately $35,131.
Hampton
Inn, Chelsea, New York -
On
September 29, 2006, we acquired the remaining equity interest in the 144-room
Hampton Inn, Chelsea, New York for approximately $37,126 which included the
assumption of $36,000 in debt and a $202 capital lease. Prior to September
29,
2006, we owned a 33.3% interest in an unconsolidated joint venture that owned
the hotel. Our investment in this venture was $4,409 and was recorded in
investment in unconsolidated joint ventures prior to the consummation of this
transaction. As of September 30, 2006, this property’s assets and
liabilities have been consolidated into the results of the Company.
The
purchase price, including transaction costs, and the allocation of purchase
price to land; building and improvements; furniture, fixtures and equipment;
and
franchise fees and loan costs are as follows:
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (Continued)
Hotel
|
|
Land
|
|
Buildings
and Improvements
|
|
Furniture
Fixtures and Equipment
|
|
Franchise
Fees and Loan Costs
|
|
Leasehold
Intangible
|
|
Total
Purchase Price
|
|
Assumed
Debt and Capital Lease
|
|
NJ
and PA Portfolio
|
|
$
|
6,207
|
|
$
|
30,988
|
|
$
|
3,978
|
|
$
|
125
|
|
|
-
|
|
$
|
41,298
|
|
$ |
-
|
|
Courtyard
by Marriott, Scranton
|
|
|
761
|
|
|
7,192
|
|
|
831
|
|
|
57
|
|
|
-
|
|
|
8,841
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residence
Inn, Tyson's Corner
|
|
|
4,283
|
|
|
14,476
|
|
|
1,240
|
|
|
201
|
|
|
-
|
|
|
20,200
|
|
|
9,596
|
|
Hilton
Garden Inn, JFK Airport
|
|
|
N/A
|
|
|
25,014
|
|
|
3,621
|
|
|
317
|
|
|
226
|
|
|
29,178
|
|
|
13,000
|
|
KW
Portfolio
|
|
|
4,708
|
|
|
22,926
|
|
|
3,918
|
|
|
195
|
|
|
-
|
|
|
31,747
|
|
|
9,023
|
|
Holiday
Inn Express, Cambridge
|
|
|
1,956
|
|
|
9,847
|
|
|
444
|
|
|
-
|
|
|
-
|
|
|
12,247
|
|
|
-
|
|
39th
and 8th Avenue
|
|
|
21,774
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,774
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residence
Inn, Norwood
|
|
|
1,970
|
|
|
11,721
|
|
|
1,403
|
|
|
50
|
|
|
-
|
|
|
15,144
|
|
|
8,000*
|
|
41st
Street
|
|
|
10,735
|
|
|
11,051
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,786
|
|
|
- |
|
Hampton
Inn, Brookhaven
|
|
|
3,131
|
|
|
17,336
|
|
|
980
|
|
|
242
|
|
|
-
|
|
|
21,689
|
|
|
15,455
|
|
Holiday
Inn Express, Hauppauge
|
|
|
2,737
|
|
|
14,076
|
|
|
658
|
|
|
173
|
|
|
-
|
|
|
17,644
|
|
|
10,152
|
|
Courtyard
by Marriott, Alexandria
|
|
|
6,394
|
|
|
26,151
|
|
|
2,586
|
|
|
-
|
|
|
-
|
|
|
35,131
|
|
|
- |
|
Hampton
Inn, Chelsea
|
|
|
7,905
|
|
|
26,087
|
|
|
2,371
|
|
|
763
|
|
|
-
|
|
|
37,126
|
|
|
36,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Wholly Owned Acquisitions
|
|
$
|
72,561
|
|
$
|
216,865
|
|
$
|
22,030
|
|
$
|
2,123
|
|
$
|
226
|
|
$
|
313,805
|
|
$
|
101,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton
Inn (Affordable Hospitality), Philadelphia
|
|
$
|
2,928
|
|
$
|
21,062
|
|
$
|
3,029
|
|
$
|
117
|
|
$
|
-
|
|
$
|
27,136
|
|
$
|
873
|
|
Total
Consolidated Joint Venture Acquisitions
|
|
$
|
2,928
|
|
$
|
21,062
|
|
$
|
3,029
|
|
$
|
117
|
|
$
|
-
|
|
$
|
27,136
|
|
$
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2006 Acquisitions
|
|
$
|
75,489
|
|
$
|
237,927
|
|
$
|
25,059
|
|
$
|
2,240
|
|
$
|
226
|
|
$
|
340,941
|
|
$
|
102,301
|
|
*
The
$8,000 assumed mortgage for Residence Inn, Norwood was repaid in full in
September 2006.
All
of
the newly acquired wholly owned hotels are leased to the TRS Lessee and managed
by HHMLP. The Hampton Inn located in Philadelphia, Pennsylvania is
leased to an entity that is owned by the TRS Lessee and our joint venture
partner.
Included
in the acquisition of the Hilton Garden Inn at the JFK Airport, New York, was
a
land lease for the underlying land with a remaining term of approximately 93
years. The remaining lease payments were determined to be below market value
and
as a result, $226 of the purchase price was allocated to an intangible asset.
Included in the acquisition of the Courtyard by Marriott in Brookline,
Massachusetts in 2005, was a prepaid land lease for the underlying land with
a
remaining term of approximately 90 years. This prepaid land lease is classified
as an intangible asset with a value of $3,570. Both lease intangibles are
recorded in other assets on the consolidated balance sheet and are being
amortized over the remaining lives of the leases.
The
interest rate on the fixed rate debt assumed in the acquisitions of the KW
Portfolio is 5.67% and was below the market rate of interest on the date of
the
acquisition. The interest rate on the fixed rate debt assumed in the acquisition
of the Holiday Inn Express, Hauppauge, New York is 5.701% and was below the
market rate of interest on the date of the acquisition. As a result, a discount
of $354 was recorded for the mortgage assumed in the acquisition of the KW
Portfolio and a discount of $472 was recorded on the debt assumed in the
acquisition of the Holiday Inn Express in Hauppauge, New York. The discounts
reduce the principal balances recorded in mortgages and notes payable. The
discount is being amortized over the remaining life of the debt and is recorded
as interest expense. Interest rates on debt assumed in the acquisition of the
Residence Inn, Tyson’s Corner, Virginia; the Hilton Garden Inn, JFK Airport, New
York and the Hampton Inn, Brookhaven, New York were at market
rates.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 — INVESTMENT IN HOTEL PROPERTIES (Continued)
The
following condensed pro forma financial is presented as if the acquisitions
of
the Holiday Inn Express, Hauppauge; Hampton Inn, Brookhaven; KW Portfolio;
Holiday Inn Express, Cambridge; New Jersey and Pennsylvania
Portfolio; Courtyard by Marriott, Scranton, Pennsylvania; Residence Inn, Tyson’s
Corner, Virginia; Hampton Inn, Philadelphia, Pennsylvania; Fairfield Inn,
Laurel, Maryland; McIntosh Portfolio; Courtyard by Marriott, Brookline,
Massachusetts; Springhill Suites, Williamsburg, Virginia; and Residence Inn,
Williamsburg, Virginia had been consummated as of January 1, 2005. All of the
other acquisitions listed above were purchased without any operating history.
The condensed pro forma information is not necessarily indicative of what actual
results of operations of the Company would have been assuming the acquisitions
had been consummated at the beginning of the respective periods presented,
nor
does it purport to represent the results of operations for future periods.
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Pro
Forma Total Revenues
|
|
$
|
42,487
|
|
$
|
39,872
|
|
$
|
115,429
|
|
$
|
104,263
|
|
Pro
Forma Income from Continuing Operations applicable to Common
Shareholders
|
|
$
|
4,471
|
|
$
|
3,110
|
|
$
|
1,970
|
|
$
|
5,730
|
|
Pro
Forma Income from Continuing Operations applicable to Common Shareholders
per Common Share-Basic
|
|
$
|
0.16
|
|
$
|
0.15
|
|
$
|
0.08
|
|
$
|
0.28
|
|
Pro
Forma Income from Continuing Operations applicable to Common Shareholders
per Common Share-Diluted
|
|
$
|
0.16
|
|
$
|
0.15
|
|
$
|
0.08
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,413,553
|
|
|
20,293,827
|
|
|
24,760,185
|
|
|
20,292,737
|
|
Diluted
|
|
|
28,556,303
|
|
|
20,364,827
|
|
|
24,863,249
|
|
|
20,324,466
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
On
August
29, 2003, HT/CNL Metro Hotels, LP purchased the Hampton Inn, (Manhattan)
Chelsea, NY. We owned a one-third equity interest in this joint venture
partnership while CNL Hospitality Partners LP (“CNL”) owned the remaining equity
interests. On September 29, 2006 we acquired CNL’s remaining equity interest in
the venture. Our share of the operating results of the venture through September
29, 2006 is included in Income from Unconsolidated Joint Ventures on the
statement of operations.
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.
On
July
1, 2004, we purchased a 50% joint venture interest in Inn America Hospitality
at
Ewing, LLC. The only asset owned by this entity is the Courtyard by Marriott,
Ewing-Hopewell, NJ.
On
July
1, 2005, we acquired a 49.9% interest in Hiren Boston. LLC (“Hiren”), the owner
of a 164 room Courtyard by Marriott in South Boston, Massachusetts, for
approximately $5,031, including settlement costs of approximately $331. This
hotel is leased to South Bay Boston, LLC, a joint venture owned by 44 New
England and our joint venture partner, and managed by an affiliate of our joint
venture partner. Our joint venture partner and the manager of the property
are
unaffiliated with the Company. The Hiren joint venture agreement provides for
a
10% preferred return during the first two years of the venture based on our
equity interest in Hiren. Cash distributions will be made from cash available
for distribution, first, to us to provide a 10% annual non-compounded return
on
our capital contributions and then to our joint venture partner to provide
a 10%
annual non-compounded return of their contributions. The 10% returns are not
cumulative. Any remaining cash available for distribution will be distributed
50% to us. Subsequent to this initial two year period, cash distributions will
be made 50% to us and 50% to our joint venture partners in Hiren. In accordance
with AICPA Statement of Position 78-9 “Accounting for Investments in Real Estate
Ventures” (SOP 78-9), Hiren will allocate income to HHLP and our joint venture
partner consistent with the allocation of cash distributions and liquidating
distributions.
On
October 7, 2005, we acquired a 49.9% interest in SB Partners, LLC (“SB
Partners”), the owner of a 118 room Holiday Inn Express in South Boston,
Massachusetts, for approximately $2,250. This hotel is leased to South Bay
Sandeep, LLC, a TRS wholly owned by SB Partners, and managed by an affiliate
of
our joint venture partner. Our joint venture partner and the manager of the
property are owned by certain members that have an interest in Hiren and are
unaffiliated with the Company. The SB Partners joint venture agreement provides
for a 10% preferred return during the first two years of the venture based
on
our equity interest in SB Partners. Cash distributions will be made from cash
available for distribution, first, to us to provide a 10% annual non-compounded
return on our capital contributions and then to our joint venture partner to
provide a 10% annual non-compounded return of their contributions. The 10%
returns are not cumulative. Any remaining cash available for distribution will
be distributed 50% to us. Subsequent to this initial two year period, cash
distributions will be made 50% to us and 50% to our joint venture partners
in SB
Partners. In accordance with SOP 78-9, SB Partners allocates income to us and
our joint venture partner consistent with the allocation of cash distributions
and liquidating distributions.
In
June
2005, we entered into a joint venture with Waterford Hospitality and Mystic
Hotel Investors, LLC (“MHI,” and together with Waterford, the “MHI Parties”),
pursuant to which the parties agreed to establish Mystic Partners, LLC (“Mystic
Partners”). The MHI Parties contributed to Mystic Partners its membership
interests in a portfolio of nine entities that own nine Marriott- or
Hilton-branded hotels in Connecticut and Rhode Island. Aggregate fair value
of
the contributed properties was approximately $250,000. We contributed
approximately $40,000 in cash to Mystic Partners in exchange for a 66.7%
preferred equity interest in the seven stabilized hotel properties in the
portfolio and a 50% preferred equity interest in the two newly-developed hotel
properties in the portfolio, subject to minority interest participations in
certain hotels.
On
February 8, 2006, Mystic Partners closed on the acquisition of the 409 room
Hartford Marriott in Hartford, Connecticut, the final hotel in the portfolio
to
be acquired by Mystic. The acquisition included the hotel, improvements, certain
personal property and a pre-paid air rights sublease relating to airspace
comprising a portion of the Hartford Convention Center. We contributed
approximately $6,700 to Mystic Partners, and the MHI Parties contributed its
Membership Interests in the Owner of the Hartford Marriott. In conjunction
with
this closing, the Mystic Partners agreed to adjust each party’s equity ownership
interest in the two development properties, the Hartford Hilton and the Hartford
Marriott, as follows:
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
(Continued)
|
Hersha
|
MHI
Parties
|
Hartford
Hilton
|
8.8%
|
79.2%
|
Hartford
Marriott
|
15.0%
|
81.0%
|
Both
the
Hartford Hilton and the Hartford Marriott properties maintain minority interest
ownership from unrelated third party investors for approximately 12.0% and
4.0%,
respectively.
