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 March 31, 2007
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the
transition period from ____ to ____
COMMISSION
FILE NUMBER: 001-14765
HERSHA
HOSPITALITY TRUST
(Exact
Name of Registrant as Specified in Its Charter)
|
Maryland
|
|
251811499
|
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
|
|
|
44
Hersha Drive
|
|
|
|
|
Harrisburg,
Pennsylvania
(Address
of Registrant’s Principal Executive Offices)
|
|
17102
(Zip
Code)
|
|
Registrant’s
telephone number, including area code: (717)
236-4400
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 ¨ 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 ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
¨
Yes x No
As
of
March 31, 2007, the number of Class A common shares of beneficial interest
outstanding was 40,771,593.
Table
of Contents for Quarterly Report on Form 10-Q
Item
No.
|
|
Page
|
|
|
|
|
3
|
Item
1.
|
|
3
|
|
|
3
|
|
|
4
|
|
|
6
|
|
|
7
|
Item
2.
|
|
27
|
Item
3.
|
|
35
|
Item
4.
|
|
36
|
|
37
|
Item
1.
|
|
37
|
Item
1.A
|
|
37
|
Item
2.
|
|
37
|
Item
3.
|
|
37
|
Item
4.
|
|
37
|
Item
5.
|
|
38
|
Item
6.
|
|
42
|
PART
I. FINANCIAL INFORMATION
Item
1.
Financial Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS AS OF
MARCH
31, 2007 [UNAUDITED] AND DECEMBER 31, 2006
[IN
THOUSANDS, EXCEPT SHARE AMOUNTS]
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
Assets:
|
|
|
|
|
|
|
Investment
in Hotel Properties, net of Accumulated Depreciation
|
|
$ |
866,669
|
|
|
$ |
807,784
|
|
Investment
in Joint Ventures
|
|
|
55,077
|
|
|
|
50,234
|
|
Development
Loans Receivable
|
|
|
55,016
|
|
|
|
47,016
|
|
Cash
and Cash Equivalents
|
|
|
8,369
|
|
|
|
10,316
|
|
Escrow
Deposits
|
|
|
15,059
|
|
|
|
14,927
|
|
Hotel
Accounts Receivable, net of allowance for doubtful accounts of
$64 and
$30
|
|
|
8,276
|
|
|
|
4,608
|
|
Deferred
Costs, net of Accumulated Amortization of $1,874 and
$1,543
|
|
|
8,111
|
|
|
|
7,525
|
|
Due
from Related Parties
|
|
|
717
|
|
|
|
4,059
|
|
Intangible
Assets, net of Accumulated Amortization of $655 and $618
|
|
|
5,762
|
|
|
|
5,594
|
|
Other
Assets
|
|
|
24,324
|
|
|
|
16,145
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,047,380
|
|
|
$ |
968,208
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Line
of Credit
|
|
$ |
45,550
|
|
|
$ |
24,000
|
|
Mortgages
and Notes Payable, net of unamortized discount of $88 and
$1,312
|
|
|
619,109
|
|
|
|
556,542
|
|
Accounts
Payable, Accrued Expenses and Other Liabilities
|
|
|
16,520
|
|
|
|
14,740
|
|
Dividends
and Distributions Payable
|
|
|
9,144
|
|
|
|
8,985
|
|
Due
to Related Parties
|
|
|
1,660
|
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
691,983
|
|
|
|
607,564
|
|
|
|
|
|
|
|
|
|
|
Minority
Interests:
|
|
|
|
|
|
|
|
|
Common
Units
|
|
$ |
29,834
|
|
|
$ |
25,933
|
|
Interest
in Consolidated Joint Ventures
|
|
|
2,553
|
|
|
|
3,092
|
|
|
|
|
|
|
|
|
|
|
Total
Minority Interests
|
|
|
32,387
|
|
|
|
29,025
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
Shares - 8% Series A, $.01 Par Value, 10,000,000 Shares Authorized,
2,400,000 Shares Issued and Outstanding at March 31, 2007 and December
31,
2006, respectively. (Aggregate Liquidation Preference $60,000
at March 31, 2007 and December 31, 2006, respectively)
|
|
|
24
|
|
|
|
24
|
|
Common
Shares - Class A, $.01 Par Value, 50,000,000 Shares Authorized,
40,771,593
and 40,671,950 Shares Issued and Outstanding at March 31, 2007
and
December 31, 2006, respectively.
|
|
|
408
|
|
|
|
405
|
|
Common
Shares - Class B, $.01 Par Value, 50,000,000 Shares
Authorized, None
Issued and Outstanding
|
|
|
-
|
|
|
|
-
|
|
Accumulated
Other Comprehensive Income
|
|
|
187
|
|
|
|
233
|
|
Additional
Paid-in Capital
|
|
|
385,803
|
|
|
|
381,592
|
|
Distributions
in Excess of Net Income
|
|
|
(63,412 |
) |
|
|
(50,635 |
) |
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
323,010
|
|
|
|
331,619
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
1,047,380
|
|
|
$ |
968,208
|
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
Revenue:
|
|
|
|
|
|
|
Hotel
Operating Revenues
|
|
$ |
46,383
|
|
|
$ |
23,925
|
|
Interest
Income from Development Loans
|
|
|
1,303
|
|
|
|
365
|
|
Land
Lease Revenue
|
|
|
1,088
|
|
|
|
-
|
|
Hotel
Lease Revenue
|
|
|
137
|
|
|
|
-
|
|
Other
Revenues
|
|
|
142
|
|
|
|
178
|
|
Total
Revenues
|
|
|
49,053
|
|
|
|
24,468
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Hotel
Operating Expenses
|
|
|
29,069
|
|
|
|
15,958
|
|
Hotel
Ground Rent
|
|
|
249
|
|
|
|
162
|
|
Land
Lease Expense
|
|
|
614
|
|
|
|
-
|
|
Real
Estate and Personal Property Taxes and Property Insurance
|
|
|
2,896
|
|
|
|
1,487
|
|
General
and Administrative
|
|
|
2,211
|
|
|
|
1,164
|
|
Depreciation
and Amortization
|
|
|
8,240
|
|
|
|
3,796
|
|
Total
Operating Expenses
|
|
|
43,279
|
|
|
|
22,567
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
5,774
|
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
137
|
|
|
|
213
|
|
Interest
Expense
|
|
|
10,310
|
|
|
|
5,618
|
|
Loss
on Debt Extinguishment
|
|
|
-
|
|
|
|
255
|
|
Loss
before income from Unconsolidated Joint Venture
Investments, Minority Interests and Discontinued
Operations
|
|
|
(4,399 |
) |
|
|
(3,759 |
) |
|
|
|
|
|
|
|
|
|
Loss
from Unconsolidated Joint Venture
Investments
|
|
|
(838 |
) |
|
|
(1,110 |
) |
|
|
|
|
|
|
|
|
|
Loss
before Minority Interests and Discontinued
Operations
|
|
|
(5,237 |
) |
|
|
(4,869 |
) |
|
|
|
|
|
|
|
|
|
Loss
allocated to Minority Interests in Continuing
Operations
|
|
|
(999 |
) |
|
|
(1,015 |
) |
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
|
(4,238 |
) |
|
|
(3,854 |
) |
|
|
|
|
|
|
|
|
|
Discontinued
Operations, net of minority interests (Note
12):
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations
|
|
|
-
|
|
|
|
(30 |
) |
Loss
from Discontinued Operations
|
|
|
-
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(4,238 |
) |
|
|
(3,884 |
) |
Preferred
Distributions
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
Net
Loss applicable to Common Shareholders
|
|
$ |
(5,438 |
) |
|
$ |
(5,084 |
) |
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
BASIC
|
|
|
|
|
|
|
Loss
from continuing operations applicable to common
shareholders
|
|
$ |
(0.13 |
) |
|
$ |
(0.25 |
) |
Loss
from Discontinued Operations
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss applicable to common shareholders
|
|
$ |
(0.13 |
) |
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
Loss
from continuing operations applicable to common
shareholders
|
|
$ |
(0.13 |
)*
|
|
$ |
(0.25 |
)*
|
Loss
from Discontinued Operations
|
|
$ |
- |
*
|
|
$ |
- |
*
|
|
|
|
|
|
|
|
|
|
Net
Loss applicable to common shareholders
|
|
$ |
(0.13 |
)* |
|
$ |
(0.25 |
)*
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,537,851
|
|
|
|
20,308,225
|
|
Diluted
|
|
|
40,537,851 |
*
|
|
|
20,308,225 |
*
|
*
|
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 since the
effect
of including these amounts in the numerator and denominator would
have no
impact. Unvested stock awards have been omitted from the
denominator for the purpose of computing diluted earnings per share
since
the effect of including this amount in the denominator would be
anti-dilutive to loss for continuing operations applicable to common
shareholders.