Additionally,
the amendment provides us with the option to purchase up to a 50.0% equity
ownership interest in Mystic Partners’ equity interest in the Hartford Hilton
and the Hartford Marriott, respectively, at a price determined in accordance
with the Amendment. Also, the Company entered into an agreement whereby we
and
MHI jointly and severally guarantee the performance of the terms of a loan
to
Adriaen’s Landing Hotel, LLC, owner of the Hartford Marriott, in the amount of
$50,000, and 315 Trumbull Street Associates, LLC, in the amount of $27,000
if at
any time during the term of the note and during such time as the net worth
of
Mystic falls below the amount of the guarantee.
The
Mystic Partners joint venture agreement provides for an 8.5% preferred return
based on our preferred equity interest in the stabilized and newly-developed
hotel properties. Cash distributions will be made from cash available for
distribution, first, to us to provide an 8.5% annual non-compounded return
on
our unreturned capital contributions and then to the MHI Parties to provide
an
8.5% annual non-compounded return of their unreturned contributions. The 8.5%
returns are not cumulative. Any remaining cash available for distribution will
be distributed to us 56.7%, with respect to the net cash flow from the
stabilized properties, 10.5% with respect to the net cash flow from the Hartford
Marriott, and 7.0% with respect to the Hartford Hilton. In accordance with
SOP
78-9, Mystic Partners will allocate income to us and the MHI Parties consistent
with the allocation of cash distributions and liquidating
distributions.
The
nine
hotels acquired by Mystic through September 30, 2006 are:
Hotel
Name
|
|
Location
|
|
Date
Acquired
|
|
Owner
|
|
Hersha
Ownership
|
|
Number
of Rooms
|
Mystic
Marriott Hotel & Spa
|
|
Mystic,
CT
|
|
August
9, 2005
|
|
Exit
88 Hotel, LLC
|
|
66.7%
|
|
285
|
Danbury
Residence Inn
|
|
Danbury,
CT
|
|
August
9, 2005
|
|
Danbury
Suites, LLC
|
|
66.7%
|
|
78
|
Southington
Residence Inn
|
|
Southington,
CT
|
|
August
9, 2005
|
|
Southington
Suites, LLC and 790 West Street, LLC
|
|
44.7%
|
|
94
|
Norwich
Courtyard by Marriott and Rosemont Suites
|
|
Norwich,
CT
|
|
August
9, 2005
|
|
Norwich
Hotel, LLC
|
|
66.7%
|
|
144
|
Warwick
Courtyard by Marriott
|
|
Warwick,
RI
|
|
August
9, 2005
|
|
Warwick
Lodgings, LLC
|
|
66.7%
|
|
92
|
Waterford
SpringHill Suites
|
|
Waterford,
CT
|
|
August
9, 2005
|
|
Waterford
Suites, LLC
|
|
66.7%
|
|
80
|
Mystic
Residence Inn
|
|
Mystic,
CT
|
|
September
15, 2005
|
|
Whitehall
Mansion Partners, LLC
|
|
66.7%
|
|
133
|
Hartford
Hilton
|
|
Hartford,
CT
|
|
October
6, 2005
|
|
315
Trumbull Street, LLC
|
|
8.8%
|
|
393
|
Marriott
Downtown
|
|
Hartford,
CT
|
|
February
8, 2006
|
|
Adriaen’s
Landing Hotel, LLC
|
|
15.0%
|
|
409
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
(Continued)
Each
of
the Mystic Partners hotel properties, except the Hartford Hilton, is under
an
Asset Management Agreement with 44 New England to provide asset management
services. Fees for these services are paid monthly to 44 New England and
recognized as income in the amount 1% of operating revenues, except for the
Hartford Marriott which is 0.25% of operating revenues. Each property owned
by
the joint venture is managed by Waterford Hotel Group, Inc., an affiliate of
MHI
Parties. The property manager will receive a base fee of 3% or 4% of gross
revenues of the property, depending on the property, and an incentive fee of
10%
of net operating income less debt service after each of HHLP and the MHI Parties
receive a 12.0% annual non-compounded return on its unreturned capital
contributions.
On
June
15, 2006, we acquired a 40.0% interest in PRA Suites at Glastonbury, LLC (“PRA
Suites”), the owner of a 136 room Homewood Suites in Glastonbury, Connecticut,
for approximately $2,480. This hotel will be leased to Hersha PRA LLC, an entity
owned by 44 New England and our joint venture partner. The hotel will be managed
HHMLP. Our joint venture partner include members that have an interest in PRA
Glastonbury, LLC and are unaffiliated with the Company. The PRA Suites joint
venture agreement provides for a 10% preferred return based on the equity
interest in PRA Suites. Cash distributions will be made from cash available
for
distribution, first, to us to provide a 10% annual non-compounded return on
our
capital contributions and then to our joint venture partner to provide a 10%
annual non-compounded return of their contributions. The 10% returns are not
cumulative. Any remaining cash available for distribution will be distributed
40% to us. In accordance with SOP 78-9, PRA Suites allocates income to us and
our joint venture partner consistent with the allocation of cash distributions
and liquidating distributions.
We
account for our investment in the above mentioned unconsolidated joint ventures
using the equity method of accounting.
As
of
September 30, 2006 and December 31, 2005 our investment in unconsolidated joint
ventures consists of the following:
|
|
Percent
Owned
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
HT/CNL
Metro Hotels, LP
|
|
|
33.3
|
%
|
$
|
-
|
|
$
|
4,487
|
|
PRA
Glastonbury, LLC
|
|
|
40.0
|
%
|
|
464
|
|
|
2,379
|
|
Inn
American Hospitality at Ewing, LLC
|
|
|
50.0
|
%
|
|
1,579
|
|
|
1,456
|
|
Hiren
Boston, LLC
|
|
|
50.0
|
%
|
|
5,066
|
|
|
5,034
|
|
SB
Partners, LLC
|
|
|
50.0
|
%
|
|
2,287
|
|
|
2,232
|
|
Mystic
Partners, LLC
|
|
|
8.8%-66.7
|
%
|
|
40,061
|
|
|
40,393
|
|
PRA
Suites at Glastonbury, LLC
|
|
|
40.0
|
%
|
|
2,528
|
|
|
-
|
|
|
|
|
|
|
$
|
51,985
|
|
$
|
55,981
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
(Continued)
The
following tables set forth the total assets, liabilities, equity and components
of net income, including the Company’s share, related to the unconsolidated
joint ventures discussed above as of September 30, 2006 and December 31, 2005
and for the three and nine months ended September 30, 2006 and
2005.
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Balance
Sheets
|
|
|
|
|
|
Assets
|
|
$
|
274,303
|
|
$
|
205,416
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
Mortgages
and notes payable
|
|
$
|
211,804
|
|
$
|
166,564
|
|
Other
liabilities
|
|
|
14,194
|
|
|
8,326
|
|
Equity:
|
|
|
|
|
|
|
|
Hersha
Hospitality Trust
|
|
|
53,558
|
|
|
56,291
|
|
Other
|
|
|
(5,253
|
)
|
|
(25,765
|
)
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
$
|
274,303
|
|
$
|
205,416
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
9/30/2006
|
|
9/30/2005
|
|
9/30/2006
|
|
9/30/2005
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
Room
revenue
|
|
$
|
23,505
|
|
$
|
10,017
|
|
$
|
62,580
|
|
$
|
18,107
|
|
Other
revenue
|
|
|
6,874
|
|
|
2,521
|
|
|
21,478
|
|
|
3,280
|
|
Operating
expenses
|
|
|
(19,063
|
)
|
|
(7,613
|
)
|
|
(55,588
|
)
|
|
(12,412
|
)
|
Interest
expense
|
|
|
(4,360
|
)
|
|
(1,680
|
)
|
|
(11,830
|
)
|
|
(2,888
|
)
|
Other
Expenses
|
|
|
(9,184
|
)
|
|
(2,190
|
)
|
|
(23,086
|
)
|
|
(4,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,228
|
)
|
$
|
1,055
|
|
$
|
(6,446
|
)
|
$
|
1,900
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
(Continued)
Equity
income recognized during the three and nine months ended September 30, 2006
and
2005 for our Equity Investments in Unconsolidated Joint Ventures:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
9/30/2006
|
|
9/30/2005
|
|
9/30/2006
|
|
9/30/2005
|
|
HT/CNL
Metro Hotels, LP
|
|
$
|
168
|
|
$
|
173
|
|
$
|
398
|
|
$
|
326
|
|
PRA
Glastonbury, LLC
|
|
|
(28
|
)
|
|
66
|
|
|
(257
|
)
|
|
139
|
|
Inn
American Hospitality at Ewing, LLC
|
|
|
42
|
|
|
(70
|
)
|
|
124
|
|
|
32
|
|
Hiren
Boston, LLC
|
|
|
254
|
|
|
144
|
|
|
28
|
|
|
144
|
|
SB
Partners, LLC
|
|
|
106
|
|
|
-
|
|
|
51
|
|
|
-
|
|
Mystic
Partners, LLC
|
|
|
1,232
|
|
|
209
|
|
|
1,089
|
|
|
209
|
|
PRA
Suites at Glastonbury, LLC
|
|
|
(1
|
)
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity in income
|
|
$
|
1,773
|
|
$
|
522
|
|
$
|
1,432
|
|
$
|
850
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 - DEVELOPMENT LOANS RECEIVABLE
We
have
approved mortgage lending to entities in which our executive officers and
affiliated trustees own an interest to enable such entities to construct hotels
and conduct related improvements on specific hotel projects at interest rates
ranging from 8.0% to 10.0% (“Development Line Funding”). As of September 30,
2006 and December 31, 2005, we had Development Loans Receivable of $34,516
and
$32,450, respectively. Interest income included in “Interest Income -
Development Loans,” was $839 and $1,163 for the three months ended September 30,
2006 and 2005, respectively, and $1,562 and $3,074 for the nine months ended
September 30, 2006 and 2005, respectively. Accrued interest on our development
loans receivable was $1,165 as of September 30, 2006 and $1,780 as of December
31, 2005.
As
of
September 30, 2006, our development loans to related parties consist of the
following:
Hotel
Property
|
|
Borrower
|
|
Principal
Outstanding 9/30/2006
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Sheraton
- JFK Airport, NY
|
|
|
Risingsam
Hospitality, LLC
|
|
$
|
9,516
|
|
|
10
|
%
|
|
March
30, 2007
|
|
Hilton
Garden Inn - Union Square, NY
|
|
|
Risingsam
Union Square, LLC
|
|
|
10,000
|
|
|
10
|
%
|
|
May
31, 2007
|
|
Holiday
Inn Express
-
29th Street, NY
|
|
|
Brisam
Management, LLC
|
|
|
15,000
|
|
|
10
|
%
|
|
May
31, 2007
|
|
|
|
|
|
|
$
|
34,516
|
|
|
|
|
|
|
|
As
of
December 31, 2005 our development loans to related parties consisted of the
following:
Hotel
Property
|
|
Borrower
|
|
Principal
Outstanding 12/31/2005
|
|
Interest
Rate
|
|
Maturity
Date
|
|
Boutique
Hotel - 35th Street, New York, NY
|
|
|
44
Fifth Avenue, LLC
|
|
$
|
9,100
|
|
|
9
|
%
|
|
August
31, 2006
|
|
Hampton
Inn - Seaport, New York, NY
|
|
|
HPS
Seaport, LLC and BCM, LLC
|
|
|
13,000
|
|
|
10
|
%
|
|
March
31, 2006
|
|
Boutique
Hotel - Tribeca, New York, NY
|
|
|
5444
Associates, LP
|
|
|
9,500
|
|
|
10
|
%
|
|
August
31, 2006
|
|
Hilton
Garden Inn - JFK Airport, NY
|
|
|
Metro
Ten Hotels, LLC
|
|
|
850
|
|
|
10
|
%
|
|
December
31, 2005
|
|
|
|
|
|
|
$
|
32,450
|
|
|
|
|
|
|
|
All
outstanding loans as of December 31, 2005 were repaid during the first and
second quarters of 2006.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
5 — OTHER ASSETS
Transaction
Costs
Legal
fees and other third party transaction costs incurred relative to entering
into
debt facilities, issuances of equity securities or acquiring interests in hotel
properties are recorded in other assets prior to the closing of the respective
transactions. Transaction costs included in other assets were $1,018 and $1,863
as of September 30, 2006 and December 31, 2005.
Deposits
Deposits
paid in connection with the acquisition of hotels are recorded in other assets.
As of September 30, 2006, we had no interest bearing deposits or
non-interest bearing deposits related to the acquisition of hotel properties.
As
of December 31, 2005, we had $8,000 in interest bearing deposits and $250 in
non-interest bearing deposits. The interest bearing deposits as of December
31,
2005 accrued interest at 8.0%.
Investment
in Statutory Trusts
We
had
investments in the common stock of Hersha Statutory Trust I and Hersha Statutory
Trust II of $1,548 as of September 30, 2006 and December 31, 2005. Our
investment in the common stock of the statutory trust entities is accounted
for
under the equity method.
Notes
Receivable
Notes
receivable included in other assets were $43 as of September 30, 2006 and $1,886
as of December 31, 2005.
Other
Assets
The
remaining balance of other assets consists of accrued interest receivable,
prepaid property taxes, prepaid insurance, non-related party receivables and
other miscellaneous prepaid expenses.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 — DEBT
Mortgages
and Notes Payable
The
total
mortgages payable balances at September 30, 2006, and December 31, 2005, were
$398,260 and $204,598, respectively, and consisted of mortgages with fixed
and
variable interest rates ranging from 4.0% to 9.43%. In addition, we had
mortgages on our held for sale properties of $ 10,201 and $-0- as of September
30, 2006 and December 31, 2005, respectively, which is classified in Liabilities
Related to Hotel Assets Held for Sale on the consolidated balance sheets. The
maturities for the outstanding mortgages ranged from August 2007 to January
2032. Aggregate interest expense incurred under the mortgages payable totaled
$4,896 and $3,081 for the three months ended September 30, 2006 and 2005,
respectively and $13,509 and $6,684 during the nine months ended September
30,
2006 and 2005, respectively.
In
the
second quarter of 2005, HHLP issued two junior subordinated notes payable in
the
aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture
agreements. The $25,774 note issued to Hersha Statutory Trust I will mature
on
June 30, 2035, but may be redeemed at HHLP’s option, in whole or in part,
beginning on June 30, 2010 in accordance with the provisions of the indenture
agreement. The $25,774 note issued to Hersha Statutory Trust II will mature
on
July 30, 2035, but may be redeemed at our option, in whole or in part, beginning
on July 30, 2010 in accordance with the provisions of the indenture agreement.
The note issued to Hersha Statutory Trust I bears interest at a fixed rate
of
7.34% per annum through June 30, 2010, and the note issued to Hersha Statutory
Trust II bears interest at a fixed rate of 7.173% per annum through July 30,
2010. Subsequent to June 30, 2010 for notes issued to Hersha Statutory Trust
I
and July 30, 2010 for notes issued to Hersha Statutory Trust II holders, the
notes bear interest at a variable rate of LIBOR plus 3.0% pre annum. Interest
expense on the notes in the amount of $940 and $935 was recorded during the
three months ended September 30, 2006 and 2005, respectively, and $2,810 and
$1,336 for the nine months ended September 30, 2006 and 2005,
respectively.
Revolving
Line of Credit
On
January 17, 2006, we entered into a revolving credit loan and security agreement
with Commerce Bank, N.A. with a maximum amount of $60,000. On July 28, 2006,
we
amended our Commerce Line of Credit to increase the maximum borrowing amount
from $60,000 to $85,000 (in certain conditions to $100,000) and modified the
interest rate terms to the option of either the bank’s prime rate of interest
minus 0.75% or LIBOR available for the periods of 1,2,3, or 6 months plus 2.00%.
Provisions of the amended line of credit allow for an increase of the principal
amount of borrowings made available under the line of credit to a maximum
aggregate amount of $100,000, depending upon certain conditions described in
the
agreement.
The
line
of credit is collateralized by a first lien-security interest in all existing
and future assets of HHLP, and title-insured, first-lien mortgages on the
Holiday Inn Express, Harrisburg, PA, the Mainstay Suites and Sleep Inn, King
of
Prussia, PA, the Fairfield Inn, Laurel, MD, the Hampton Inn, Philadelphia,
PA,
the Residence Inn, Norwood, MA and collateral assignment of all hotel management
contracts from which HHLP or its affiliates derive revenue. The line of credit
includes certain financial covenants and requires that we maintain (1) a minimum
tangible net worth of $110.0 million; (2) a maximum accounts and other
receivables from affiliates of $75.0 million; and (3) certain financial ratios.
The Company is in compliance with each of these covenants as of September 30,
2006. The line of credit replaced a line of credit with Sovereign Bank and
expires on December 31, 2008.
This
revolving credit loan replaced both the secured and unsecured lines of credit
that we previously maintained. As a result of the termination of the Sovereign
Bank Line of Credit , we expensed $255 in unamortized deferred costs related
to
the origination of the Sovereign Bank Line of Credit.
The
Company maintained a Line of Credit balance of $37,768 at September 30, 2006
and
$-0- at December 31, 2005. The Company recorded interest expense of $861 and
$74, for the three months ended September 30, 2006 and 2005, respectively,
and
$1,524 and $155, for the nine months ended September 30, 2006 and 2005,
respectively. The weighted average interest rate on our Line of Credit during
the three months ended September 30, 2006 and 2005 was 7.58% and 6.33%,
respectively, and was 7.28% and 5.83% for the nine months ended September 30,
2006 and 2005, respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 and 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 — DEBT (Continued)
Deferred
Costs
Costs
associated with entering into mortgages and notes payable and our revolving
line
of credit are deferred and amortized over the life of the debt instruments.
Amortization of deferred costs is recorded in interest expense. As of September
30, 2006, deferred
costs were $6,777, net of accumulated amortization of $1,417. Deferred costs
were $4,131, net of accumulated amortization of $1,437, as of December 31,
2005.
Amortization of deferred costs for the three and nine months ended September
30,
2006 was $249 and $624, respectively. Amortization of deferred costs for the
three and nine months ended September 30, 2005 was $171 and $342,
respectively.
Debt
Extinguishment
As
noted
above, the Sovereign Bank Line of Credit was replaced by the Commerce Line
of
Credit in January 2006. As a result of this termination, we expensed $255 in
unamortized deferred costs related to the origination of the Sovereign Bank
Line
of Credit, which are included in the Loss on Debt Extinguishment caption on
the
face of the consolidated statements of operations for the nine months ended
September 30, 2006.
On
April
7, 2006, we repaid $21,900 on our mortgage with Merrill Lynch for the Hampton
Inn Herald Square property as a result of a debt refinancing. The new debt
of
$26,500 has a fixed interest rate of 6.085% and a maturity date of May 1, 2016.
As a result of this extinguishment, we expensed $534 in unamortized deferred
costs and prepayment penalties, which are included in the Loss on Debt
Extinguishment caption on the face of the consolidated statements of operations
for the nine months ended September 30, 2006.
On
June
9, 2006, we repaid $34,200 on our mortgage with UBS for the McIntosh Portfolio,
as a result of a debt refinancing. The new debt of $36,300 has a fixed interest
rate of 6.33% and maturity date of June 11, 2016 for each of the loans
associated with the McIntosh Portfolio. As a result of this extinguishment,
we
expensed $374 in unamortized deferred costs, which are included in the Loss
on
Debt Extinguishment caption on the face of the consolidated statements of
operations for the nine months ended September 30, 2006.
On
September 9, 2006, we repaid $8,287 on our mortgage with South New Hampshire
Bank for the Residence Inn, Norwood, using proceeds from a draw on our line
of
credit with Commerce Bank. All pre-payment related fees associated with this
payoff were reimbursed by the seller of the property prior to September 30,
2006.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 — 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.
Management
Agreements
44
New
England engages HHMLP as the property manager for hotels it leases 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 the TRS Lessee 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
September 30, 2006, HHMLP managed all forty four hotels leased to the TRS
Lessee, and we consolidated the financial statements of these forty four hotels
in these financial statements. HHMLP also manages two consolidated joint venture
hotel properties and three unconsolidated joint venture hotel properties in
which we maintain an investment. 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. In addition, two of our consolidated joint venture hotel
properties which are not managed by HHMLP pay an asset management fee to HHMLP
each month equivalent to 1% of gross revenues. The incentive management fee,
if
any, for a hotel is due annually in arrears on the ninetieth day following
the
end of each fiscal year and is based upon the financial performance of the
hotel. For the three months ended September 30, 2006 and 2005, management fees
incurred totaled $1,246 and $797, respectively, and for the nine months ended
September 30, 2006 and 2005, management fees incurred totaled $3,211 and $2,221,
respectively. These fees are recorded as Hotel Operating Expenses.
Administrative
Services Agreement
Prior
to
July 1, 2005, under the terms of an administrative service agreement, HHMLP
provided accounting and reporting services for the Company. The terms of the
agreement provided for us to pay HHMLP an annual fee of $10 per property
(prorated from the time of acquisition) for each hotel in our portfolio. On
July
1, 2005, the administrative service fee was replaced by monthly accounting
and
information technology fees for each of our wholly owned hotels. Monthly fees
for accounting services are $2 per property and monthly information technology
fees are $0.5 per property. For the three months ended September 30, 2006 and
2005, the Company incurred administrative services fees of $0 and $10,
respectively, and for the nine months ended September 30, 2006 and 2005, the
Company incurred administrative fees of $0 and $140, respectively. For the
three
and nine months ended September 30, 2006, the Company incurred accounting fees
of $281 and $768 and information technology fees of $64 and $184. Administrative
services fees, accounting fees, and information technology fees are included
in
General and Administrative expenses.
Franchise
Agreements
The
hotel
properties are operated under franchise agreements assumed by the hotel property
lessee. The franchise agreements have 10 to 20 year terms but may be terminated
by either the franchisee or franchisor on certain anniversary dates specified
in
the agreements. The franchise agreements require annual payments for franchise
royalties, reservation, and advertising services, and such payments are based
upon percentages of gross room revenue. These payments are paid by the lessees
and charged to expenses as incurred. Franchise fee expense for the three months
ended September
30, 2006
and
2005, was $2,871 and $1,935 respectively, and for the nine months ended
September 30, 2006 and 2005, was $7,210 and $4,330, respectively. The initial
fees incurred to enter into the franchise agreements are amortized over the
life
of the franchise agreements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Acquisitions
from Affiliates
We
have
acquired from entities owned or controlled by certain of our executive officers
and our related party 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 previously
utilized, a “re-pricing” methodology that, in effect, adjusted the initial
purchase price for the hotel, one or two years after we initially purchased
the
hotel, based on the actual operating performance of the hotel during the twelve
months prior to the repricing. As part of our lease termination agreement with
HHMLP, the original sellers of all of these properties, HHMLP and the Company
have waived their respective rights to any and all purchase price adjustments
for all properties. 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 related party
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. This right of first refusal would apply to each party until one year
after
such party ceases to be an officer or related party trustee of our Company.
Since our initial public offering in 1999, we have acquired, wholly or through
joint ventures, a total of 64 hotels, including 19 hotels acquired from entities
controlled by our officers or trustees. Of the 19 acquisitions from these
entities, 16 were newly-constructed or newly-renovated by these entities prior
to our acquisition. Our Acquisition Committee of the Board of Trustees is
comprised solely of independent trustees, and the purchase prices and all
material terms of the purchase of hotels from related parties are negotiated
with the Acquisition Committee. At the discretion of the independent trustees,
the Board of Trustees has hired an independent accounting firm to provide our
Board of Trustees with an “Agreed Upon Procedures” report for certain
acquisitions and dispositions to related parties.
Hotel
Supplies
For
the
three months ended September 30, 2006 and 2005, we incurred expenses of $372
and
$112, respectively, and for the nine months ended September 30, 2006 and 2005,
we incurred expenses of $1,247 and $830, respectively, for hotel supplies from
Hersha Hotel Supply, an unconsolidated related party, which are expenses
included in Hotel Operating Expenses. Approximately $85 and $52 is included
in
accounts payable at September 30, 2006 and December 31, 2005.
Capital
Expenditure Fees
Beginning
April 1, 2006, HHMLP began to charge a 5% fee on all capital expenditures and
pending renovation projects at the properties as compensation for procurement
services related to capital expenditures and for project management of
renovation projects. For the three and nine months ended September 30, 2006,
we
incurred fees of $59 and $116, respectively, which were capitalized in with
the
cost of fixed asset additions.
Due
From Related Parties
The
Due
from Related Parties balance as of September 30, 2006 and December 31, 2005
was
approximately $6,767 and $2,799, respectively. The balances as of September
30,
2006 and December 31, 2005 consisted of accrued interest due on our development
loans and receivables owed from our unconsolidated joint ventures.
Due
to
Related Parties
The
Due
to Related Parties balance as of September 30, 2006 and December 31, 2005,
totaled $7,420 and $4,655, respectively. The balances as of September 30, 2006
and December 31, 2005 consisted of monies payable to HHMLP for administrative,
management, and benefit related fees.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(Continued)
Land
Leases
In
conjunction with the acquisition of the Hilton Garden Inn, Edison, NJ, we
assumed a land lease from a third party with an original term of 75 years.