|
The
Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS]
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(4,238 |
) |
|
$ |
(3,884 |
) |
Adjustments
to reconcile net incometo net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
8,208
|
|
|
|
4,015
|
|
Amortization
|
|
|
369
|
|
|
|
248
|
|
Debt
extinguishment
|
|
|
-
|
|
|
|
223
|
|
Income
allocated to minority interests
|
|
|
(999 |
) |
|
|
(1,020 |
) |
Equity
in income of unconsolidated joint ventures
|
|
|
838
|
|
|
|
1,110
|
|
Distributions
from unconsolidated joint ventures
|
|
|
-
|
|
|
|
1,135
|
|
Gain
recognized on change in fair value of derivative
instrument
|
|
|
(18 |
) |
|
|
(4 |
) |
Stock
based compensation expense
|
|
|
107
|
|
|
|
43
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
in:
|
|
|
|
|
|
|
|
|
Hotel
accounts receivable
|
|
|
(3,613 |
) |
|
|
(1,921 |
) |
Escrows
|
|
|
(132 |
) |
|
|
121
|
|
Other
assets
|
|
|
(717 |
) |
|
|
545
|
|
Due
from related party
|
|
|
4,230
|
|
|
|
1,523
|
|
(Decrease)
in:
|
|
|
|
|
|
|
|
|
Due
to related party
|
|
|
(1,637 |
) |
|
|
(753 |
) |
Accounts
payable and accrued expenses
|
|
|
1,749
|
|
|
|
1,934
|
|
Net
cash provided by operating activities
|
|
|
4,147
|
|
|
|
3,315
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Purchase
of hotel property assets
|
|
|
(26,261 |
) |
|
|
(90,294 |
) |
Capital
expenditures
|
|
|
(3,459 |
) |
|
|
(1,565 |
) |
Deposits
on hotel acquisitions
|
|
|
(9,496 |
) |
|
|
(2,515 |
) |
Cash
paid for franchise fee intangible
|
|
|
(5 |
) |
|
|
-
|
|
Repayment
of notes receivable
|
|
|
5
|
|
|
|
5
|
|
Investment
in development loans receivable
|
|
|
(9,000 |
) |
|
|
(1,100 |
) |
Repayment
of development loans receivable
|
|
|
1,000
|
|
|
|
19,450
|
|
Distributions
from unconsolidated joint ventures
|
|
|
1,233
|
|
|
|
3,153
|
|
Advances
and capital contributions to unconsolidated joint ventures
|
|
|
(97 |
) |
|
|
(719 |
) |
Net
cash used in investing activities
|
|
|
(46,080 |
) |
|
|
(73,585 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from (repayments of) borrowings under line of credit, net
|
|
|
21,550
|
|
|
|
37,243
|
|
Principal
repayment of mortgages and notes payable
|
|
|
(816 |
) |
|
|
(755 |
) |
Proceeds
from mortgages and notes payable
|
|
|
28,543
|
|
|
|
35,500
|
|
Cash
paid for deferred financing costs
|
|
|
(87 |
) |
|
|
(448 |
) |
Dividends
paid on common shares
|
|
|
(7,314 |
) |
|
|
(3,661 |
) |
Dividends
paid on preferred shares
|
|
|
(1,200 |
) |
|
|
(1,200 |
) |
Distributions
paid on common partnership units
|
|
|
(690 |
) |
|
|
(510 |
) |
Net
cash provided by financing activities
|
|
|
39,986
|
|
|
|
66,169
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,947 |
) |
|
|
(4,101 |
) |
Cash
and cash equivalents - beginning of period
|
|
|
10,316
|
|
|
|
8,780
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$ |
8,369
|
|
|
$ |
4,679
|
|
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
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 — BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Hersha Hospitality
Trust (“we” or the “Company”) have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information
and
with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required
by
U.S. generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the year ending December
31,
2007.
Recent
Accounting Pronouncements
SFAS
No. 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
establishes a new definition of fair value, provides guidance on how to measure
fair value and establishes new disclosure requirements of assets and liabilities
at their fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company has not determined
whether the adoption of SFAS No. 157 will have a material effect on the
Company’s financial statements.
SFAS
No. 159
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”).
SFAS 159 permits entities to choose to measure many financial instruments
and
certain other items at fair value and requires certain disclosures for amounts
for which the fair value option is applied. This standard is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of Statement 157. The Company has not
determined whether the adoption of SFAS No. 159 will have a material effect
on the Company’s financial statements.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 — INVESTMENT IN HOTEL PROPERTIES
Investment
in Hotel Properties consist of the following at March 31, 2007 and December
31,
2006:
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
147,777
|
|
|
$ |
135,943
|
|
Buildings
and Improvements
|
|
|
687,674
|
|
|
|
640,666
|
|
Furniture,
Fixtures and Equipment
|
|
|
95,947
|
|
|
|
88,179
|
|
Construction
in Progress
|
|
|
4,839
|
|
|
|
4,359
|
|
|
|
|
936,237
|
|
|
|
869,147
|
|
|
|
|
|
|
|
|
|
|
Less
Accumulated Depreciation
|
|
|
(69,568 |
) |
|
|
(61,363 |
) |
|
|
|
|
|
|
|
|
|
Total
Investment in Hotel Properties
|
|
$ |
866,669
|
|
|
$ |
807,784
|
|
2007
Transactions
During
the three months ended March 31, 2007 we acquired the following wholly owned
hotel properties:
2007
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
|
|
Acquisition
Date
|
|
Land
|
|
|
Buildings
and Improvements
|
|
|
Furniture
Fixtures and Equipment
|
|
|
Franchise
Fees and Loan Costs
|
|
|
Total
Purchase Price
|
|
|
Fair
Value of Assumed Debt and Capital Lease
|
|
Residence
Inn Langhorne
|
|
1/8/2007
|
|
$ |
1,463
|
|
|
$ |
12,125
|
|
|
$ |
2,170
|
|
|
$ |
99
|
|
|
$ |
15,857
|
|
|
|
-
|
|
Residence
Inn Carlisle
|
|
1/10/2007
|
|
|
1,015
|
|
|
|
7,511
|
|
|
|
1,330
|
|
|
|
89
|
|
|
|
9,945
|
|
|
|
7,000
|
|
Holiday
Inn Express Chester
|
|
1/25/2007
|
|
|
1,500
|
|
|
|
6,701
|
|
|
|
1,031
|
|
|
|
210
|
|
|
|
9,442
|
|
|
|
6,700
|
|
Hampton
Inn Seaport
|
|
2/1/2007
|
|
|
7,816
|
|
|
|
19,056
|
|
|
|
1,729
|
|
|
|
- |
|
|
|
28,601
|
|
|
|
20,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
2007 Wholly Owned Acquisitions
|
|
|
|
$ |
11,794
|
|
|
$ |
45,393
|
|
|
$ |
6,260
|
|
|
$ |
398
|
|
|
$ |
63,845
|
|
|
$ |
33,902
|
|
In
connection with the 2007 acquisitions we acquired $84 in working
capital. In addition to cash and assumed debt, consideration included
$2,100 in deposits made in 2006. Included in the purchase price of Residence
Inn, Langhorne, PA is $226 that was paid to entities that are owned in part
by
certain executives and trustees of the Company. Interest rates on
debt assumed in the acquisition of the Residence Inn, Carlisle, PA and the
Holiday Inn Express & Suites, Chester, NY were at market
rates. We assumed $19,250 in debt with the acquisition of the Hampton
Inn-Seaport, New York, NY bearing interest at a fixed rate of 6.36% which
was
determined to be above market rates. We recorded a premium of $952
related to the assumption of this debt.
The
Residence Inn, Carlisle, PA and the Hampton Inn-Seaport, New York, NY were
acquired from entities that are owned by certain of the Company’s executives and
trustees. Included in the consideration for the Residence Inn,
Carlisle, PA were 119,818 units in our operating partnership valued at $11.10
per unit that were issued to sellers that are not affiliated with the
Company. Consideration for the Hampton Inn-Seaport, New York, NY,
included 15,016 units of our operating partnership valued at $11.20 per unit
and
an $8,208 note payable. The operating partnership units were issued
to certain executives and trustees of the Company and the note payable is
with
entities that are owned in part by certain executives and trustees of the
Company. The note payable bears interest at 8.0% and matures on
February 1, 2008. Interest expense of $106 was incurred on the notes
payable during the three months ended March 31, 2007.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 — INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
All
of
the newly acquired wholly owned hotels are leased to our wholly owned taxable
REIT subsidiary (TRS), 44 New England Management Company and all are managed
by
Hersha Hospitality Management, LP (“HHMLP”). HHMLP is owned by three
of the Company’s executives, two of its affiliated trustees and other investors
that are not affiliated with the Company.
The
following condensed pro forma financial information is presented as if all
2007
acquisitions and 16 properties acquired in 2006 had been consummated as of
January 1, 2006. Properties acquired without any operating history are excluded
from the condensed pro forma operating results. 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 years presented, nor does it purport to represent the
results of operations for future periods.
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
Pro
Forma Total Revenues
|
|
$ |
49,565
|
|
|
$ |
43,513
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma Income from Continuing Operations applicable to Common
Shareholders
|
|
$ |
(4,259 |
) |
|
$ |
(3,968 |
) |
Income
from Discontinued Operations
|
|
|
-
|
|
|
|
(30 |
) |
Pro
Forma Net Income
|
|
|
(4,259 |
) |
|
|
(3,998 |
) |
Preferred
Distributions
|
|
|
1,200
|
|
|
|
1,200
|
|
Pro
Forma Net Income (Loss) applicable to Common Shareholders
|
|
$ |
(5,459 |
) |
|
$ |
(5,198 |
) |
|
|
|
|
|
|
|
|
|
Pro
Forma Income (Loss) applicable to Common Shareholders per
Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.13 |
) |
|
$ |
(0.26 |
) |
Diluted
|
|
$ |
(0.13 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,537,851
|
|
|
|
20,308,225
|
|
Diluted
|
|
|
40,537,851
|
|
|
|
20,308,225
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
We
account for our investment in the following unconsolidated joint ventures
using
the equity method of accounting. As of March 31, 2007 and December
31, 2006 our investment in unconsolidated joint ventures consists of the
following:
|
|
Percent
Owned
|
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
PRA
Glastonbury, LLC
|
|
|
40.0 |
% |
|
|
469
|
|
|
|
463
|
|
Inn
American Hospitality at Ewing, LLC
|
|
|
50.0 |
% |
|
|
1,182
|
|
|
|
1,414
|
|
Hiren
Boston, LLC
|
|
|
50.0 |
% |
|
|
4,625
|
|
|
|
4,871
|
|
SB
Partners, LLC
|
|
|
50.0 |
% |
|
|
2,083
|
|
|
|
2,213
|
|
Mystic
Partners, LLC
|
|
|
8.8%-66.7 |
% |
|
|
37,857
|
|
|
|
39,180
|
|
PRA
Suites at Glastonbury, LLC
|
|
|
40.0 |
% |
|
|
2,093
|
|
|
|
2,093
|
|
Metro
29th Street Associates, LLC
|
|
|
50.0 |
% |
|
|
6,768
|
|
|
|
-
|
|
|
|
|
|
|
|
$ |
55,077
|
|
|
$ |
50,234
|
|
Any
difference between the carrying amount of these investments and the underlying
equity in net assets is amortized over the expected useful lives of the
properties and other intangible assets.