Monthly payments as determined by the lease agreement are due through the
expiration in August 2074. On February 16, 2006, in conjunction with the
acquisition of the Hilton Garden Inn, JFK Airport, NY, we assumed a land lease
with an original term of 99 years. Monthly payments as determined by the lease
agreement are due through the expiration in July of 2100. Both land leases
provide rent increases at scheduled intervals. We record rent expense on a
straight-line basis over the life of the lease from the beginning of the lease
term. For the three months ended September 30, 2006 and 2005, we incurred $222
and $108, respectively, and for the nine months ended September 30, 2006 and
2005,we incurred $600 and $325, respectively, in lease expense under the
agreements.
On
January 6, 2005, we purchased land in Carlisle, PA for $700 plus closing costs
from a related party entity and leased the land to 44 Carlisle Associates,
L.P.,
a related party. In July 2005, 44 Carlisle Associates, L.P. exercised their
option to purchase the land from us. The purchase price consisted of $700 for
the land plus all fees and expenses.
On
February 18, 2005, we purchased land at the Bradley International Airport,
Windsor Locks, CT for $1,000 plus closing costs and leased the land to 44
Windsor Locks Associates, LLC, a related party. In addition to the purchase
price, the terms of the lease required 44 Windsor Locks Associates, LLC to
post
a $350 deposit. In July 2005, 44 Windsor Locks Associates, LLC exercised their
option to purchase the land from us. The purchase price consisted of $1,000
for
the land plus all fees and expenses, and the $350 deposit was
returned.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
8 - DERIVATIVE INSTRUMENTS
The
Company’s objective in using derivatives is to add stability to interest expense
and to manage its exposure to interest rate movements or other identified risks.
To accomplish this objective, the Company primarily uses interest rate swaps
and
interest rate caps as part of its cash flow hedging strategy. Interest rate
swaps designated as cash flow hedges involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount. Interest rate caps
designated as cash flow hedges limit the Company’s exposure to increased cash
payments due to increases in variable interest rates.
On
July
1, 2005, the Company acquired an interest rate cap with a notional amount of
$34,230 to hedge against the variability in cash flows on a variable interest
rate debt instrument. The principal of the variable interest rate debt being
hedged equals the notional amount of the interest rate cap. The interest rate
cap effectively fixes interest payments when LIBOR exceeds 5.0%. On June 12,
2006, we terminated this interest rate cap due to the refinancing of the
associated interest rate debt instrument to a fixed rate. We received $79 in
cash and reclassified $58 in reduction to interest expense as a result of the
termination of this cap.
At
September 30, 2006, the fair value of the interest rate swap was $41 and is
included in other assets on the face of the consolidated balance sheets. At
December 31, 2005, the fair value of the interest rate cap was $23 and is
included in other assets and the fair value of the interest rate swap was $0.
The change in net unrealized gains/losses was a loss of $122 and a gain of
$167
for the three months ended September 30, 2006 and 2005, respectively, for
derivatives designated as cash flow hedges and the change in net unrealized
gains/losses was a loss of $87 and a gain of $267 for the nine months ended
September 30, 2006 and 2005, respectively, for derivatives designed as cash
flow
hedges. Hedge ineffectiveness of $3 and $4 on cash flow hedges was recognized
in
unrealized gain/loss on derivatives during the three months ended September
30,
2006 and 2005, respectively. Hedge ineffectiveness of $10 and $11 on cash flow
hedges was recognized in unrealized gain/loss on derivatives during the nine
months ended September 30, 2006 and 2005, respectively. Hedge ineffectiveness
is
included in interest expense on the face of the consolidated statements of
operations.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
9 - SHARE-BASED PAYMENTS
In
December 2004, the FASB issued Statement of Financial Accounting Standards
No.
123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which is a revision of
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation,” (“SFAS 123”). SFAS No. 123R supersedes Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion
No. 25”) and its related implementation guidance. SFAS No. 123R requires
companies to record compensation expense for share-based payments to employees,
including grants of employee stock options and stock awards, at fair value.
Effective April 1, 2005, the Company has adopted SFAS 123R. No stock-based
compensation plan was in place at the time SFAS 123R was adopted. In 2004,
the
Company established the Hersha Hospitality Trust 2004 Equity Incentive Plan
which provides for the grant of stock options, stock appreciation rights, stock
awards, performance shares and incentive awards. The maximum number of shares
of
common stock that can be issued under this plan is 1.5 million shares. No
share-based payments were granted under this plan during the year ended December
31, 2004.
On
June
1, 2005, the Compensation Committee of the Board of Trustees granted 71,000
restricted share awards to executives. The restricted share awards vest 25%
each
year over four years and compensation expense is recognized ratably over the
four year vesting period based on the fair value of the shares on the date
of
grant. The fair value of the restricted share awards on the grant date was
$9.60
per share. As of September 30, 2006, 25% of these restricted share awards were
vested.
On
June
1, 2006, the Compensation Committee of the Board of Trustees granted 89,500
restricted share awards to executives. The restricted share awards vest 25%
each
year over four years and compensation expense is recognized ratably over the
four year vesting period based on the fair value of the shares on the date
of
grant. The fair value of the restricted share awards on the grant date was
$9.40
per share. As of September 30, 2006, none of these restricted share awards
were
vested.
A
summary
of the stock awards issued under the 2004 Equity Incentive Plan are as
follows:
Date
of Award Issuance
|
|
Shares
Issued
|
|
Shares
Vested at
9/30/2006
|
|
Unearned
Compensation at
9/30/2006
|
|
Period
until Full Vesting
|
|
June
1, 2005
|
|
|
71,000
|
|
|
17,750
|
|
$
|
455
|
|
|
2.75
years
|
|
June
1, 2006
|
|
|
89,500
|
|
|
-
|
|
|
771
|
|
|
3.75
years
|
|
|
|
|
160,500
|
|
|
17,750
|
|
$
|
1,226
|
|
|
|
|
Compensation
expense of $95 and $43 was incurred during the three months ended September
30,
2006 and 2005, respectively, and $198 and $57 for the nine months ended
September 30, 2006 and 2005, respectively, related to the restricted share
awards and is recorded in general and administrative expense on the statement
of
operations. Unearned compensation as of September 30, 2006 and December 31,
2005
was $1,226 and $582, respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 — EARNINGS PER SHARE
The
following table 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. The computation of basic and diluted earnings per
share
is presented below.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$
|
5,601
|
|
$
|
2,637
|
|
$
|
4,536
|
|
$
|
4,245
|
|
Distributions
to 8.0% Series A Preferred Shareholders
|
|
|
(1,200
|
)
|
|
(720
|
)
|
|
(3,600
|
)
|
|
(720
|
)
|
Income
from continuing operations applicable to common
shareholders
|
|
|
4,401
|
|
|
1,917
|
|
|
936
|
|
|
3,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from Discontinued Operations
|
|
|
179
|
|
|
(176
|
)
|
|
736
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to common shareholders
|
|
$
|
4,580
|
|
$
|
1,741
|
|
$
|
1,672
|
|
$
|
4,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$
|
5,601
|
|
$
|
2,637
|
|
$
|
4,536
|
|
$
|
4,245
|
|
Allocation
of income to minority interest in continuing operations
|
|
|
-
|
* |
|
-
|
* |
|
-
|
* |
|
-
|
|
Distributions
to 8.0% Series A Preferred Shareholders
|
|
|
(1,200
|
)
|
|
(720
|
)
|
|
(3,600
|
)
|
|
(720
|
)
|
Income
from continuing operations applicable to common
shareholders
|
|
|
4,401
|
|
|
1,917
|
|
|
936
|
|
|
3,525
|
|
Income
(loss) from Discontinued Operations
|
|
|
179
|
|
|
(176
|
)
|
|
736
|
|
|
990
|
|
Allocation
of income (loss) to minority interest in discontinued
operations
|
|
|
-
|
* |
|
-
|
* |
|
-
|
* |
|
-
|
|
Income
from Discontinued Operations
|
|
|
179
|
|
|
(176
|
)
|
|
736
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to common shareholders
|
|
$
|
4,580
|
|
$
|
1,741
|
|
$
|
1,672
|
|
$
|
4,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - basic
|
|
|
28,413,553 |
|
|
20,293,827 |
|
|
24,760,185 |
|
|
20,292,737 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
awards
|
|
|
142,750 |
|
|
71,000 |
|
|
103,064 |
|
|
31,729 |
|
Partnership
units
|
|
|
- |
* |
|
- |
* |
|
- |
* |
|
- |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - diluted
|
|
|
28,556,303 |
|
|
20,364,827 |
|
|
24,863,249 |
|
|
20,324,466 |
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 — EARNINGS PER SHARE (Continued)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations applicable to common
shareholders
|
|
$
|
0.15
|
|
$
|
0.10
|
|
$
|
0.04
|
|
$
|
0.17
|
|
Income
from Discontinued Operations
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
0.03
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to common shareholders
|
|
$
|
0.16
|
|
$
|
0.09
|
|
$
|
0.07
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations applicable to common
shareholders
|
|
$
|
0.15
|
* |
$
|
0.10
|
* |
$
|
0.04
|
* |
$
|
0.17
|
* |
Income
from Discontinued Operations
|
|
$
|
0.01
|
* |
$
|
(0.01
|
)* |
$
|
0.03
|
* |
$
|
0.05
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income applicable to common shareholders
|
|
$
|
0.16
|
* |
$
|
0.09
|
* |
$
|
0.07
|
* |
$
|
0.22
|
* |
*
|
Income
allocated to minority interest in the Partnership has been excluded
from
the numerator and Partnership units have been omitted from the denominator
for the purpose of computing diluted earnings per share for the three
and
nine months ended September 30, 2006 since the effect of including
these
amounts in the numerator and denominator would have no
impact.
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
11 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
Interest
paid during the nine months ended September 30, 2006 and 2005 totaled $17,378
and $9,414, respectively.
The
following non-cash investing and financing activities occurred during the nine
months ended September 30, 2006 and 2005:
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Common
shares issued as part of the Dividend Reinvestment Plan
|
|
$
|
19
|
|
$
|
19
|
|
Issuance
of Stock to the Board of Trustees
|
|
|
46
|
|
|
-
|
|
Issuance
of Stock Awards
|
|
|
841
|
|
|
682
|
|
Compensation
Expense from vesting of Stock Awards
|
|
|
198
|
|
|
57
|
|
Issuance
of Common LP Units
|
|
|
9,940
|
|
|
-
|
|
Reallocation
to minority interest as a result of issuance of Common LP
Units
|
|
|
6,578
|
|
|
-
|
|
Debt
assumed in hotel property acquisitions
|
|
|
102,301
|
|
|
-
|
|
Conversion
of Common LP Units to Class A Commons Shares
|
|
|
651
|
|
|
-
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
12 — DISCONTINUED OPERATIONS
We
follow
the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which requires, among other things, that the operating
results of certain real estate assets which have been sold, or otherwise qualify
as held for disposition (as defined by SFAS No. 144), be included in
discontinued operations in the statements of operations for all periods
presented.
On
May
13, 2005, we completed the disposition of the Doubletree Club, Jamaica, NY
and
the Holiday Inn Express, Long Island City, NY in a sale of the land,
improvements and certain personal property to unaffiliated buyers for $20,500,
plus transaction costs. Assets sold had a net book value of $18,806 and debt
related to assets held for sale of $12,952 was assumed by the buyers. A note
receivable for $1,700 was received as part of the proceeds from the sale of
the
Doubletree Club and was repaid as of June 30, 2006. Interest payments were
due
quarterly with repayment of the principal due upon maturity. Gain on the sale
of
the two properties was $1,323, of which $162 was allocated to minority interest
in HHLP.
In
September of 2005, our Board of Trustees authorized management of the Company
to
sell the Holiday Inn Express, Hartford, CT and this asset is classified as
“held
for sale” on the Company’s Consolidated Balance Sheet as of December 31, 2005.
The operating results for this hotel have been reclassified to discontinued
operations in the statements of operations for the three and nine months ended
September 30, 2006 and September 30, 2005. The hotel was acquired by the Company
in January 2004 and was sold on April 12, 2006. Proceeds from the sale were
$3,600, and the gain on the sale was $497, of which $61 was allocated to
minority interest in HHLP.
In
March
of 2006, our Board of Trustees authorized management of the Company to sell
four
properties located in metropolitan Atlanta, Georgia. These four properties
are
the Holiday Inn Express, Duluth, Comfort Suites, Duluth, Hampton Inn, Newnan
and
the Hampton Inn Peachtree City. These assets are classified as “held for sale”
on the Company’s Consolidated Balance Sheet as of September 30, 2006. The
operating results for these hotels have been reclassified to discontinued
operations in the statements of operations for the three and nine months ended
September 30, 2006 and 2005. These hotels were acquired by the Company in April
and May 2000. In October, the Company signed definitive agreements for the
sale
of these four assets for an aggregate purchase price of $18.1 million. The
sale
of these four properties is expected to be completed by the end of the fourth
quarter of 2006.
As
of
September 30, 2006, Liabilities Related to Hotel Assets Held for Sale was
$10,201 and consisted of mortgages on the four properties in Georgia. As of
December 31, 2005, Liabilities Related to Hotel Assets Held for Sale was $375
and related to the Holiday Inn Express, Hartford, CT, capital lease which was
extinguished with the sale of the property in April 2006.
During
2004, in conjunction with the acquisition of the Holiday Inn Express, Hartford,
CT, we assumed a land lease from a third party with an original term of 99
years. Monthly payments as determined by the lease agreement are due through
the
expiration in September 2101. Due to the sale of this property in the second
quarter of 2006, we did not incur lease expense for the three months ended
September 30, 2006. For the three months ended September 30, 2005, we incurred
$75 in lease expense under this agreement, and for the nine months ended
September 30, 2006 and 2005, we incurred $85 and $225 in lease expense under
this agreement, which have been reclassified to discontinued operations in
the
statement of operations.
We
allocate interest and capital lease expense to discontinued operations for
debt
that is to be assumed or that is required to be repaid as a result of the
disposal transaction. We allocated $221 and $245 of interest and capital lease
expense to discontinued operations for the three months ended September 30,
2006
and 2005, respectively. For the nine months ended September 30, 2006 and 2005,
we allocated $687 and $1,025, respectively, of interest and capital lease
expenses to discontinued operations.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
12 — DISCONTINUED OPERATIONS (continued)
Assets
Held for Sale consisted of the following at September 30, 2006 and December
31,
2005:
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,008
|
|
$
|
-
|
|
Buildings
and Improvements
|
|
|
16,605
|
|
|
2,644
|
|
Furniture,
Fixtures and Equipment
|
|
|
3,463
|
|
|
1,119
|
|
Deferred
Costs
|
|
|
237
|
|
|
-
|
|
|
|
|
22,313
|
|
|
3,763
|
|
|
|
|
|
|
|
|
|
Less
Accumulated Depreciation
|
|
|
(5,153
|
)
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
Total
Investment in Hotel Properties
|
|
$
|
17,160
|
|
$
|
3,407
|
|
The
following table sets forth the components of discontinued operations (excluding
the gains on sale) for the three and nine months ended September 30, 2006 and
2005:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
Revenue:
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Hotel
Operating Revenues
|
|
$
|
1,493
|
|
$
|
2,049
|
|
$
|
5,042
|
|
$
|
7,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Capital Lease Expense
|
|
|
221
|
|
|
245
|
|
|
687
|
|
|
1,025
|
|
Hotel
Operating Expenses
|
|
|
1,000
|
|
|
1,528
|
|
|
3,426
|
|
|
5,311
|
|
Land
Lease
|
|
|
-
|
|
|
75
|
|
|
85
|
|
|
225
|
|
Real
Estate and Personal Property Taxes and Property Insurance
|
|
|
69
|
|
|
101
|
|
|
243
|
|
|
367
|
|
General
and Administrative
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35
|
|
Depreciation
and Amortization
|
|
|
-
|
|
|
300
|
|
|
259
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
$
|
1,290
|
|
$
|
2,249
|
|
$
|
4,700
|
|
$
|
7,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Discontinued Operations before Minority
Interest
|
|
|
203
|
|
|
(200
|
)
|
|
342
|
|
|
(195
|
)
|
Allocation
to Minority Interest
|
|
|
24
|
|
|
(24
|
)
|
|
42
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss)from Discontinued Operations
|
|
$
|
179
|
|
$
|
(176
|
)
|
$
|
300
|
|
$
|
(171
|
)
|
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”, “anticipates”,
“intends”, “plans” and “estimates” and variations of such words and similar
words also identify forward-looking statements. Our actual results may differ
materially, including the following: economic conditions generally and the
real
estate market specifically; the effect of threats of terrorism and increased
security precautions on travel patterns and demand for hotels; the threatened
or
actual outbreak of hostilities and international political instability;
governmental actions; legislative/regulatory changes, including changes to
laws
governing the taxation of REITs; level of proceeds from asset sales; cash
available for capital expenditures; availability of capital; ability to
refinance debt; rising interest rates; rising insurance premiums; competition;
supply and demand for hotel rooms in our current and proposed market areas,
including the existing and continuing weakness in business travel and lower-than
expected daily room rates; other factors that may influence the travel industry,
including health, safety and economic factors; and changes in generally accepted
accounting principles, policies and guidelines applicable to REITs. Additional
risks are discussed in the Company’s filings with the Securities and Exchange
Commission. 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
September 30, 2006, we owned interests in 63 hotels in the eastern United States
including 18 hotels owned through joint ventures. For purposes of the REIT
qualification rules, we cannot directly operate any of our hotels. Instead,
we
must lease our hotels. In 2001, the REIT 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, as of September 30, 2006, we have leased 44 of our hotels to a
wholly-owned TRS, which pays qualifying rent, and the TRS has entered into
management contracts with HHMLP with respect to those hotels. We intend to
lease
all newly acquired hotels to a TRS. As of September 30, 2006, we also owned
interests in 18 hotels through joint ventures and those hotels are leased to
TRSs that are wholly owned by those joint ventures or to entities that are
owned
jointly by our TRS Lessee and our partners in the joint venture. The hotels
owned by the joint ventures are managed, pursuant to the terms of certain
management agreements, by HHMLP or management companies affiliated with our
joint venture partners. As all of our hotels have been leased to the TRS Lessee
or a joint venture TRS, we are participating more directly in the operating
performance of our hotels. The TRSs directly receive all revenue from, and
are
required to fund all expenses relating to, hotel operations. The TRSs are also
subject to income tax on their earnings.
Operating
Results
The
following table outlines operating results for the Company’s portfolio of wholly
owned hotels and those owned through joint venture interests that are
consolidated in our financial statements for the three and nine months ended
September 30, 2006 and 2005.
CONSOLIDATED
HOTELS:
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
%
Variance
|
|
2006
|
|
2005
|
|
%
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
Available
|
|
|
407,923
|
|
|
263,120
|
|
|
|
|
|
1,142,861
|
|
|
662,539
|
|
|
|
|
Rooms
Occupied
|
|
|
326,215
|
|
|
205,532
|
|
|
|
|
|
855,139
|
|
|
480,950
|
|
|
|
|
Occupancy
|
|
|
79.97
|
%
|
|
78.11
|
%
|
|
2.4
|
%
|
|
74.82
|
%
|
|
72.59
|
%
|
|
3.1
|
%
|
Average
Daily Rate (ADR)
|
|
$
|
117.94
|
|
$
|
109.56
|
|
|
7.6
|
%
|
$
|
111.53
|
|
$
|
102.58
|
|
|
8.7
|
%
|
Revenue
Per Available Room (RevPAR)
|
|
$
|
94.31
|
|
$
|
85.58
|
|
|
10.2
|
%
|
$
|
83.45
|
|
$
|
74.47
|
|
|
12.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
Revenues
|
|
$
|
38,472,206
|
|
$
|
22,518,441
|
|
|
|
|
$
|
95,369,544
|
|
$
|
49,336,823
|
|
|
|
|
Food
& Beverage
|
|
$
|
1,307,143
|
|
$
|
1,431,254
|
|
|
|
|
$
|
5,181,254
|
|
$
|
4,126,026
|
|
|
|
|
Other
Revenues
|
|
$
|
953,264
|
|
$
|
623,209
|
|
|
|
|
$
|
2,265,805
|
|
$
|
1,180,365
|
|
|
|
|
Total
Revenues
|
|
$
|
40,732,613
|
|
$
|
24,572,904
|
|
|
|
|
$
|
102,816,603
|
|
$
|
54,643,214
|
|
|
|
|
Discontinued
Assets
|
|
$
|
1,493,055
|
|
$
|
2,049,003
|
|
|
|
|
$
|
5,042,370
|
|
$
|
7,689,981
|
|
|
|
|
The
following table outlines operating results for the three and nine months ended
September 30, 2006 and 2005 for hotels we own through an unconsolidated joint
venture interest. These operating results reflect 100% of the operating results
of the property including our interest and the interests of our joint venture
partners and minority interests.
UNCONSOLIDATED
JOINT VENTURES:
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
%
Variance
|
|
2006
|
|
2005
|
|
%
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
Available
|
|
|
234,603
|
|
|
97,193
|
|
|
|
|
|
657,828
|
|
|
173,937
|
|
|
|
|
Rooms
Occupied
|
|
|
171,119
|
|
|
77,300
|
|
|
|
|
|
471,279
|
|
|
138,552
|
|
|
|
|
Occupancy
|
|
|
72.94
|
%
|
|
79.53
|
%
|
|
-8.3
|
%
|
|
71.64
|
%
|
|
79.66
|
%
|
|
-10.1
|
%
|
Average
Daily Rate (ADR)
|
|
$
|
137.36
|
|
$
|
129.59
|
|
|
6.0
|
%
|
$
|
132.79
|
|
$
|
130.68
|
|
|
1.6
|
%
|
Revenue
Per Available Room (RevPAR)
|
|
$
|
100.19
|
|
$
|
103.07
|
|
|
-2.8
|
%
|
$
|
95.13
|
|
$
|
104.10
|
|
|
-8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
Revenues
|
|
$
|
23,505,484
|
|
$
|
10,017,401
|
|
|
|
|
$
|
62,579,820
|
|
$
|
18,106,640
|
|
|
|
|
Food
& Beverage
|
|
$
|
4,941,637
|
|
$
|
1,754,362
|
|
|
|
|
$
|
15,927,400
|
|
$
|
2,360,671
|
|
|
|
|
Other
Revenues
|
|
$
|
1,932,007
|
|
$
|
765,795
|
|
|
|
|
$
|
5,550,315
|
|
$
|
919,682
|
|
|
|
|
Total
Revenues
|
|
$
|
30,379,128
|
|
$
|
12,537,558
|
|
|
|
|
$
|
84,057,535
|
|
$
|
21,386,993
|
|
|
|
|
The
following table outlines operating results for the three and nine months ended
September 30, 2006 and 2005 for our entire portfolio of hotels, which includes
wholly owned hotels, hotels we own through joint venture interests that are
consolidated in our financial statements, and hotels we own through an
unconsolidated joint venture interest. These operating results reflect 100%
of
the operating results of the property including our interest and the interests
of our joint venture partners and minority interests.
ALL
HOTELS (INCLUDES CONSOLIDATED HOTELS AND UNCONSOLIDATED JOINT VENTURE
ASSETS):
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
%
Variance
|
|
2006
|
|
2005
|
|
%
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
Available
|
|
|
642,526
|
|
|
360,313
|
|
|
|
|
|
1,800,689
|
|
|
836,476
|
|
|
|
|
Rooms
Occupied
|
|
|
497,334
|
|
|
282,832
|
|
|
|
|
|
1,326,418
|
|
|
619,502
|
|
|
|
|
Occupancy
|
|
|
77.40
|
%
|
|
78.50
|
%
|
|
-1.4
|
%
|
|
73.66
|
%
|
|
74.06
|
%
|
|
-0.5
|
%
|
Average
Daily Rate (ADR)
|
|
$
|
124.62
|
|
$
|
115.04
|
|
|
8.3
|
%
|
$
|
119.20
|
|
$
|
108.90
|
|
|
9.5
|
%
|
Revenue
Per Available Room (RevPAR)
|
|
$
|
96.46
|
|
$
|
90.30
|
|
|
6.8
|
%
|
$
|
87.80
|
|
$
|
80.65
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
Revenues
|
|
$
|
61,977,690
|
|
$
|
32,535,842
|
|
|
|
|
$
|
157,949,364
|
|
$
|
67,443,463
|
|
|
|
|
Food
& Beverage
|
|
$
|
6,248,780
|
|
$
|
3,185,616
|
|
|
|
|
$
|
21,108,654
|
|
$
|
6,486,697
|
|
|
|
|
Other
Revenues
|
|
$
|
2,885,271
|
|
$
|
1,389,004
|
|
|
|
|
$
|
7,816,120
|
|
$
|
2,100,047
|
|
|
|
|
Total
Revenues
|
|
$
|
71,111,741
|
|
$
|
37,110,462
|
|
|
|
|
$
|
186,874,138
|
|
$
|
76,030,207
|
|
|
|
|
Discontinued
Assets
|
|
$
|
1,493,055
|
|
$
|
2,049,003
|
|
|
|
|
$
|
5,042,370
|
|
$
|
7,689,981
|
|
|
|
|
Comparison
of the three month period ended September 30, 2006 to September 30, 2005 (in
thousands, except per share data).