On
February 1, 2007 we acquired a 50.0% interest in Metro 29th Street
Associates,
LLC (“Metro 29th”), the lessee of the 228 room Holiday Inn Express-Manhattan,
New York, NY, for approximately $6,817. Metro 29th holds
a twenty
five year lease with certain renewal options at the end of the lease
term. We also acquired an option to acquire a 50% interest in the
entity that owns the Holiday Inn Express-Manhattan. The option is
exercisable after February 1, 2012 or upon termination of Metro 29th Street’s lease
of
the hotel and expires at the end of the lease term. The fair value of
the option was $933 at the time of acquisition and is recorded in other assets
on our consolidated balance sheet. We issued 694,766 units in our
operating partnership valued at $11.15 per unit for our interest in Metro
29th and the
option. Metro 29th Street
entered
into an agreement with Metro 29th Sublessee,
LLC, a
joint venture owned by 44 New England and our joint venture partner, to sublease
the hotel property. The hotel is managed by HHMLP.
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 March 31, 2007 and December 31, 2006
and
for the three months ended March 31, 2007 and 2006.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
(CONTINUED)
Balance
Sheets
|
|
|
|
|
|
|
|
|
March
31,
2007
|
|
|
December
31,
2006
|
|
Investment
in hotel properties, net
|
|
$ |
240,741
|
|
|
$ |
244,113
|
|
Other
Assets
|
|
|
24,571
|
|
|
|
24,496
|
|
Assets
|
|
$ |
265,312
|
|
|
$ |
268,609
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
Mortgages
and notes payable
|
|
$ |
212,341
|
|
|
$ |
211,576
|
|
Other
liabilities
|
|
|
12,673
|
|
|
|
11,687
|
|
Equity
|
|
|
40,298
|
|
|
|
45,346
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
$ |
265,312
|
|
|
$ |
268,609
|
|
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
Room
Revenue
|
|
$ |
18,922
|
|
|
$ |
16,423
|
|
Other
Revenue
|
|
|
7,031
|
|
|
|
6,195
|
|
Operating
Expenses
|
|
|
(18,014 |
) |
|
|
(16,793 |
) |
Interest
Expense
|
|
|
(3,750 |
) |
|
|
(3,513 |
) |
Lease
Expense
|
|
|
(919 |
) |
|
|
(117 |
) |
Property
Taxes and Insurance
|
|
|
(1,415 |
) |
|
|
(1,289 |
) |
Federal
and State Income Taxes
|
|
|
-
|
|
|
|
-
|
|
Depreciation,
Amortization, and Other
|
|
|
(5,470 |
) |
|
|
(5,085 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,615 |
) |
|
$ |
(4,179 |
) |
Equity
income recognized during the three months ended March 31, 2007 and 2006 for
our
Equity Investments in Unconsolidated Joint Ventures:
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
HT/CNL
Metro Hotels, LP
|
|
$ |
-
|
|
|
$ |
38
|
|
PRA
Glastonbury, LLC
|
|
|
6
|
|
|
|
(259 |
) |
Inn
American Hospitality at Ewing, LLC
|
|
|
(11 |
) |
|
|
10
|
|
Hiren
Boston, LLC
|
|
|
(246 |
) |
|
|
(334 |
) |
SB
Partners, LLC
|
|
|
(129 |
) |
|
|
(131 |
) |
Mystic
Partners, LLC
|
|
|
(408 |
) |
|
|
(434 |
) |
PRA
Suites at Glastonbury, LLC
|
|
|
(1 |
) |
|
|
-
|
|
Metro
29th Street Associates, LLC
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity in loss
|
|
$ |
(838 |
) |
|
$ |
(1,110 |
) |
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 — DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES
We
have
approved mortgage lending to entities, including 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
March 31, 2007 and December 31, 2006, we had Development Loans Receivable
of
$55,016 and $47,016, respectively. Interest income included in “Interest Income
— Development Loans,” was $1,303 and $365 for the three months ended March 31,
2007 and 2006, respectively. Accrued interest on our development
loans receivable was $1,136 as of March 31, 2007 and $883 as of December
31,
2006.
As
of
March 31, 2007, our development loans receivable balance consists of the
following:
Hotel
Property
|
Borrower
|
|
Principal
Outstanding 3/31/2007
|
|
|
Interest
Rate
|
|
Maturity
Date
|
Sheraton
- JFK Airport, NY
|
Risingsam
Hospitality, LLC
|
|
$ |
10,016
|
|
|
|
10 |
% |
September
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
|
Boutique
Hotel - Manhattan, NY
|
Brisam
East 52, LLC
|
|
|
10,000
|
|
|
|
10 |
% |
December
6, 2007
|
Boutique
Hotel - Manhattan, NY
|
Brisam
Greenwich, LLC
|
|
|
10,000
|
|
|
|
10 |
% |
September
12, 2007
|
|
|
|
$ |
55,016
|
|
|
|
|
|
|
As
of
December 31, 2006 our development loans receivable balance consists of the
following:
Hotel
Property
|
Borrower
|
|
Principal
Outstanding 12/31/2006
|
|
|
Interest
Rate
|
|
Maturity
Date
|
Sheraton
- JFK Airport, NY
|
Risingsam
Hospitality, LLC
|
|
$ |
9,016
|
|
|
|
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
|
Boutique
Hotel - Manhattan, NY
|
Brisam
East 52, LLC
|
|
|
3,000
|
|
|
|
10 |
% |
December
6, 2007
|
Boutique
Hotel - Manhattan, NY
|
Brisam
Greenwich, LLC
|
|
|
10,000
|
|
|
|
10 |
% |
September
12, 2007
|
|
|
|
$ |
47,016
|
|
|
|
|
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 — DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES
(CONTINUED)
On
July
28, 2006, we purchased land at 440 West 41st Street, New York City, for $21,982,
including closing costs. We paid $9,882 in cash and entered into a $12,100
fixed
rate interest only mortgage. The land was immediately leased to an
unrelated hotel developer, Metro Forty First Street, LLC, under a fixed lease.
On June 28, 2006, we purchased land at 39th and 8th Avenue, New York City,
for
$21,774, including closing costs. We paid $9,064 in cash and entered into
a
$13,250 variable rate interest only mortgage. The land was
immediately leased to an unrelated hotel developer, Metro 39th Street
Associates, LLC, under a fixed lease. Both lease agreements earn rents at
a
minimum rental rate of 10% of our net investment in the land. Additional
rents
are paid by the lessee for the interest on the mortgage, real estate taxes
and
insurance. Revenues from our land leases are recorded in land lease revenue
on
our consolidated statement of operations. All expenses related to the
land leases are recorded in operating expenses as land lease
expense.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
5 — OTHER ASSETS
Other
Assets consisted of the following at March 31, 2007 and December 31,
2006:
|
|
March
31,
2007
|
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
Transaction
Costs
|
|
$ |
23
|
|
|
$ |
252
|
|
Deposits
on Hotel Acquisitions
|
|
|
9,496
|
|
|
|
2,144
|
|
Investment
in Statutory Trusts
|
|
|
1,548
|
|
|
|
1,548
|
|
Notes
Receivable
|
|
|
2,547
|
|
|
|
2,438
|
|
Due
from Lessees
|
|
|
1,806
|
|
|
|
2,318
|
|
Prepaid
Expenses
|
|
|
2,850
|
|
|
|
3,533
|
|
Interest
due on Development Loans to Non-Related Parties
|
|
|
1,127
|
|
|
|
871
|
|
Deposits
on Property Improvement Plans
|
|
|
3,028
|
|
|
|
1,405
|
|
Hotel
Purchase Option
|
|
|
991
|
|
|
|
-
|
|
Other
|
|
|
908
|
|
|
|
1,636
|
|
|
|
$ |
24,324
|
|
|
$ |
16,145
|
|
Transaction
Costs - Transaction costs include 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.
Deposits
on Hotel Acquisitions - Refundable deposits paid in connection with
the acquisition of hotels, including accrued interest, are recorded in other
assets. As of March 31, 2007, we had $9,496 in interest bearing deposits
related
to the acquisition of a hotel property and additional equity purchases in
two of
our unconsolidated joint ventures. These deposits accrue interest
between 10% and 11%. As of December 31, 2006, we had $2,000 in
interest bearing deposits and $100 in non-interest bearing deposits related
to the acquisition of hotel properties. The interest bearing deposit as of
December 31, 2006 accrued interest at 10%.
Investment
in Statutory Trusts - We have an investment in the common stock of
Hersha Statutory Trust I and Hersha Statutory Trust II. Our investment is
accounted for under the equity method.
Notes
Receivable - Notes receivable as of March 31, 2007 and December 31, 2006
include notes receivable of $1,350 extended in November and December 2006
to the
purchaser of the Holiday Inn Express, Duluth, GA; Comfort Suites, Duluth,
GA;
Hampton Inn, Newnan, GA; and the Hampton Inn Peachtree City, GA (collectively
the “Atlanta Portfolio”). Each of these notes bear interest at 8% and have
maturity dates of December 31, 2007 or January 1, 2008. Also included
in notes receivable is a loan made to one of our partners in an unconsolidated
joint venture in the amount of $1,000 bearing interest at 12% with a maturity
date of December 27, 2007.
Due
from Lessees - Due
from lessees represent rents due under our land lease and hotel lease
agreements.
Prepaid
Expense - Prepaid
expenses include amounts paid for property tax, insurance and other expenditures
that will be expensed in the next twelve months.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
5 — OTHER ASSETS (CONTINUED)
Interest
due on
Development Loans–
Interest
due on development
loans represents interest income due from loans extended to non-related parties
that is used to enable such entities to construct hotels and conduct
related improvements on specific hotel projects.