Revenue
Our
total
revenues for the three month period ended September 30, 2006 consisted of hotel
operating revenues for hotels leased to our wholly owned TRS, 44 New England,
and hotels owned through joint venture interests which are consolidated in
our
financial statements. Our total revenues were approximately $41,278 representing
an increase of $16,705 or 67.98% compared to total revenues of $24,573 for
the
three month period ended September 30, 2005. The increase in revenues is
primarily attributable to the acquisitions consummated since the comparable
period in 2005 and improved performance at certain of our hotels. Since
September 30, 2005, the Company has acquired interests in the following eighteen
hotels:
Brand
|
|
Location
|
|
Rooms
|
|
Acquisition
Date
|
Hampton
Inn
|
|
Chelsea/New
York, NY
|
|
144
|
|
September
29, 2006
|
Courtyard
|
|
Alexandria
|
|
203
|
|
September
29, 2006
|
Hampton
Inn
|
|
Brookhaven,
NY
|
|
161
|
|
September
6, 2006
|
Holiday
Inn Express
|
|
Hauppauge,
NY
|
|
133
|
|
September
1, 2006
|
Residence
Inn
|
|
Norwood,
MA
|
|
96
|
|
July
27, 2006
|
Holiday
Inn Express
|
|
Cambridge,
MA
|
|
112
|
|
May
3, 2006
|
Residence
Inn
|
|
North
Dartmouth, MA
|
|
96
|
|
May
1, 2006
|
Comfort
Inn
|
|
North
Dartmouth, MA
|
|
84
|
|
May
1, 2006
|
Hawthorne
Suites
|
|
Franklin,
MA
|
|
100
|
|
April
25, 2006
|
Hilton
Garden Inn
|
|
JFK
Airport, NY
|
|
188
|
|
February
16, 2006
|
Hampton
Inn
|
|
Philadelphia,
PA
|
|
250
|
|
February
15, 2006
|
Residence
Inn
|
|
Tysons
Corner, VA
|
|
96
|
|
February
2, 2006
|
Courtyard
|
|
Scranton,
PA
|
|
120
|
|
February
1, 2006
|
Courtyard
|
|
Langhorne,
PA
|
|
118
|
|
January
3, 2006
|
Fairfield
Inn
|
|
Mt.
Laurel, NJ
|
|
118
|
|
January
3, 2006
|
Fairfield
Inn
|
|
Bethlehem,
PA
|
|
103
|
|
January
3, 2006
|
Residence
Inn
|
|
Williamsburg,
VA
|
|
108
|
|
November
22, 2005
|
Springhill
Suites
|
|
Williamsburg,
VA
|
|
120
|
|
November
22, 2005
|
Revenues
for all eighteen hotels were recorded from the date of acquisition as Hotel
Operating Revenues. As of July 1, 2006, we entered into an agreement to lease
the Holiday Inn Conference Center to an unrelated third party. Revenues from
the
operation of this property were included in Hotel Operating Revenues in the
three months ended September 30, 2005. For the three months ended September
30,
2006, only Hotel Lease Revenue is included in Total Revenues.
During
the three months ended September 30, 2006, we acquired two parcels of land
which
are being leased to hotel developers. The leases are fixed rate triple
net
leases. During the three months ended September 30, 2006, we earned $408
from
these leases, which is included in total revenues.
The
income from our unconsolidated joint ventures is accounted for utilizing the
equity method of accounting, and our portion of the net income from the 15
hotels in these joint ventures is recorded as “Income from Unconsolidated Joint
Venture Investments” in our Statement of Operations. Our joint venture
agreements contain provisions that define the cash distributions and liquidating
distributions and income is allocated to us consistent with those provisions.
Income from unconsolidated joint venture investments increased $1,251 from
$522
for the three months ended September 30, 2005 to $1,773 for the three months
ended September 30, 2006. Since September 30, 2005, we have acquired
unconsolidated joint venture interests in the following properties:
Joint
Venture
|
|
Brand
|
|
Name
|
|
Rooms
|
|
Ownership
%
|
|
Hersha
Preferred Equity Return
|
|
Acquisition
Date
|
PRA
Suites at Glastonbury, LL
|
|
Homewood
Suites
|
|
Glastonbury,
CT
|
|
136
|
|
40.0%
|
|
10.00%
|
|
June
15, 2006
|
Mystic
Partners, LLC
|
|
Marriott
|
|
Hartford,
CT
|
|
409
|
|
15.0%
|
|
8.50%
|
|
February
8, 2006
|
SB
Partners, LLC
|
|
Holiday
Inn Express
|
|
South
Boston, MA
|
|
118
|
|
50.0%
|
|
10.00%
|
|
October
7, 2005
|
Mystic
Partners, LLC
|
|
Hilton
|
|
Hartford,
CT
|
|
393
|
|
8.8%
|
|
8.50%
|
|
October
6, 2005
|
Further,
the third quarter of 2006 included income from unconsolidated joint ventures
for
a full quarter related to the following six hotels that were purchased during
the three months ended September 30, 2005:
Joint
Venture
|
|
Brand
|
|
Name
|
|
Rooms
|
|
Ownership
%
|
|
Hersha
Preferred Equity Return
|
|
Acquisition
Date
|
Mystic
Partners, LLC
|
|
Marriott
|
|
Mystic,
CT
|
|
285
|
|
66.7%
|
|
8.50%
|
|
August
9, 2005
|
Mystic
Partners, LLC
|
|
Courtyard
|
|
Norwich,
CT
|
|
144
|
|
66.7%
|
|
8.50%
|
|
August
9, 2005
|
Mystic
Partners, LLC
|
|
Courtyard
|
|
Warwick,
RI
|
|
92
|
|
66.7%
|
|
8.50%
|
|
August
9, 2005
|
Mystic
Partners, LLC
|
|
Residence
Inn
|
|
Danbury,
CT
|
|
78
|
|
66.7%
|
|
8.50%
|
|
August
9, 2005
|
Mystic
Partners, LLC
|
|
Residence
Inn
|
|
Southington,
CT
|
|
94
|
|
44.7%
|
|
8.50%
|
|
August
9, 2005
|
Mystic
Partners, LLC
|
|
Springhill
Suites
|
|
Waterford,
CT
|
|
80
|
|
66.7%
|
|
8.50%
|
|
August
9, 2005
|
Mystic
Partners, LLC
|
|
Residence
Inn
|
|
Mystic,
CT
|
|
133
|
|
66.7%
|
|
8.50%
|
|
September
15, 2005
|
For
the
three months ended September 30, 2006, interest income increased $287 compared
to the same period in 2005. This increase was a result of an increase in
development loans outstanding with unrelated parties. Interest Income -
Development Loans for the three months ended September 30, 2006 decreased $324
from $1,163 for the three months ended September 30, 2005 to $839 during the
same period in 2006, due primarily to a decrease in the average balance
development loans receivable to related parties during the period. Other
revenue increased approximately $107 for the three months ended September 30,
2006 compared to the same period in 2005 as a result of fees earned for asset
management services provided to properties owned by some of our unconsolidated
joint ventures.
Expenses
Total
hotel operating expenses increased 61.2% to approximately $22,627 for the three
month period ended September 30, 2006 from $14,034 for the three month period
ended September 30, 2005. Consistent with the increase in hotel operating
revenues, hotel operating expenses increased primarily due to the acquisitions
consummated since the comparable period in 2005 as mentioned above. The
acquisitions also resulted in an increase in depreciation and amortization
from
$2,853 for the three months ended September 30, 2005 to $5,256 for the three
months ended September 30, 2006. Similarly, real estate and personal property
tax and property insurance increased $519, or 45.0%, in the three months ended
September 30, 2006 when compared to the same period in 2005.
General
and administrative expense increased by approximately $254 from $1,096 in 2005
to $1,350 in 2006. General and administrative expenses increased primarily
due
to higher compensation expense related to our increase in asset management
and
accounting staff. This increase in cost has been partially offset by the
reduction in initial costs related to establishing our process to evaluate
internal controls that were incurred during the three months ended September
30,
2005.
Net
Income
Net
income applicable to common shareholders for the three month period ended
September 30, 2006 was approximately $4,580 compared to net income applicable
to
common shareholders of $1,741 for the same period in 2005.
Operating
income for the three months ended September 30, 2006 was $10,151 compared to
operating income of $5,329 during the same period in 2005. The $4,822, or 90.5%,
increase in operating income resulted from improved performance of our portfolio
and acquisitions that have increased the scale of our operations enabling us
to
leverage the absorption of administrative costs.
The
increase in our operating income was partially offset by increases in interest
expense, which increased $2,681
from $4,284 for
the
three months ended September 30, 2005 to $6,965
for
the
three months ended September 30, 2006. The increase in interest expense is
the
result of mortgages placed on newly acquired properties.
Net
income applicable to common shareholders was also negatively impacted by a
full
quarter of preferred dividends resulting from our issuance of 8.0% Series A
cumulative redeemable preferred shares in the third quarter of 2005. Preferred
dividends for the full three months ended September 30, 2006 were $1,200 versus
$720 for the three months ended September 30, 2005.
Included
in net income applicable to common shareholders for the three months ended
September 30, 2006 is $179 income from discontinued operations compared to
$176
loss during the same period in 2005. Discontinued operations results from the
operations of hotel properties that we have sold and the hotel properties we
have committed to sell.
Comparison
of the nine month period ended September 30, 2006 to September 30,
2005.
Revenue
Our
total
revenues for the nine month period ended September 30, 2006 consisted of hotel
operating revenues for hotels leased to our wholly owned TRS, 44 New England,
and hotels owned through joint venture interests which are consolidated in
our
financial statements. Our total revenues for the nine month period ended
September 30, 2006 also included hotel lease revenue for the lease of the
Holiday Inn Conference Center, New Cumberland, Pennsylvania which was leased
to
unrelated third party beginning on July 1, 2006. Our total revenues were
approximately $103,362 representing an increase of $48,719 or 89.2% compared
to
total revenues of $54,643 for the nine month period ended September 30, 2005.
The increase in revenues is primarily attributable to the acquisitions
consummated since the comparable period in 2005 and improved performance at
certain of our hotels. As noted above, we have acquired interests in eighteen
hotels since September 30, 2005. Revenues for all eighteen hotels were recorded
from the date of acquisition as Hotel Operating Revenues. Further, hotel
operating revenue for the nine months ended September 30, 2006 included revenues
for a full nine months related to three hotels that were purchased in June
2005,
three hotels that were purchased in May 2005, one hotel that was purchased
in
April 2005 and one hotel that was purchased in January of 2005.
During
the nine months ended September 30, 2006, we acquired two parcels of land
which
are being leased to hotel developers. The leases are fixed rate triple net
leases. During the nine months ended September 30, 2006, we earned $408 from
these leases, which is included in total revenues.
Income
from unconsolidated joint venture investments increased $582 from $850 for
the
nine months ended September 30, 2005 to $1,432 for the nine months ended
September 30, 2006. Since September 30, 2005, we have acquired unconsolidated
joint venture interests in seven properties.
For
the
nine months ended September 30, 2006, interest income increased $666 compared
to
the same period in 2005. This increase was the result of an increase in
development loans outstanding with unrelated parties, interest earned on
proceeds from the offering of our common stock, which was completed in the
second quarter of 2006, and an increase in interest income on our escrow
deposits. Interest Income - Development Loans for the nine months ended
September 30, 2006 decreased $1,512 from $3,074 for the nine months ended
September 30, 2005 to $1,562 during the same period in 2006, due primarily
to a
decrease in the average balance of development loans receivable during the
period.
Other
revenue increased approximately $352 for the nine months ended September 30,
2006 compared to the same period in 2005 as a result of fees earned for asset
management services provided to hotels owned by some of our unconsolidated
joint
ventures.
Expenses
Total
hotel operating expenses increased 81.8% to approximately $59,977 for the nine
months ended September 30, 2006 from $32,987 for the nine month period ended
September 30, 2005. Consistent with the increase in hotel operating revenues,
hotel operating expenses increased primarily due to the acquisitions consummated
since the comparable period in 2005 as mentioned above. The acquisitions also
resulted in an increase in depreciation and amortization from $6,605 for the
nine months ended September 30, 2005 to $13,661 for the nine months ended
September 30, 2006. Similarly, real estate and personal property tax and
property insurance increased $1,855, or 67.1%, in the nine months ended
September 30, 2006 when compared to the same period in 2005.
General
and administrative expense increased by approximately $1,117 from $3,209 in
2005
to $4,326 in 2006. General and administrative expenses increased primarily
due
to higher compensation expense related to our increase in asset management
and
accounting staff. This increase in cost has been partially offset by the
reduction in initial costs related to establishing our process to evaluate
internal controls that were incurred during the three months ended September
30,
2005.
Net
Income
Net
income applicable to common shareholders for the nine months ended September
30,
2006 was approximately $1,672 compared to net income applicable to common
shareholders of $4,515 for the same period in 2005.
Operating
income for the nine months ended September 30, 2006 was $20,179 compared to
operating income of $8,753 during the same period in 2005. The $11,426, or
130.5%, increase in operating income resulted from improved performance of
our
portfolio and acquisitions that have increased the scale of our operations
enabling us to leverage the absorption of administrative costs.
The
increase in our operating income was partially offset by increases in interest
expense, which increased $9,963
from $8,543 for
the
nine months ended September 30, 2005 to $18,506
for
the
nine months ended September 30, 2006. The increase in interest expense is the
result of our issuance of $51,548 of notes payable in the second quarter of
2005
and mortgages placed on newly acquired properties. Also in the nine months
ended
September 30, 2006, we
refinanced $56,125 in variable rate debt, replacing it with $62,800 fixed rate
debt, and replaced our line of credit with an increased credit facility. As
a
result of terminating the variable rate debt and line of credit, we incurred
$1,163 in debt extinguishment expense due to early termination fees and to
write-off deferred loan costs associated with the retired debt and credit
facility.
Net
income applicable to common shareholders was also negatively impacted by $3,600
in preferred dividends resulting from our issuance of 8.0% Series A cumulative
redeemable preferred shares in the third quarter of 2005, compared to $720
in
preferred dividends for the same period in 2005.
Included
in net income applicable to common shareholders for the nine months ended
September 30, 2006 is $300 income from discontinued operations compared to
a
$171 loss during the same period in 2005. Discontinued operations results from
the operations of two properties that were sold in June of 2005 and April 2006
and the hotel properties we have committed to sell. Also included in net income
applicable to common shareholders for the nine months ended September 30, 2006
is a gain of $436 resulting from the sale of the Holiday Inn Express in
Hartford, CT which had been held for sale. Included in net income applicable
to
common shareholders for the nine months ended September 30, 2005 is a gain
of
$1,161 resulting from the sale of Doubletree Club, Jamaica, NY and the Holiday
Inn Express, Hunters Point, NY.
Liquidity
and Capital Resources
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 the net cash provided
by
operations will be adequate to fund the Company’s operating requirements, debt
service and the 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
the
second quarter of 2005, HHLP issued two junior subordinated notes payable in
the
aggregate amount of $51,548 to the Hersha Statutory Trusts, pursuant to
indenture agreements. The $25,774 note issued to Hersha Statutory Trust I will
mature on June 30, 2035, but may be redeemed at HHLP’s option, in whole or in
part, beginning on June 30, 2010 in accordance with the provisions of the
indenture agreement. The $25,774 note issued to Hersha Statutory Trust II will
mature on July 30, 2035, but may be redeemed at our option, in whole or in
part,
beginning on July 30, 2010 in accordance with the provisions of the indenture
agreement. The note issued to Hersha Statutory Trust I bears interest at a
fixed
rate of 7.34% per annum through June 30, 2010 and the note issued to Hersha
Statutory Trust II bears interest at a fixed rate of 7.173% per annum through
July 30, 2010. Subsequent to June 30, 2010 for notes issued to Hersha Statutory
Trust I and July 30, 2010 for notes issued to Hersha Statutory Trust II holders,
the notes bear interest at a variable rate of LIBOR plus 3.0% pre annum.
Interest
expense on the notes in the amount of $940 and $935 was recorded during the
three months ended September 30, 2006 and 2005, respectively, and $2,810 and
$1,336 for the nine months ended September 30, 2006 and 2005,
respectively.
On
August
5, 2005, we completed a public offering of 2,400,000 million of 8.00% Series
A
Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation
preference $25.00 per share. Net proceeds of the offering, less expenses and
underwriters commissions, were approximately $57,750. Proceeds from the offering
were used to finance the acquisition of the Company’s interests in Mystic
Partners, LLC (“Mystic”) and SB Partners, LLC (“SB Partners”). The remaining net
proceeds have been principally allocated to fund secured development loans
and
for general corporate purposes.
On
April
28, 2006, we completed a public offering of 6,520,000 common shares at $9.00
per
share. On May 9, 2006, the underwriter exercised its over-allotment option
with
respect to this offering, and we issued an additional 977,500 common shares
at
$9.00 per share. Proceeds to the Company, net of underwriting discounts and
commissions and expenses, were approximately $63,400. Immediately upon closing
the offering, the Company contributed all of the net proceeds of the offering
to
the Partnership in exchange for additional Partnership interests. Of the net
offering proceeds, approximately $30,000 was used to repay indebtedness and
approximately $19,500 was used to fund property acquisitions.
On
September 19, 2006, we completed a public offering of 3,775,000 common shares
at
$9.75 per share. On September 28, 2006, the underwriter exercised its
over-allotment option with respect to this offering, and we issued an additional
566,250 common shares at $9.75 per share. Proceeds
to us, net of underwriting discounts and commissions and expenses, were
approximately $39,960. Immediately upon closing the offering, we contributed
all
of the net proceeds of the offering to the Partnership in exchange for
additional Partnership interests. The net offering proceeds were used to repay
indebtedness.
On
January 17, 2006, we entered into a revolving credit loan and security agreement
with Commerce Bank, N.A. with a maximum amount of $60,000. On July 28, 2006,
we
amended our Commerce Line of Credit to increase the maximum borrowing amount
from $60,000 to $85,000 (in certain conditions to $100,000) and modified the
interest rate terms to the option of either the bank’s prime rate of interest
minus 0.75% or LIBOR available for the periods of 1,2,3, or 6 months plus 2.00%.
Provisions of the amended line of credit allow for an increase of the principal
amount of borrowings made available under the line of credit to a maximum
aggregate amount of $100,000, depending upon certain conditions described in
the
agreement.
The
line
of credit is collateralized by a first lien-security interest in all existing
and future assets of HHLP, and title-insured, first-lien mortgages on the
Holiday Inn Express, Harrisburg, PA, the Mainstay Suites and Sleep Inn, King
of
Prussia, PA, the Fairfield Inn, Laurel, MD, the Hampton Inn, Philadelphia,
PA,
the Residence Inn, Norwood, MA and collateral assignment of all hotel management
contracts from which HHLP or its affiliates derive revenue. The line of credit
includes certain financial covenants and requires that we maintain (1) a minimum
tangible net worth of $110.0 million; (2) a maximum accounts and other
receivables from affiliates of $75.0 million; and (3) certain financial ratios.
The Company is in compliance with each of these covenants as of September 30,
2006. The line of credit replaced a line of credit with Sovereign Bank and
expires on December 31, 2008. This revolving credit loan replaced both the
secured and unsecured lines of credit that we previously maintained. As a result
of the termination of the Sovereign Bank Line of Credit, we expensed $255 in
unamortized deferred costs related to the origination of the Sovereign Bank
Line
of Credit.
In
the
second quarter of 2006, we
refinanced $56,125 in variable rate debt, replacing it with $62,800 fixed rate
debt.
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, our existing cash, the proceeds from additional issuances of common
shares, issuances of operating partnership units or other securities or
borrowings. We make available to the TRS 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 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.
Cash
Flow Analysis
Net
cash
provided by operating activities for the nine months ended September 30, 2006
and 2005 was $18,019 and $3,790 respectively. The increase in net cash provided
by operating activities was primarily the result of an increase in the number
of
hotels owned and operated over the same period in 2005. Also, operating cash
distributions from unconsolidated joint ventures of $1,834 were received during
the nine months ended September 30, 2006.
Net
cash
used in investing activities for the nine months ended September 30, 2006 and
2005 increased $39,834 from $191,373 in the nine months ended September 30,
2005
compared to $231,307 for the nine months ended September 30, 2006. Net cash
used
for the purchase of hotel properties and advances and capital contributions
for
unconsolidated joint ventures increased $53,086 in the nine months ended
September 30, 2006 over the same period in 2005. In addition, capital
expenditures increased $5,966 as part of our on going acquisition and renovation
programs. These uses of cash were partially offset by a decrease in advances
of
development loans receivable, net of repayments, of $16,753.
Net
cash
provided by financing activities for the nine months ended September 30, 2006
was $220,781compared to cash provided by financing activities of $186,444 for
the nine month period ended September 30, 2005. This was, in part the result
of
$103,357 in net proceeds from our offerings of common stock in the second and
third quarters of 2006, compared to proceeds of $57,855 from our offering of
preferred stock during the nine months ended September 30, 2005. Also, net
borrowings under our line of credit were $37,768 during the nine months ended
September 30, 2006, compared to net of repayments under our line of credit
of
$888 during the same period in 2005. The increase in net cash provided by
financing activities for the nine months ended September 30, 2006 was partially
offset by a decrease in net proceeds from mortgages and notes payable of $55,702
in 2006 when compared to net proceeds from mortgages and notes payable in 2005.
In the second quarter of 2005, the company entered into $51,548 of notes payable
with Hersha Statutory Trust I and Hersha Statutory Trust II. Also, dividends
paid of $3,600 were paid in the nine months ended September 30, 2006 compared
to
$720 during the same period in 2005 due to the issuance of preferred shares
in
the third quarter of 2005.
Funds
From Operations
The
National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds
from Operations (“FFO”) as a non-GAAP financial measure of performance of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. We calculate FFO
applicable to common shares and Partnership units in accordance with the
April
2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper.
The White Paper defines FFO as net income (loss) (computed in accordance
with
GAAP) excluding extraordinary items as defined under GAAP and gains or losses
from sales of previously depreciated assets, plus certain non-cash items,
such
as depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Our interpretation of the NAREIT definition
is
that minority interest in net income (loss) should be added back to (deducted
from) net income (loss) as part of reconciling net income (loss) to FFO.
Our FFO
computation may not be comparable to FFO reported by other REITs that do
not
compute FFO in accordance with the NAREIT definition, or that interpret the
NAREIT definition differently than we do.
The
GAAP
measure that we believe to be most directly comparable to FFO, net income
(loss)
applicable to common shares, includes depreciation and amortization expenses,
gains or losses on property sales, minority interest and preferred dividends.
In
computing FFO, we eliminate these items because, in our view, they are not
indicative of the results from our property operations.
FFO
does
not represent cash flows from operating activities in accordance with GAAP
and
should not be considered an alternative to net income as an indication of
Hersha’s performance or to cash flow as a measure of liquidity or ability to
make distributions. We consider FFO to be a meaningful, additional measure
of
operating performance because it excludes the effects of the assumption that
the
value of real estate assets diminishes predictably over time, and because
it is
widely used by industry analysts as a performance measure. We show both FFO
from
consolidated hotel operations and FFO from unconsolidated joint ventures
because
we believe it is meaningful for the investor to understand the relative
contributions from our consolidated and unconsolidated hotels. The display
of
both FFO from consolidated hotels and FFO from unconsolidated joint ventures
allows for a detailed analysis of the operating performance of our hotel
portfolio by management and investors. We present FFO applicable to common
shares and Partnership units because our Partnership units are redeemable
for
common shares. We believe it is meaningful for the investor to understand
FFO
applicable to all common shares and Partnership units.
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 share data)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to common shares
|
|
$
|
4,580
|
|
$
|
1,741
|
|
$
|
1,672
|
|
$
|
4,515
|
|
Income
allocated to minority interest
|
|
|
868
|
|
|
370
|
|
|
543
|
|
|
526
|
|
Income
(loss) of discontinued operations allocated to minority
interest
|
|
|
24
|
|
|
(24
|
)
|
|
42
|
|
|
(24
|
)
|
(Income)
from unconsolidated joint ventures
|
|
|
(1,773
|
)
|
|
(522
|
)
|
|
(1,432
|
)
|
|
(850
|
)
|
(Gain)
on sale of assets
|
|
|
-
|
|
|
-
|
|
|
(436
|
)
|
|
(1,161
|
)
|
Depreciation
and amortization
|
|
|
5,256
|
|
|
2,853
|
|
|
13,661
|
|
|
6,605
|
|
FFO
related to the minority interests in consolidated joint ventures
(1)
|
|
|
(11
|
)
|
|
(81
|
)
|
|
(324
|
)
|
|
(296
|
)
|
Funds
from consolidated hotel operations applicable to common shares
and
Partnership units
|
|
|
8,944
|
|
|
4,337
|
|
|
13,726
|
|
|
9,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Unconsolidated Joint Ventures
|
|
|
1,773
|
|
|
522
|
|
|
1,432
|
|
|
850
|
|
Depreciation
and amortization of purchase price in excess of historical cost
(2)
|
|
|
448
|
|
|
159
|
|
|
1,369
|
|
|
159
|
|
Interest
in depreciation and amortization of unconsolidated joint ventures
(3)
|
|
|
1,409
|
|
|
1,502
|
|
|
3,982
|
|
|
2,018
|
|
Funds
from unconsolidated joint ventures operations applicable to common
shares
and Partnership units
|
|
|
3,630
|
|
|
2,183
|
|
|
6,783
|
|
|
3,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations applicable to common shares and Partnership
units
|
|
$
|
12,574
|
|
$
|
6,520
|
|
$
|
20,509
|
|
$
|
12,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares and Units Outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,137,978
|
|
|
23,136,264
|
|
|
28,219,775
|
|
|
23,135,164
|
|
Diluted
|
|
|
32,280,728
|
|
|
23,207,264
|
|
|
28,322,839
|
|
|
23,166,893
|
|
(1)
|
Adjustment
made to deduct FFO related to the minority interest in our consolidated
joint ventures. Represents the portion of net income and depreciation
allocated to our joint venture
partners.
|
(2)
|
Adjustment
made to add depreciation of purchase price in excess of historical
cost of
the assets in the unconsolidated joint venture at the time of our
investment.
|
(3)
|
Adjustment
made to add our interest in real estate related depreciation and
amortization of our unconsolidated joint ventures. Allocation of
depreciation and amortization is consistent with allocation of
income and
loss.
|
FFO
was
$12,574 for the three month period ended September 30, 2006, which was an
increase of $6,054, over FFO in the comparable period in 2005, which was
$6,520.