Deposits
on Property Improvement Plans– Deposits on
property
improvement plans consists of amounts advanced to HHMLP that is to be used
to
fund capital expenditures as part of our property improvement programs at
certain properties.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 — DEBT
Mortgages
and Notes Payable
The
total
mortgages payable balance at March 31, 2007 and December 31, 2006, was
$558,615 and $504,523, respectively, and consisted of mortgages with fixed
and variable interest rates ranging from 4.0% to 9.0%. The maturities for
the
outstanding mortgages ranged from August 2008 to January 2032. Aggregate
interest expense incurred under the mortgages payable totaled $7,934 and
$4,310
for the three months ended March 31, 2007 and 2006, respectively. Based our
estimate of market interest rates, the fair value of the Company’s debt exceeded
its carrying value by approximately $5,162 at March 31, 2007.
We
have
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 our 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, the notes bear interest at a
variable rate of LIBOR plus 3.0% pre annum. Interest expense in amount of $956
and $925 was recorded for the three months ended March 31, 2007 and 2006,
respectively.
Revolving
Line of Credit
We
have a
revolving credit loan and security agreement with Commerce Bank, N.A. with
a
maximum amount of $100,000 and interest rate terms 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%, at our discretion.
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 during the three months
ended March 31, 2006.
The
Company maintained a line of credit balance of $45,550 at March 31, 2007
and
$24,000 at December 31, 2006. The Company recorded interest expense of $950
and
$399 related to the line of credit borrowings, for the three months ended
March
31, 2007 and 2006, respectively. The weighted average interest rate
on our Line of Credit for the three months ended March 31, 2007 and 2006
was
7.50% and 6.92%, respectively.
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 March
31,
2007, deferred costs were $8,111, net of accumulated amortization of
$1,874. Deferred costs were $7,525, net of accumulated amortization
of $1,543, as of December 31, 2006. Amortization of deferred costs for the
three
months ended March 31, 2007 and 2006 was $331 and $213,
respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [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 our operating partnership, Hersha Hospitality
Limited Partnership (the “Partnership”) , which is indirectly the sole general
partner of the subsidiary partnerships. The Company does not anticipate any
losses as a result of our obligations as general partner in the
Partnership.
Management
Agreements
Our
wholly owned TRS, 44 New England, engages eligible independent contractors,
including HHMLP, as the property managers for hotels it leases from us pursuant
to management agreements. Our management agreements with HHMLP provide for
five-year terms and are subject to early termination upon the occurrence of
defaults and certain other events described therein. As required under the
REIT
qualification rules, HHMLP must qualify as an “eligible independent contractor”
during the term of the management agreements. Under the management agreements,
HHMLP generally pays the operating expenses of our hotels. All operating
expenses or other expenses incurred by HHMLP in performing its authorized
duties
are reimbursed or borne by our TRS to the extent the operating expenses or
other
expenses are incurred within the limits of the applicable approved hotel
operating budget. HHMLP is not obligated to advance any of its own funds
for
operating expenses of a hotel or to incur any liability in connection with
operating a hotel. Management agreements with other unaffiliated
hotel management companies have similar terms.
As
of
March 31, 2007, HHMLP managed forty four of the properties leased to our
TRS. HHMLP also managed two consolidated joint venture hotel
properties and four unconsolidated joint venture hotel properties in which
we
maintain an investment. For its services, HHMLP receives a base management
fee,
and if a hotel exceeds certain thresholds, an incentive management fee. The
base management fee for a hotel is due monthly and is equal to 3% of gross
revenues associated with each hotel managed for the related month. The incentive
management fee, if any, for a hotel is due annually in arrears on the ninetieth
day following the end of each fiscal year and is based upon the financial
performance of the hotel. There were no incentive management fees for the
three months ended March 31, 2007 and 2006. For the three months ended March
31,
2007 and 2006, management fees incurred totaled $1,039 and $789, respectively,
and are recorded as Hotel Operating Expenses.
Accounting
and Information Technology Fees
Each
of
the wholly owned hotels managed by HHMLP incurs a monthly accounting and
information technology fee. Monthly fees for accounting services are
$2 per property and monthly information technology fees are $0.5 per property.
For the three months ended March 31, 2007 and 2006, the Company incurred
accounting fees of $352 and $227, respectively, and incurred information
technology fees of $82 and $57, respectively. Accounting 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 hotels
and charged to expense as incurred. Franchise fee expense for the three months
ended March 31, 2007 and 2006 was $3,273 and $1,932 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
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Acquisitions
from Affiliates
We
have
entered into an option agreement with each of our officers and affiliated
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 at fair market value. This right of first refusal would apply to each
party
until one year after such party ceases to be an officer or trustee of our
Company. Since our initial public offering in 1999, we have acquired, wholly
or
through joint ventures, a total of 76 hotels, including 22 hotels acquired
from
entities controlled by our officers or affiliated trustees. Of the 22
acquisitions from these entities, 18 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.
Hotel
Supplies
For
the
three months ended March 31, 2007 and 2006, we incurred expenses of $346
and
$226, respectively, for hotel supplies from Hersha Hotel Supply, an
unconsolidated related party, which are expenses included in Hotel Operating
Expenses. Approximately $200 and $66 is included in accounts payable at March
31, 2007 and December 31, 2006, respectively.
Capital
Expenditure Fees
Beginning
April 1, 2006, HHMLP began to charge a 5% fee on all capitalized 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 months ended March 31, 2007 we
incurred fees of $39 which were capitalized in with the cost of fixed asset
additions.
Due
From Related Parties
The
Due
from Related Party balance as of March 31, 2007 and December 31, 2006 was
approximately $717 and $4,059 respectively. The majority of the balance as
of
March 31, 2007 and December 31, 2006 were receivables owed from our
unconsolidated joint ventures.
Due
to
Related Parties
The
Due
to Related Parties balance as of March 31, 2007 and December 31, 2006 was
approximately $1,660 and $3,297, respectively. The balances as of March 31,
2007
and December 31, 2006 consisted of amounts payable to HHMLP for administrative,
management, and benefit related fees.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 — COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Hotel
Ground Rent
During
2003, 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, we assumed a land lease
with an original term of 99 years. Monthly payments are determined by
the lease agreement and are due through the expiration in July
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 March 31, 2007
and
2006, we incurred $249 and $162, in hotel ground rent under the
agreement.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
8 — DERIVATIVE INSTRUMENTS
We
maintain an interest rate swap that fixes our interest rate on a variable
rate
mortgage. Under the terms of this interest rate swap, we pay fixed
rate interest of 4.73% of the notional amount and we receive floating rate
equal
to the one month U.S. dollar LIBOR. The notional amount amortizes in
tandem with the amortization of the underlying hedged debt and is $7,902
as of
March 31, 2007.
At
March
31, 2007 and December 31, 2006, the fair value of the interest rate swap
was $19
and $47, respectively, and is included in other assets on the face of the
consolidated balance sheets. The change in net unrealized gains/losses was
a
loss of $46 and gain of $117 for the three months ended March 31, 2007 and
2006,
respectively, for derivatives designated as cash flow hedges which were
reflected on our Balance Sheet in Accumulated Other Comprehensive Income.
Hedge
ineffectiveness of $3 and $4 on cash flow hedges was recognized for the three
months ended March 31, 2007 and 2006, respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
9 — SHARE-BASED PAYMENTS
A
summary
of the stock awards issued to executives of the Company under the 2004 Equity
Incentive Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Vested
|
|
|
Unearned
Compensation
|
|
|
Date
of Award Issuance
|
|
Shares
Issued
|
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
|
March
31, 2007
|
|
|
December
31, 2006
|
|
Period
until Full Vesting
|
June
1, 2005
|
|
|
71,000
|
|
|
|
17,750
|
|
|
|
17,750
|
|
|
$ |
666
|
|
|
$ |
412
|
|
2.25
years
|
June
1, 2006
|
|
|
89,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
369
|
|
|
|
719
|
|
3.25
years
|
|
|
|
160,500
|
|
|
|
17,750
|
|
|
|
17,750
|
|
|
$ |
1,035
|
|
|
$ |
1,131
|
|
|
Compensation
expense related to stock awards issued to executives of the Company of $95
and
$43 was incurred during the three months ended March 31, 2007 and 2006,
respectively, related to the restricted share awards.
On
January 3, 2006, we awarded 1,000 common shares to each of our five independent
trustees. The fair value of each of the shares on the grant date was
$9.12 per share. On January 2, 2007, we awarded 1,000 common shares to each
of
our four independent trustees. The fair value of each of the shares on the
grant
date was $11.44 per share. Compensation expense related to stock awards
issued to the Board of Trustees of $12 and $13 was incurred during the three
months ended March 31, 2007 and 2006, respectively.
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [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 March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
$ |
(4,238 |
) |
|
$ |
(3,854 |
) |
Distributions
to 8.0% Series A Preferred Shareholders
|
|
|
(1,200 |
) |
|
|
(1,200 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations applicable to common
shareholders
|
|
|
(5,438 |
) |
|
|
(5,054 |
) |
Loss
from Discontinued Operations
|
|
|
-
|
|
|
|
(30 |
) |
Net
Loss applicable to common
shareholders
|
|
$ |
(5,438 |
) |
|
$ |
(5,084 |
) |
|
|
|
|
|
|
|
|
|
DILUTED*
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
$ |
(4,238 |
) |
|
$ |
(3,854 |
) |
Distributions
to 8.0% Series A Preferred Shareholders
|
|
|
(1,200 |
) |
|
|
(1,200 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations applicable to common
shareholders
|
|
|
(5,438 |
) |
|
|
(5,054 |
) |
Loss
from Discontinued Operations
|
|
|
-
|
|
|
|
(30 |
) |
Net
Loss applicable to common shareholders
|
|
$ |
(5,438 |
) |
|
$ |
(5,084 |
) |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - basic
|
|
|
40,537,851
|
|
|
|
20,308,225
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Unvested
stock awards
|
|
|
- |
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares -
diluted*
|
|
|
40,537,851
|
|
|
|
20,308,225
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 — EARNINGS PER SHARE (CONTINUED)
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
Loss
from continuing operations applicable to common
shareholders
|
|
$ |
(0.13 |
) |
|
$ |
(0.25 |
) |
Loss
from Discontinued Operations
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss applicable to common shareholders
|
|
$ |
(0.13 |
) |
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
Loss
from continuing operations applicable to common
shareholders
|
|
$ |
(0.13 |
)*
|
|
$ |
(0.25 |
)* |
Loss
from Discontinued Operations
|
|
$ |
- |
*
|
|
$ |
- |
*
|
|
|
|
|
|
|
|
|
|
Net
Loss applicable to common shareholders
|
|
$ |
(0.13 |
)*
|
|
$ |
(0.25 |
)* |
*
|
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 since the
effect
of including these amounts in the numerator and denominator would
have no
impact. Unvested stock awards have been omitted from the
denominator for the purpose of computing diluted earnings per share
since
the effect of including this amount in the denominator would be
anti-dilutive to loss for continuing operations applicable to common
shareholders.
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [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 three months ended March 31, 2007 and 2006 totaled $8,654
and
$5,031, respectively.
The
following non-cash investing and financing activities occurred during the
three
months ended March 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
Common
Shares issued as part of the Dividend Reinvestment Plan
|
|
$ |
7
|
|
|
$ |
6
|
|
Issuance
of Common Shares to the Board of Trustees
|
|
|
46
|
|
|
|
46
|
|
Compensation
Expense from vesting of Stock Awards
|
|
|
95
|
|
|
|
43
|
|
Issuance
of Common LP Units for acquisitions
|
|
|
9,248
|
|
|
|
6,000
|
|
Reallocation
to minority interest as a result of issuance of Common LP
Units
|
|
|
3,361
|
|
|
|
5,847
|
|
Debt
assumed in hotel property acquisition
|
|
|
33,902
|
|
|
|
22,596
|
|
Conversion
of Common LP Units to Common Shares
|
|
|
694
|
|
|
|
-
|
|
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
12 — DISCONTINUED OPERATIONS
In
September of 2005, our Board of Trustees authorized management of the Company
to
sell the Holiday Inn Express, Hartford, CT. The Company had acquired
the hotel in January 2004 and sold the hotel 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. The operating results for
this hotel have been reclassified to discontinued operations in the statements
of operations for the three months ended March 31, 2006.
In
March
of 2006, our Board of Trustees authorized management of the Company to sell
the
following four properties located in metropolitan Atlanta,
Georgia: Holiday Inn Express, Duluth, Comfort Suites, Duluth, Hampton
Inn, Newnan and the Hampton Inn, Peachtree City. These assets were
classified as “held for sale” as of March 31, 2006. The operating results for
these hotels were reclassified to discontinued operations in the statements
of
operations for the three months ended March 31, 2006. These hotels were acquired
by the Company in April and May 2000 and were sold during November and December
2006. Proceeds from the sales were $18,100, and the gain on the sale
was $290, of which $33 was allocated to minority interest in
HHLP. Notes receivable in the aggregate amount of $1,350 were
received as part of the proceeds of the sale of the Atlanta
Portfolio. Interest payments are due quarterly with repayment of the
principal due upon maturity on December 31, 2007 or January 1,
2008.
The
following table sets forth the components of discontinued operations (excluding
the gains on sale) for the three months ended March 31, 2006:
|
|
Three
Months Ended
March
31, 2006
|
|
Revenue:
|
|
|
|
Hotel
Operating Revenues
|
|
$ |
1,953
|
|
Percentage
Lease Revenues - HHMLP
|
|
|
-
|
|
Total
Revenue
|
|
|
1,953
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Interest
and Capital Lease Expense
|
|
|
238
|
|
Hotel
Operating Expenses
|
|
|
1,306
|
|
Hotel
Ground Rent
|
|
|
75
|
|
Real
Estate and Personal Property Taxes and Property Insurance
|
|
|
110
|
|
General
and Administrative
|
|
|
-
|
|
Depreciation
and Amortization
|
|
|
259
|
|
Total
Expenses
|
|
|
1,988
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Discontinued Operations before Minority
Interest
|
|
|
(35 |
) |
Allocation
to Minority Interest
|
|
|
(5 |
) |
|
|
|
|
|
Income
(Loss) from Discontinued Operations
|
|
$ |
(30 |
) |
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 [UNAUDITED]
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
13 — SUBSEQUENT EVENTS
On
April
1, 2007, we increased our investment in PRA Glastonbury, LLC, the owner of
the
Hilton Garden Inn, Glastonbury, CT, and PRA Suites at Glastonbury, LLC, the
owner of the Homewood Suites, Glastonbury, CT. We contributed $780
and $716 to PRA Glastonbury, LLC and PRA Suites at Glastonbury, LLC,
respectively and received an additional 8% preferred interest in each
venture.
On
May 7,
2007, the Compensation Committee of the Board of Trustees approved non-equity
incentive awards to each of the named executive officers, with respect to
the
fiscal year ended December 31, 2006, payable in May 2007. We recorded
$701 in compensation expense related to the non-equity incentive awards during
the quarter ended March 31, 2007. We also entered into amendments to the
employment agreements with our named executive officers and entered into
an
employment agreement with our Chief Accounting Officer. The
Compensation Committee determined the 2007 compensation for our named executive
officers, which includes the issuance of restricted shares.
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
March 31, 2007, we owned interests in 71 hotels located primarily in the
eastern
United States including 19 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. The REIT qualification rules allow 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. As of
March
31, 2007, we have leased all but one of our hotels to a wholly-owned TRS,
a
joint venture owned TRS, or a corporate entity owned by our wholly-owned
TRS.
The
hotel
not leased to a TRS entity is leased to an unrelated third party lessee.
Each of these TRS entities pay qualifying rent, and the TRS entities
have
entered into management contracts with qualified independent managers, including
Hersha Hospitality Management, LP, or HHMLP, to operate our hotels. The TRS
directly receives all revenue from, and funds all expenses relating to hotel
operations. The TRS is also subject to income tax on its earnings. We intend
to
lease all newly acquired hotels to a TRS.
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 months ended March
31,
2007 and 2006.
CONSOLIDATED
HOTELS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
Available
|
|
|
564,460
|
|
|
|
339,437
|
|
|
|
66.3 |
% |
Rooms
Occupied
|
|
|
366,283
|
|
|
|
215,092
|
|
|
|
70.3 |
% |
Occupancy
|
|
|
64.89 |
% |
|
|
63.37 |
% |
|
|
2.4 |
% |
Average
Daily Rate (ADR)
|
|
$ |
119.10
|
|
|
$ |
100.61
|
|
|
|
18.4 |
% |
Revenue
Per Available Room (RevPAR)
|
|
$ |
77.29
|
|
|
$ |
63.75
|
|
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
Revenues
|
|
$ |
43,624,596
|
|
|
$ |
21,640,706
|
|
|
|
101.6 |
% |
Total
Revenues
|
|
$ |
46,383,283
|
|
|
$ |
23,925,432
|
|
|
|
93.9 |
% |
Revenues
from Discontinued Operations
|
|
$ |
-
|
|
|
$ |
1,952,773
|
|
|
|
-100.0 |
% |
The
following table outlines operating results for the three months ended March
31,
2007 and 2006 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 March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
Available
|
|
|
229,992
|
|
|
|
201,718
|
|
|
|
14.0 |
% |
Rooms
Occupied
|
|
|
143,510
|
|
|
|
133,586
|
|
|
|
7.4 |
% |
Occupancy
|
|
|
62.40 |
% |
|
|
66.22 |
% |
|
|
-5.8 |
% |
Average
Daily Rate (ADR)
|
|
$ |
131.85
|
|
|
$ |
122.94
|
|
|
|
7.2 |
% |
Revenue
Per Available Room (RevPAR)
|
|
$ |
82.27
|
|
|
$ |
81.42
|
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
Revenues
|
|
$ |
18,922,228
|
|
|
$ |
16,423,330
|
|
|
|
15.2 |
% |
Total
Revenues
|
|
$ |
25,953,042
|
|
|
$ |
22,617,587
|
|
|
|
14.7 |
% |
Comparison
of the three month period ended March 31, 2007 and 2006
(dollars
in thousands, except per share data).
Revenues
Our
total
revenues for the three months ended March 31, 2007 consisted of hotel operating
revenues, interest income from our development loan program, land lease revenue,
hotel lease revenue and other revenue. Hotel operating revenue is recorded
for
wholly owned hotels that are leased to our wholly owned TRS and hotels owned
through joint venture interests that are consolidated in our financial
statements. Hotel operating revenue increased $22,458, or 93.9%, from $23,925
for the three months ended March 31, 2006 to $46,383 for the same period
in
2007. The increase in revenues is primarily attributable to the
acquisitions consummated in 2006 and improved RevPAR at certain of our hotels.
We acquired interests in the following 19 consolidated hotels since March
31,
2006:
Brand
|
|
Location
|
|
Acquisition
Date
|
|
Rooms
|
Hawthorne
Suites
|
|
Franklin,
MA
|
|
4/25/2006
|
|
100
|
Residence
Inn
|
|
North
Dartmouth, MA
|
|
5/1/2006
|
|
96
|
Comfort
Inn
|
|
North
Dartmouth, MA
|
|
5/1/2006
|
|
84
|
Holiday
Inn Express
|
|
Cambridge,
MA
|
|
5/3/2006
|
|
112
|
Residence
Inn
|
|
Norwood,
MA
|
|
7/27/2006
|
|
96
|
Holiday
Inn Express
|
|
Hauppauge,
NY
|
|
9/1/2006
|
|
133
|
Hampton
Inn
|
|
Farmingville,
NY
|
|
9/6/2006
|
|
161
|
Courtyard
|
|
Alexandria,
VA
|
|
9/29/2006
|
|
203
|
Summerfield
Suites
|
|
White
Plains, NY
|
|
12/28/2006
|
|
159
|
Summerfield
Suites
|
|
Bridgewater,
NJ
|
|
12/28/2006
|
|
128
|
Summerfield
Suites
|
|
Gaithersburg,
MD
|
|
12/28/2006
|
|
140
|
Summerfield
Suites
|
|
Pleasant
Hill, CA
|
|
12/28/2006
|
|
142
|
Summerfield
Suites
|
|
Pleasanton,
CA
|
|
12/28/2006
|
|
128
|
Summerfield
Suites
|
|
Scottsdale,
AZ
|
|
12/28/2006
|
|
164
|
Summerfield
Suites
|
|
Charlotte,
NC
|
|
12/28/2006
|
|
144
|
Residence
Inn
|
|
Langhorne,
PA
|
|
1/8/2007
|
|
100
|
Residence
Inn
|
|
Carlisle,
PA
|
|
1/10/2007
|
|
78
|
Holiday
Inn Express
|
|
Chester,
NY
|
|
1/25/2007
|
|
80
|
Hampton
Inn
|
|
Seaport,
NY
|
|
2/1/2007
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,313
|
Revenues
for all 19 hotels were recorded from the date of acquisition as hotel operating
revenues. Further, hotel operating revenues for the three months ended March
31,
2007 included revenues for a full year related to the following 7 hotels
that
were purchased during the three months ended March 31, 2006:
Brand
|
|
Location
|
|
Acquisition
Date
|
|
Rooms
|
Hilton
Garden Inn
|
|
JFK
Airport, NY
|
|
2/16/2006
|
|
188
|
Hampton
Inn
|
|
Philadelphia,
PA
|
|
2/15/2006
|
|
250
|
Residence
Inn
|
|
Tysons
Corner, VA
|
|
2/2/2006
|
|
96
|
Courtyard
|
|
Scranton,
PA
|
|
2/1/2006
|
|
120
|
Courtyard
|
|
Langhorne,
PA
|
|
1/3/2006
|
|
118
|
Fairfield
Inn
|
|
Mt.