FFO was $20,509 for the nine month period ended September 30, 2006, which
was an
increase of $8,167, over FFO in the comparable period in 2005, which was
$12,342. The increase in FFO was primarily a result of a strengthened economy;
the benefits of acquiring assets and interests in joint ventures since September
30, 2005; continued stabilization and maturation of the existing portfolio;
an
increase in business travel and continued attention to the average daily
rate.
FFO
was
negatively impacted by increases in our interest expense and dividends paid
to
our preferred shareholders and debt extinguishment charges incurred during
the
period ended September 30, 2006.
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 amounts 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 consolidated hotels as
“Hotel Operating Revenue” and “Hotel Operating Expense” when earned and
incurred. Included in hotel operating revenues is primarily room revenues and
revenue from other hotel operating departments. These revenues are recorded
net
of any sales or occupancy taxes collected from our guests. All revenues are
recorded on an accrual basis, as earned. We participate in frequent guest
programs sponsored by the brand owners of our hotels and we expense the charges
associated with those programs, as incurred.
Stock
Compensation
We
apply
Statement of Financial Accounting Standards No. 123R, “Share-Based Payments”
(SFAS 123R) whereby we measure the cost of employee service received in exchange
for an award of equity instruments based on the grant -date fair value of the
award. The cost is recognized over the period during which an employee is
required to provide service in exchange for the award.
Allowance
for Doubtful Accounts
Accounts
receivable are charged to bad debt expense when they are determined to be
uncollectible based upon a periodic review of the accounts by management.
Accounting principles generally accepted in the United States of America require
that the allowance method be used to recognize bad debts. Our evaluation
of the adequacy of the allowance for doubtful accounts is based on known or
inherent credit risks, economic conditions in the markets our hotels operate,
past experience, and other factors. This evaluation requires judgment and is
inherently subjective. Deterioration in the quality of our hotel accounts
receivable or other receivables could require us to record additional allowance.
Derivatives
The
Company’s objective in using derivatives is to add stability to interest expense
and to manage its exposure to interest rate movements or other identified risks.
To accomplish this objective, the Company primarily uses interest rate swaps
as
part of its cash flow hedging strategy. Interest rate swaps designated as cash
flow hedges involve the receipt of variable-rate amounts in exchange for
fixed-rate payments over the life of the agreements without exchange of the
underlying principal amount. Interest rate caps designated as cash flow hedges
limit the Company's exposure to increased cash payments due to increases in
variable interest rates. During the three and nine months ended September 30,
2006, these derivatives were used to hedge the variable cash flows associated
with existing variable-rate debt.
As
of
September 30, 2006, no derivatives were designated as fair value hedges or
hedges of net investments in foreign operations. Additionally, the Company
does
not use derivatives for trading or speculative purposes and currently does
not
have any derivatives that are not designated as hedges.
Investment
in Unconsolidated Joint Ventures
The
equity method of accounting is used for joint ventures in which we have the
ability to exercise significant influence. Under the equity method, we
recognize our share of net earnings or losses of the joint venture based on
our
ownership interest in the joint venture and our rights to distributions of
the
joint venture.
Evaluation
of Consolidation Criteria for Investments in Joint Ventures and Other
Contractual Relationships
We
evaluate our investments and contractual relationships to determine (a) if
the
investment or relationship is with a Variable Interest Entitie (VIE) and (b)
if
the entity is required to be consolidated with us in accordance with the
Financial Accounting Standards Board issued FASB Interpretation No. 46, (“FIN
46R”) “Consolidation of Variable Interest Entities (VIE’s), an interpretation of
Accounting Research Bulletin No. 51 (ARB No. 51),” as amended. FIN 46R addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in any VIE through means other than voting rights, and accordingly,
should include the VIE in its consolidated financial statements.
In
addition to other contractual relationships, our investments in development
loans receivable and joint ventures are evaluated to determine whether they
meet
the guidelines of consolidation in accordance with FIN 46R: Our examination
consists of reviewing the sufficiency of equity at risk, controlling financial
interests, voting rights, and the obligation to absorb expected losses and
expected gains, including residual returns. The estimation of an entities
expected future losses, expected gains, and residual returns requires
significant judgment. We will continue to evaluate each of our investments
and
contractual relationships to determine if consolidation is required based upon
the provisions of FIN 46R.
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 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. We have reviewed each
of
our hotel properties at September 30, 2006 for impairment and, based on our
estimate of each hotel’s future undiscounted cash flows, determined that no
impairment existed at any of our hotels.
Inflation
Operators
of hotels in general possess the ability to adjust room rates. However,
competitive pressures may limit the hotel operator’s ability to raise room rates
in the face of inflation.
Seasonality
Our
hotels’ operations historically have been seasonal in nature, reflecting higher
occupancy rates during the second and third quarters. This seasonality can
be
expected to cause fluctuations in our quarterly lease revenue to the extent
that
we receive percentage rent.
Subsequent
Events
On
September 14, 2006, our Board of Trustees declared quarterly cash dividends
of
$0.18 per common share and unit of limited partnership interest in our operating
partnership for the quarter ending September 30, 2006. The common share dividend
and limited partnership unit distribution were paid on October 17, 2006 to
shareholders and unitholders of record on September 30, 2006. The quarterly
dividend pertaining to the Series A Preferred Shares for the third quarter
of
2006 was declared on September 14, 2006 to shareholders of record on October
1,
2006 at a rate of $0.50 per share. The dividend was paid on October 18,
2006.
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 September 30, 2006, we
maintained a balance of $37,768 under our Line of Credit. The total floating
rate mortgages payable of $38,188 had a current weighted average interest rate
of 8.23%. The total fixed rate mortgages payable of $421,821 had a current
weighted average interest rate of 6.47%.
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 one interest rate swap related to debt on the Four Points
by
Sheraton, Revere. We do not intend to enter into derivative or interest rate
transactions for speculative purposes.
Approximately
91.7% of our outstanding mortgages payable are subject to fixed rates, including
the debt whose rate is fixed through a derivative instrument, while
approximately 8.3% of our outstanding mortgages payable are subject to floating
rates. The total weighted average interest rate on our debt and Line of Credit
as of September 30, 2006 was approximately 6.67%. If the interest rate for
our
Line of Credit and other variable rate debt was 100 basis points higher or
lower
during the period ended September 30, 2006, our interest expense for the three
month and nine month period ended September 30, 2006 would have been increased
or decreased by approximately $144 and $244, respectively.
As
of
September 30, 2006, mortgages and notes payable and liabilities related to
hotel
assets held for sale included fixed-rate debt, with a carrying value of
approximately $421.8 million. Changes in market interest rates on our fixed-rate
debt impact the fair value of the debt, but it has no impact on interest
incurred for cash flow. If interest rates raise 100 basis points and our
fixed
rate debt balance remains constant, we expect the fair value of our debt
to
decrease, the same way the price of a bond declines as interest rates rise.
The
sensitivity analysis related to our fixed-rate debt assumes an immediate
100
basis point move in interest rates from their September 30, 2006 levels,
with
all other variables held constant. A 100 basis point increase in market interest
rates would result in the fair value of our fixed-rate debt approximating
$380
million, and a 100 basis point decrease in market interest rates would result
in
the fair value of our fixed-rate debt approximating $470 million.
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 September 30, 2006, the following table presents expected
principal repayments and related weighted average interest rates by expected
maturity dates (in thousands):
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Fixed
Rate Debt
|
|
$
|
851
|
|
$
|
6,166
|
|
$
|
21,843
|
|
$
|
29,978
|
|
$
|
29,562
|
|
$
|
333,422
|
|
$
|
421,822
|
|
Average
Interest Rate
|
|
|
6.47
|
%
|
|
6.45
|
%
|
|
6.46
|
%
|
|
6.45
|
%
|
|
6.28
|
%
|
|
6.28
|
%
|
|
6.40
|
%
|
Floating
Rate Debt
|
|
$
|
144
|
|
$
|
593
|
|
$
|
13,873
|
|
$
|
8,596
|
|
$
|
12,366
|
|
$
|
2,615
|
|
$
|
38,187
|
|
Average
Interest Rate
|
|
|
8.24
|
%
|
|
8.24
|
%
|
|
7.83
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
|
8.05
|
%
|
The
table
incorporates only those exposures that existed as of September 30, 2006 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.
At
September 30, 2006, the fair value of the interest rate swap was $41 and is
included in other assets on the face of the consolidated balance sheets. At
December 31, 2005, the fair value of the interest rate cap was $23 and is
included in other assets and the fair value of the interest rate swap was $0.
The change in net unrealized gains/losses was a loss of $122 and a gain of
$167
for the three months ended September 30, 2006 and 2005, respectively, for
derivatives designated as cash flow hedges and the change in net unrealized
gains/losses was a loss of $87 and a gain of $267 for the nine months ended
September 30, 2006 and 2005, respectively, for derivatives designed as cash
flow
hedges. Hedge ineffectiveness of $3 and $4 on cash flow hedges was recognized
in
unrealized gain/loss on derivatives during the three months ended September
30,
2006 and 2005, respectively. Hedge ineffectiveness of $10 and $11 on cash flow
hedges was recognized in unrealized gain/loss on derivatives during the nine
months ended September 30, 2006 and 2005, respectively. Hedge ineffectiveness
is
included in interest expense on the face of the consolidated statements of
operations. On June 12, 2006, we terminated the interest rate cap due to the
refinancing of the associated interest rate debt instrument to a fixed rate.
We
received $79 in cash and reclassified $58 in reduction to interest expense
as a
result of the termination of this cap.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
The
Company’s management, under the supervision of and with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and procedures, as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of
1934, as amended (the “Exchange Act”), as of the end of the period covered by
this report. Based on such evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period,
the
Company’s disclosure controls and procedures are effective and reasonably
designed to ensure that all material information relating to the Company
required to be included in the Company’s reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
Changes
in Internal Control Over Financial Reporting
In
connection with our annual assessment of internal control over financial
reporting, management identified certain material weaknesses in internal
control, which are described in our Annual Report on Form 10-K for the year
ended December 31, 2005. In response to the material weaknesses identified
by
the Company, the Company and HHMLP have taken certain remedial measures in
response to identified material weaknesses. To date, the remedial measures
occurring during the nine months ended September 30, 2006 include the following:
·
|
HHMLP
has hired additional senior accounting professionals including a
corporate
controller and director of internal audit. The Company intends to
continue
its oversight of the internal control improvements being implemented
by
HHMLP and other third party service providers.
|
·
|
The
Company has worked with HHMLP to establish additional and more rigorous
procedures to be performed by HHMLP to prepare and review financial
information prior to release to the Company for inclusion in the
consolidated financial statements.
|
·
|
HHMLP,
in cooperation with the Company, has taken steps to better inform
and
train hotel and corporate level accounting employees regarding controls
over revenue accounting, account reconciliations and account analysis.
|
Except
as
described above, there was no change in our internal control over financial
reporting during the quarter ended September 30, 2006, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II. OTHER
INFORMATION
Item
1. Legal Proceedings.
None.
None.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Default Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
Item
5. Other Information.
None.
(a)
Exhibits Required by Item 601 of Regulation S-K.
10.1
|
Purchase
and Sale Agreement, dated July 11, 2006, by and between CNL Hospitality
Partners, LP and Hersha Hospitality Limited Partnership (filed as
Exhibit
10.1 to the Current Report on Form 8-K filed July 17, 2006 (SEC File
No.
001-14765) and incorporated by reference
herein).
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
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
|
|
|
|
(Registrant)
|
|
|
|
|
|
November
9, 2006
|
|
/s/
Ashish R. Parikh
|
|
|
|
Ashish
R. Parikh
|
|
|
|
Chief
Financial Officer
|
|