Laurel, NJ
|
|
1/3/2006
|
|
118
|
Fairfield
Inn
|
|
Bethlehem,
PA
|
|
1/3/2006
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993
|
We
invest
in hotel development projects by providing secured first mortgage or mezzanine
financing to hotel developers and through the acquisition of land that is
then
leased to hotel developers. Interest income is earned on our
development loans at rates 10%. Interest income from development
loans receivable was $1,303 for the three months ended March 31, 2007 compared
to $365 for the same period in 2006. The average balance of
development loans receivable outstanding during the three months ended March
31,
2006 was lower then the average balance outstanding during the same period
in
2007 resulting in a $938 increase in interest income. In June and
July of 2006 we acquired two parcels of land which are being leased to hotel
developers. Our net investment in these parcels is approximately $18,946.
The
land is leased to hotel developers at a minimum rental rate of 10% of our
net
investment in the land. Additional rents are paid by the lessee for the
principal and interest on the mortgage, real estate taxes and insurance.
During
the three months ended March 31, 2007, we recorded $1,088 in land lease revenue
from these parcels. We incurred $614 in expense related to these land
leases resulting in a contribution of $474 to our operating income during
the
three months ended March 31, 2007.
Total
revenues for the three months ended March 31, 2007 also included hotel lease
revenue for the lease of the Holiday Inn Conference Center, New Cumberland,
Pennsylvania which has a fixed rent over the five year term. Beginning on
July
1, 2006 this hotel was leased to an unrelated party. Prior to July 1, 2006,
this
hotel was leased to our wholly owned TRS and operating revenues and expenses
of
the hotel were recorded in hotel operating revenue and hotel operating
expenses. Hotel lease revenue of $137 was recorded in the three
months ended March 31, 2007 related to the lease of this property.
Other
revenue consists primarily of fees earned for asset management services provided
to certain properties owned by our unconsolidated joint
ventures.
Expenses
Total
hotel operating expenses increased 82.2% to approximately $29,069 for the
three
months ended March 31, 2007 from $15,958 for the three months ended March
31,
2006. 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 $3,796 for the three months
ended March 31, 2006 to $8,240 for the three months ended March 31, 2007.
Similarly, real estate and personal property tax and property insurance
increased $1,409, or 94.8%, in the three months ended March 31, 2007 when
compared to the same period in 2006.
General
and administrative expense increased by approximately $1,047 from $1,164
in 2006
to $2,211 in 2007. General and administrative expenses increased primarily
due
to higher compensation expense related to the accrual of bonuses and
compensation increases which were determined and approved by the board of
trustees in May of 2007. This increase in cost has been partially
offset by the reduction in costs related to enhancing our process to evaluate
internal controls that were incurred during the three months ended March
31,
2006.
Unconsolidated
Joint Venture Investments
Loss
from
unconsolidated joint venture investments decreased $272 from $1,110 for the
three months ended March 31, 2006 to $838 for the three months ended March
31,
2007. Since March 31, 2006, we have acquired unconsolidated joint
venture interests in the following two properties:
Joint
Venture
|
|
Brand
|
|
Name
|
|
Acquisition
Date
|
|
Rooms
|
|
Ownership
%
|
|
Hersha
Preferred Equity Return
|
Metro
29th Street Associates, LLC
|
|
Holiday
Inn Express
|
|
New
York, NY
|
|
2/1/2007
|
|
228
|
|
50.0%
|
|
N/A
|
PRA
Suites at Glastonbury, LLC
|
|
Homewood
Suites
|
|
Glastonbury,
CT
|
|
6/15/2006
|
|
136
|
|
40.0%
|
|
10.0%
|
In
addition, we acquired joint venture interests in the following property during
the three months ended March 31, 2006:
Joint
Venture
|
|
Brand
|
|
Name
|
|
Acquisition
Date
|
|
Rooms
|
|
Ownership
%
|
|
Hersha
Preferred Equity Return
|
Mystic
Partners, LLC
|
|
Marriott
|
|
Hartford,
CT
|
|
2/8/2006
|
|
409
|
|
15.0%
|
|
8.5%
|
Loss
from
unconsolidated joint venture investments during the three months ended March
31,
2007 was favorably impacted by the continued stabilization of these properties
which were newly constructed when acquired. On September 28, 2006 we acquired
the remaining 66.7% interest in the joint venture that owned the Hampton
Inn-Chelsea, New York, NY. Prior to acquiring the remaining interest
in this hotel, we owned a 33.3% interest and income was recorded in income
from
investments in unconsolidated joint ventures. After this acquisition,
results of operations of this hotel property were included in our consolidated
hotel operating results.
Net
loss
applicable to common shareholders for the three months ended March 31, 2007
was
approximately $5,438 compared to net loss applicable to common shareholders
of
$5,084 for the same period in 2006.
Operating
income for the three months ended March 31, 2007 was $5,774 compared to
operating income of $1,901 during the same period in 2006. The $3,873 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 $4,692 from $5,618 for the three months ended March
31,
2006 to $10,310 for the three months ended March 31, 2007. The increase in
interest expense is the result of mortgages placed on newly acquired properties
and increased average balances on our line of credit. Mortgages and notes
payable increased from $256,146 as of December 31, 2005 to $556,542 as of
December 31, 2006. As of March 31, 2007, we had $619,109 in mortgages
and notes payable. During the three months ended March 31, 2006, we
also replaced our line of credit with an increased credit facility. We incurred
$255 in debt extinguishment expense due to early termination fees and to
write-off deferred loan costs associated with the retired credit
facility.
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.
We
maintain a revolving credit loan and security agreement with Commerce Bank,
N.A.
with a maximum amount of $100,000 and interest rate terms, at our discretion,
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%. 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 certain hotel properties 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 March 31, 2007.
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 affiliated
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 three months ended March 31, 2007
and
2006 was $4,147 and $3,315, respectively. The increase in net cash provided
by
operating activities was primarily the result of an increase in income before
depreciation and amortization and decreases in due from related parties.
This
was offset by an increase in hotel accounts receivable and other
assets and a decrease in due to related parties.
Net
cash
used in investing activities for the three months ended March 31, 2007 decreased
$27,505 from $73,585 in the three months ended March 31, 2006 compared to
$46,080 for the three months ended March 31, 2007. Net cash used for the
purchase of hotel properties decreased $64,033 in 2006 over 2005. Cash used
for
deposits on hotel acquisitions in 2007 increased by $6,981 over the same
period
in 2006. We also increased our capital expenditures from $1,565 in
2006 to $3,459 in 2006 as a result of continuing property improvement plans
at
certain properties in 2007 that begin in the second half of 2006 in addition
to
capital expenditures in the ordinary course of business. Cash used to invest
in
development loans receivable, net of repayments, increased by $26,350 in
2007
compared to 2006, as the originations of new development loans exceeded
repayments in 2007.
Net
cash
provided by financing activities for the three months ended March 31, 2007
was
$39,986 compared to cash provided by financing activities of $66,169 for
the
three months ended March 31, 2006. This decrease was, in part, the result
of
proceeds from mortgages and notes payable, net of repayments, of $27,727
in 2007
compared to net proceeds of $34,745 in 2006. Net cash provided by borrowing
under our line of credit facility was $37,243 in 2006 compared to $21,550
in 2006. Net borrowings under the line of credit were used in 2007
and 2006 to fund the acquisition of hotel properties.
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.
(dollars
in thousands, except share data)
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shares
|
|
$ |
(5,438 |
) |
|
$ |
(5,084 |
) |
Loss
allocated to minority interest
|
|
|
(999 |
) |
|
|
(1,015 |
) |
Loss
of discontinued operations allocated to minority interest
|
|
|
-
|
|
|
|
(5 |
) |
Loss
from unconsolidated joint ventures
|
|
|
838
|
|
|
|
1,110
|
|
Depreciation
and amortization
|
|
|
8,240
|
|
|
|
3,796
|
|
Depreciation
and amortization from discontinued operations
|
|
|
-
|
|
|
|
259
|
|
FFO
related to the minority interests in consolidated joint ventures
(1)
|
|
|
198
|
|
|
|
186
|
|
Funds
from consolidated hotel operations applicable
to common shares and Partnership units
|
|
|
2,839
|
|
|
|
(753 |
) |
|
|
|
|
|
|
|
|
|
Loss
from Unconsolidated Joint Ventures
|
|
|
(838 |
) |
|
|
(1,110 |
) |
Add:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of purchase price in
excess of historical cost (2)
|
|
|
494
|
|
|
|
474
|
|
Interest
in depreciation and amortization of
unconsolidated joint venture (3)
|
|
|
1,192
|
|
|
|
956
|
|
Funds
from unconsolidated joint ventures operations applicable
to common shares and Partnership units
|
|
|
848
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
Funds
from Operations applicable
to common shares and Partnership units
|
|
$ |
3,687
|
|
|
$ |
(433 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares and Units Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,537,851
|
|
|
|
23,535,145
|
|
Diluted
|
|
|
45,085,158
|
|
|
|
23,535,145
|
|
(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
$3,687 for the three month period ended March 31, 2007, which was an increase
of
$4,120 over FFO in the comparable period in 2006. The increase in FFO
was primarily a result of a strengthened economy; the benefits of acquiring
assets and interests in joint ventures since March 31, 2006; continued
stabilization and maturation of the existing portfolio; and continued attention
to the average daily rate.
FFO
was
negatively impacted by increases in our interest expense during the period
ended
March 31, 2007.
Critical
Accounting Policies
The
estimates and assumptions made by management in applying critical accounting
policies have not changed materially during 2007 and 2006, and none of
the
estimates or assumptions have proven to be materially incorrect or resulted
in
our recording any significant adjustments relating to prior
periods. See our Annual Report on Form 10-K for the year ended
December 31, 2006 for a summary of the accounting policies that management
believes are critical to the preparation of the consolidated financial
statements.
Subsequent
Events
On
April
1, 2007, we increased our investment in PRA Glastonbury, LLC, the owner of
the
Hilton Garden Inn, Glastonbury, CT, and PRA Suites at Glastonbury, LLC, the
owner of the Homewood Suites, Glastonbury, CT. We contributed $780
and $716 to PRA Glastonbury, LLC and PRA Suites at Glastonbury, LLC,
respectively and received an additional 8% preferred interest in each
venture.
On
May 7,
2007, the Compensation Committee of the Board of Trustees approved non-equity
incentive awards to each of the named executive officers, with respect to
the
fiscal year ended December 31, 2006, payable in May 2007. We recorded
$701 in compensation expense related to the non-equity incentive awards during
the quarter ended March 31, 2007. We also entered into amendments to the
employment agreements with our named executive officers and entered into
an
employment agreement with our Chief Accounting Officer. The
Compensation Committee determined the 2007 compensation for our named executive
officers, which includes the issuance of restricted shares.
Item
3. Quantitative and
Qualitative Disclosures About Market Risk.
(dollars
in thousands, except per share data)
Our
primary market risk exposure is to changes in interest rates on our variable
rate Line of Credit and other floating rate debt. At March 31, 2007, we
maintained a balance of $45,550 under our Line of Credit. The total floating
rate mortgages payable of $32,096 had a current weighted average interest
rate
of 6.22%. The total fixed rate mortgages and notes payable of $587,101 had
a
current weighted average interest rate of 6.22%.
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, MA. We do not intend to enter into derivative or interest
rate
transactions for speculative purposes.
Approximately
94.8% of our outstanding mortgages payable are subject to fixed rates, including
the debt whose rate is fixed through a derivative instrument, while
approximately 5.2% 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 March 31, 2007 was approximately 6.42%. 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 March 31, 2007, our interest expense for the three
month
period ended March 31, 2006 would have been increased or decreased by
approximately $158 and $158, respectively.
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 March 31, 2007 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 $537 million, and a 100 basis point decrease
in
market interest rates would result in the fair value of our fixed-rate debt
approximating $652 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 March 31, 2007, the following table presents expected principal
repayments and related weighted average interest rates by expected maturity
dates (in thousands):
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Debt
|
|
|
2,359
|
|
|
|
29,804
|
|
|
|
29,900
|
|
|
|
24,749
|
|
|
|
6,765
|
|
|
|
493,524
|
|
|
|
587,101
|
|
Average
Interest Rate
|
|
|
6.22 |
% |
|
|
6.19 |
% |
|
|
6.17 |
% |
|
|
6.07 |
% |
|
|
6.06 |
% |
|
|
6.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate Debt
|
|
|
286
|
|
|
|
445
|
|
|
|
21,704
|
|
|
|
7,031
|
|
|
|
182
|
|
|
|
2,448
|
|
|
|
32,096
|
|
Average
Interest Rate
|
|
|
8.17 |
% |
|
|
8.18 |
% |
|
|
7.65 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,645
|
|
|
$ |
30,249
|
|
|
$ |
51,604
|
|
|
$ |
31,780
|
|
|
$ |
6,947
|
|
|
$ |
495,972
|
|
|
$ |
619,197
|
|
The
table
incorporates only those exposures that existed as of March 31, 2007 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.
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
None.
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.
2006
Non-Equity Incentive Plan Compensation
On
May 7,
2007, the Compensation Committee of the Board of Trustees approved incentive
awards to the Chief Executive Officer (“CEO”) and each of the other named
executive officers, with respect to the fiscal year ended December 31, 2006,
payable in May 2007. The incentive awards were made pursuant to the
Company’s 2006 Annual Incentive Compensation Plan (the
“2006 Incentive Plan”) approved on May 25, 2006.
For
the
2006 fiscal year, the Compensation Committee established opportunities for
certain executive officers to receive an incentive award of between 15% to
75%
of their annual base salary pursuant to the 2006 Incentive Plan. Such awards
could be earned on the basis of the Company’s attainment of certain financial
metrics together with the satisfaction of specific individual performance
objectives that were determined by the Compensation Committee. Eligibility
for
the minimum incentive award occurred when adjusted funds from operations,
or
AFFO, per share reached 95% of the budgeted AFFO for 2006. Eligibility for
the
higher tier incentive award occurred when AFFO per share reached 105% of
the
budgeted AFFO for 2006. An additional consideration for eligibility for an
incentive award by the Chief Executive Officer, President and Chief Operating
Officer and the Chief Financial Officer included the Company’s achievement of a
dividend payout ratio of less than or equal to 95% of AFFO. The Compensation
Committee established additional position-specific quantitative and qualitative
performance goals for each of the named executive officers. Position-specific
performance goals have included, but have not been limited to, growing the
size
of the Company’s portfolio, maintaining institutional ownership of the Company
common shares at certain levels, complying with disclosure obligations pursuant
to the federal securities laws and achieving clearance with the Company’s
independent public accountants with regard to internal controls and
procedures.
The
Compensation Committee determined that the Company had increased annual AFFO
per
share by more than 105% of the budgeted AFFO per share for 2006 and was able
to
bring the dividend payout ratio below 95%. All named executive
officers met a majority of their individual goals that were set by the
Compensation Committee. In addition, the Compensation Committee noted
that senior management had grown the asset base substantially and had achieved
numerous other accomplishments during the year.
Based
upon the foregoing, the Compensation Committee determined that the 2006
incentive awards were as follows: Hasu P. Shah, Chairman of the Board
of Trustees, received an incentive award in the amount of $62,500 which is
equal
to 50% of his 2006 annual base salary. Jay H. Shah, Chief Executive
Officer, received an incentive award in the amount of $262,500 which is equal
to
75% of his 2006 annual base salary. Neil H. Shah, President and Chief
Operating Officer, received an incentive award in the amount of $240,000
which
is equal to 75% of his 2006 annual base salary. Ashish R. Parikh,
Chief Financial Officer, received an incentive award in the amount of $112,500
which is equal to 50% of his 2006 annual base salary. Michael R.
Gillespie, Chief Accounting Officer, received an incentive award in the amount
of $23,250 which is equal to 15% of his 2006 annual base salary. All
incentive awards are scheduled to be paid in cash to the named executive
officer
on May 11, 2007.
The
following table presents information relating to total compensation of the
Named
Executive Officers for the fiscal year ended December 31, 2006.
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
|
Stock
Awards (1)
|
|
|
Non-Equity
Incentive Plan Compensation
|
|
|
All
Other Compensation (2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hasu
P. Shah
|
|
2006
|
|
$ |
125,000
|
|
|
$ |
32,568
|
|
|
$ |
62,500
|
|
|
$ |
22,423
|
|
|
$ |
242,491
|
|
Chairman
of the Board of Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay
H. Shah
|
|
2006
|
|
$ |
350,000
|
|
|
$ |
107,979
|
|
|
$ |
262,500
|
|
|
$ |
31,945
|
|
|
$ |
752,424
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neil
H. Shah
|
|
2006
|
|
$ |
320,000
|
|
|
$ |
79,867
|
|
|
$ |
240,000
|
|
|
$ |
47,146
|
|
|
$ |
687,013
|
|
President
and Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashish
R. Parikh
|
|
2006
|
|
$ |
225,000
|
|
|
$ |
51,422
|
|
|
$ |
112,500
|
|
|
$ |
31,134
|
|
|
$ |
420,056
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
R. Gillespie
|
|
2006
|
|
$ |
155,000
|
|
|
$ |
6,854
|
|
|
$ |
23,250
|
|
|
$ |
7,825
|
|
|
$ |
192,929
|
|
Chief
Accounting Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
(1)
|
Represents
expense recognized by the Company for financial statement reporting
purposes in 2006 in accordance with SFAS No. 123R for restricted
common
share awards held by each named executive officer, which may include
amounts from awards granted in and prior to 2006. Please see Note
9 to the
financial statements in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2006 for a discussion of share-based compensation
expense.
|
(2)
|
Includes
insurance premiums paid
by the Company for medical, dental and life insurance benefits
and
dividend payments on unvested restricted common shares. In
2006, the following health insurance premium amounts were
paid: Hasu P. Shah - $13,873; Jay H. Shah - $1,255; Neil H.
Shah - $26,140; Ashish R. Parikh - $17,598; Michael R. Gillespie
-
$5,989. In 2006, the following dividend amounts were paid on
unvested restricted common shares: Hasu P. Shah - $8,550; Jay H.
Shah -
$28,350; Neil H. Shah - $20,970; Ashish R. Parikh - $13,500; Michael
R.
Gillespie - $1,800.
|
Employment
Agreements
On
May 7,
2007, we entered into amendments to our employment agreements (individually,
an
“Agreement” collectively, the “Agreements”) with Hasu P. Shah (Chairman of the
Board of Trustees), Jay H. Shah (Chief Executive Officer), Neil H. Shah
(President and Chief Operating Officer), and Ashish R. Parikh (Chief Financial
Officer) as well as an employment agreement with Michael R. Gillespie (Chief
Accounting Officer) (individually, an “Executive” and collectively,
the “Executives”). These Agreements supercede all prior employment
agreements between each Executive and the Company. The following
description of the material terms of the Agreements is qualified in its entirety
by reference to the terms of the actual Agreements, which are attached hereto
as
Exhibits 10.6 through Exhibit 10.10 and incorporated by reference
herein.
The
Agreements expire on December 31, 2008 if written notice of non-renewal by
either party is given to the other party by July 3, 2008. If no such
notice is given, the Agreement continues until terminated by either party
upon
not less than one hundred eighty (180) days notice to the other party setting
forth the effective date of termination. The Agreements provide
for a minimum base salary and eligibility to receive certain incentive
compensation, including but not limited to, stock options or shares of stock
of
the Company. The Agreements contain provisions that provide for the payments
and
provisions of other benefits by the Company to the effected Executive upon
the
occurrence of certain triggers. These triggers include the termination of
such
Executive’s employment with the Company due to voluntary termination,
termination with cause, death or disability, termination without cause and
termination without cause or resignation for good reason following a change
of
control. Specifically, the Agreements also provide for the payment of certain
compensation to each Executive in the event of a voluntary or involuntary
termination of such Executive’s employment by the Company or upon a change of
control of the Company, including the following:
|
·
|
Upon
a termination without cause (as defined in the Agreements), the
Company
shall make a lump sum payment to the Executive within ten (10)
days after
termination without cause equal to the sum of the Executive’s accrued but
unused vacation to the date of termination plus the amount of the
Executive’s monthly base salary then in effect for the lesser of 12 months
or the number of months (including a fractional month) remaining
in the
term of the Agreement.
|
|
·
|
Upon
a termination without cause or an Executive’s resignation for good reason
(as defined in the Agreements) within twelve months following a
change of
control of the Company (as defined in the Agreement), the Company
shall
(i) fully vest the Executive’s share awards and option grants, regardless
of any vesting schedule, (ii) pay all base salary and any reimbursable
expenses incurred and accrued vacation through the termination
date, (iii)
pay an amount equal to a multiple of the sum of (x) the
Executive’s then annual base salary, (y) the maximum annual bonus
that the Executive could earn for the year that includes the date
of
termination (or if no maximum bonus amount has been set, the Executive’s
target bonus for that year) and (z) the fair market value
(determined as of the date of the change of control) of the share
award(s)
received by the Executive for the year that includes the date of
termination (or if no share awards were made in that year, the
next
preceding year in which the Executive received a share award),
and (iv)
pay the Executive’s insurance benefits for a period of eighteen (18)
months after termination. If
the insurance benefit would constitute an “excess parachute payment”
under Section 280G of the Internal Revenue Code of 1986, as amended,
it
will be reduced, if and only to the extent that, a reduction will
allow
the Executive to receive a greater net after tax amount than the
Executive
would receive absent a reduction. For purposes of calculating the
payment described in (iii) above, the Agreements provide for the
following
multiples: Hasu P. Shah - 2x; Jay H Shah - 4x; Neil H. Shah 3x;
Ashish R.
Parikh; 2x and Michael R. Gillespie - 1x. Payments made in
accordance with the change of control provisions shall be made
in one lump
within ten days following such
termination.
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The
Agreements also contain certain provisions concerning confidential information,
non-competition and non-recruitment.
On
May 7,
2007, the Company delivered a notice of termination of the employment agreement
it had entered into with David Desfor. The terms of the employment
agreement provide that the agreement will terminate 180 days after either
party
has provided the other with written notice of termination. After
termination of the employment agreement, Mr. Desfor will continue to be employed
by the Company.
2007
Named Executive Officer Compensation
On
May 7,
2007, the Compensation Committee reviewed the total compensation packages
(including annual salary, restricted stock awards and potential bonus awards)
for each of the CEO and the other named executive officers of the Company
and
made the following compensation determinations for fiscal year
2007: Hasu P. Shah, Chairman of the Board, will receive $150,000 in
annual compensation and shares of restricted stock equal to
$100,000. Jay H. Shah, Chief Executive Officer, will receive $400,000
in annual compensation and shares of restricted stock equal to
$1,000,000. Neil H. Shah, President and Chief Operating Officer, will
receive $375,000 in annual compensation and shares of restricted stock equal
to
$1,000,000. Ashish R. Parikh, Chief Financial Officer, will receive
$250,000 in annual compensation and shares of restricted stock equal to
$400,000. Michael R. Gillespie, Chief Accounting Officer, will
receive $175,000 in annual compensation and shares of restricted
stock equal to $75,000. Twenty-five percent of the restricted shares
vest on each anniversary of the date of grant resulting in 100% of such
restricted shares being fully vested on the fourth anniversary of the date
of
grant. The value of the restricted shares was calculated using a
volume weighted average of the closing price of the Company’s common shares for
the 30 days immediately preceding May 7, 2007 and resulted at a price per
share
of $12.00.
2007
Non-Equity Incentive Plan Compensation
In
addition, on May 7, 2007, the Compensation Committee, approved the 2007 Annual
Incentive Compensation Plan for the CEO and each of the other named executive
officers, with respect to the fiscal year ending December 31, 2007 (the “2007
Incentive Plan”). The 2007 Incentive Plan is not set forth in a
written agreement.
For
fiscal 2007, the Compensation Committee established opportunities for the
CEO
and each of the named executive officers to receive an incentive award in
amounts equal to a percentage of their respective annual base salary pursuant
to
the 2007 Incentive Plan. Such incentive awards could be earned on the
basis of the Company’s attainment of certain financial metrics together with the
satisfaction of specific individual performance objectives that have been
determined by the Compensation Committee.
Eligibility
for the minimum incentive award occurs when AFFO per share increases by at
least
5% from AFFO for 2006. Eligibility for the higher tier incentive award occurs
when AFFO per share increases by at least 10% from AFFO for 2006. An additional
consideration for eligibility for a cash award by the Chief Executive Officer,
President and Chief Operating Officer and the Chief Financial Officer includes
the Company’s achievement of a dividend payout ratio of less than or equal to
95% of AFFO. The Compensation Committee established additional position-specific
quantitative and qualitative performance goals for the CEO each of the named
executive officers. Position-specific performance goals have included, but
have
not been limited to, growing the size of the Company’s portfolio, maintaining
institutional ownership of the Company common shares at certain levels,
complying with disclosure obligations pursuant to the federal securities
laws
and achieving clearance with the Company’s independent public accountants with
regard to internal controls and procedures.
The
Compensation Committee recommended that the following officers be eligible
to
receive potential incentive awards at their respective levels: Jay H. Shah,
Chief Executive Officer, is eligible to receive a potential incentive award
at
50% and 100% of his base salary. Neil H. Shah, President and Chief
Operating Officer, is eligible to receive a potential incentive award at
50% and
100% of his base salary. Ashish R. Parikh, Chief Financial Officer,
is eligible to receive a potential incentive award at 25% and 75% of his
base
salary. Michael R. Gillespie, Chief Accounting Officer, is eligible
to receive a potential incentive award at 15% and 25% of his base
salary. Payments for incentive awards pursuant to the 2007 Incentive
Plan will be paid in one annual payment during the 2008 calendar year if
the
Compensation Committee determines that the performance criteria are
met.
(a) Exhibits
Required by Item 601 of Regulation S-K.
10.1
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Contribution
Agreement, dated as of January 16, 2007, by and among Shree Associates,
Kunj Associates, Shanti III Associates, Trust FBO Neil H. Shah
under The
Hasu and Hersha Shah 2004 Trust, Trust FBO Jay H. Shah under The
Hasu and
Hersha Shah 2004 Trust, Shreenathji Enterprises, LTD and David
L. Desfor
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed
January 10, 2007 (SEC File No. 001-14765) and incorporated by
reference herein).
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10.2
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Purchase
and Sale Agreement, dated as of January 17, 2007, between BCM,
LLC, HPS Seaport LLC and Hersha Hospitality Limited Partnership
(filed as
Exhibit 10.1 to the Current Report on Form 8-K filed January 23,
2007 (SEC
File No. 001-14765) and incorporated by reference
herein).
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10.3
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Contribution
Agreement, dated as of January 17, 2007, between Shree Associates,
Kunj
Associates, Devi Associates, Shanti II Associates, Trust FBO Jay
H. Shah
under The Hasu and Hersha Shah 2004 Trust, Trust FBO Neil H. Shah
under
The Hasu and Hersha Shah 2004 Trust , David L. Desfor and Hersha
Hospitality Limited Partnership (filed as Exhibit 10.2 to the Current
Report on Form 8-K filed January 23, 2007 (SEC File No.
001-14765) and incorporated by reference herein).
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10.4
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Amended
and Restated Purchase and Sale Agreement, dated as of February
1, 2007, between BCM, LLC, HPS Seaport LLC and SEAPORT HOSPITALITY,
LLC
(filed as Exhibit 10.1 to the Current Report on Form 8-K filed
February 7,
2007 (SEC File No. 001-14765) and incorporated by reference
herein).
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10.5
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Sales
Agreement by and between Hersha Hospitality Trust and Cantor Fitzgerald
& Co., dated April 5, 2007 (filed as Exhibit 10.1 to the Current
Report on Form 8-K filed April 6, 2007 (SEC File No. 001-14765) and
incorporated by reference herein).
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Employment
Agreement, dated May 7, 2007, by and between the Company and Hasu
P.
Shah.
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Employment
Agreement, dated May 7, 2007, by and between the Company and Jay
H.
Shah.
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Employment
Agreement, dated May 7, 2007, by and between the Company and Neil
H.
Shah.
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Employment
Agreement, dated May 7, 2007, by and between the Company and Ashish
Parikh.
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Employment
Agreement, dated May 7, 2007, by and between the Company and Michael
R.
Gillespie.
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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HERSHA
HOSPITALITY TRUST
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(Registrant)
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May
10, 2007
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/s/
Ashish R. Parikh
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Ashish
R. Parikh
Chief
Financial Officer
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43