SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): March 30, 2000
HERSHA HOSPITALITY TRUST
(Exact name of registrant as specified in its charter)
Maryland 005-55249 251811499
(State or other jurisdiction (Commission File No.) I.R.S. Employer
of incorporation) (Identification No.)
148 Sheraton Drive, Box A
New Cumberland, Pennsylvania 17070
(Address of principal executive offices)
(717) 770-2405
(Registrant's telephone number, including area code)
N/A
(former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
Hersha Hospitality Trust (the "Company") is filing this Current Report
on Form 8-K to describe various material risk factors that may affect our
business, financial condition and operations.
Some of the information you will find in our Securities Exchange Act of
1934 filings and our prospectuses or any prospectus supplements may contain
"forward-looking" statements. Also, documents subsequently filed by the Company
with the Securities and Exchange Commission may contain similar forward-looking
statements. You can identify these types of statements by their use of
forward-looking words such as "may," "will," "should," "could," "plans,"
"intends," "expects," "anticipates," "estimates," "projects," "continues" or
other similar words. These types of statements discuss future events or
expectations or contain projections or estimates.
When considering these forward-looking statements, you should keep in
mind the following risk factors. These risk factors could cause our actual
financial and operating results to differ materially and adversely from those
contained in or implied by any forward-looking statement.
The following risk factors are not necessarily exhaustive, particularly
as to possible future events, and new risk factors may emerge periodically. Many
things can happen that can cause our actual financial and operating results to
be very different than those described by us in our SEC filings. Any statements
made by us that are not historical facts should be considered to be
forward-looking statements. We make no promise to update any of our
forward-looking statements, or to publicly release the results if we revise any
of them.
RISK FACTORS
CONFLICTS OF INTEREST
Because of the ownership in and/or positions with the Company, Hersha
Hospitality Limited Partnership (the "Partnership") and the Hersha Hospitality
Management, L.P., the lessee of the Company's hotels (the "Lessee"), of Hasu P.
Shah, Bharat C. Mehta, Kanti D. Patel, Kiran P. Patel, Rajendra O. Gandhi, David
L. Desfor and certain other affiliates, [the "Hersha Affiliates"] there are
inherent conflicts of interest in the lease, acquisition, disposition and
operation of the Company's hotels. Consequently, the interests of shareholders
may not have been, and in the future may not be, reflected fully in all
decisions made or actions taken by officers and Trustees of the Company.
CONFLICTS RELATING TO SALES OR REFINANCING OF HOTELS
There is unrealized gain associated with the interests of the Hersha
Affiliates in the Company's hotels and, as a result, any sale of the hotels or
refinancing or prepayment of principal on the indebtedness assumed by the
Company in connection with the purchase of the hotels may cause adverse tax
consequences to the Hersha Affiliates. Therefore, the interests of the Company
and the Hersha Affiliates could be different in connection with the disposition
or refinancing of a hotel. Decisions in connection with any transaction
involving the Company, including the disposition of a hotel or refinancing of or
prepayment of principal on the indebtedness assumed by the Company in connection
with the purchase of a hotel, in which a Trustee or officer of the Company, or
any affiliate thereof, has an interest (other than solely as a result of his
status as a Trustee, officer or shareholder of the Company) must be made by a
majority of the Trustees, including a majority of the independent Trustees.
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NO ARM'S-LENGTH BARGAINING ON PERCENTAGE LEASES, CONTRIBUTION
AGREEMENTS, THE ADMINISTRATIVE SERVICES AGREEMENT AND OPTION AGREEMENT
The terms of the percentage leases, the agreements pursuant to which
the Company and the Partnership acquired, directly or indirectly, the hotels,
the Administrative Services Agreement (pursuant to which the Lessee provides
certain services to the Company) and the Option Agreement (pursuant to which the
Company has a two-year option to acquire any hotels acquired or developed by any
affiliate of the Company within 15 miles of the Company's hotels) were not
negotiated on an arm's-length basis. The Company does not own any interest in
the Lessee. Messrs. Hasu P. Shah, K.D. Patel, and Bharat C. Mehta are Trustees
of the Company and collectively own approximately 35% of the Lessee.
Consequently, they have a conflict of interest regarding the negotiation and
enforcement of the percentage leases, the Administrative Services Agreement and
the Option Agreement.
COMPETING HOTELS OWNED OR TO BE ACQUIRED BY THE HERSHA AFFILIATES
The Hersha Affiliates may develop or acquire new hotels, subject to
certain limitations. While it is anticipated that Mr. Shah will devote
substantially all of his time to the business of the Company, such development
or acquisition may materially affect the amount of time Mr. Shah has to devote
to the affairs of the Company. The Lessee and its affiliates may operate hotels
that are not owned by the Company, subject to certain restrictions, which may
materially affect the amount of time that the Lessee has to devote to managing
the hotels.
ACQUISITION OF HOTELS WITH LIMITED OPERATING HISTORY
Certain hotels purchased by the Company have little operating history
or have been newly renovated. The purchase prices of such hotels are based upon
projections by management as to the expected operating results of such hotels,
subjecting the Company to risks that such hotels may not achieve anticipated
operating results or may not achieve such results within anticipated time
frames. As a result, the Lessee may not generate enough net operating income
from such hotels to make the initial fixed rent payments or, after the rent is
adjusted after the applicable time period as set forth in each hotel's
percentage lease, to make the base rent payments. In addition, after rent is
adjusted, room revenues may be less than required to result in the payment of
percentage rent at levels at a particular hotel that provide the Company with
its anticipated return on investment. In either case, the amounts available for
distribution to shareholders could be reduced.
NEED FOR CERTAIN CONSENTS FROM THE LIMITED PARTNERS
Under the partnership agreement of the Partnership, as amended and
restated, the holders of at least two-thirds of the interests in the
Partnership, including the Company, which owns approximately only a 35% interest
in the Partnership, must approve a sale of all or substantially all of the
assets of the Partnership or a merger or consolidation of the Partnership,
provided, however, that such approval shall no longer be required if the Company
ever fails to pay a distribution of $.72 per share to the holders of the
Priority Common Shares for any 12-month period.The Hersha Affiliates own
approximately a 65% interest in the Partnership and thus effectively hold veto
power over such extraordinary transactions, which could result in the
disapproval of a transaction that would be beneficial to the shareholders of the
Company.
RISKS RELATED TO THE COMPANY'S DISTRIBUTIONS
The Company distributed 100% of its forecasted cash available for
distribution during each quarter during 1999 and the holders of subordinated
units of interest in the Partnership were entitled to receive an amount per
subordinated unit less than the priority distribution paid to the holders of the
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Priority Common Shares in the first, second and fourth quarters of 1999. If
actual cash available for distribution falls short of anticipated cash available
for distribution, the Company may not be able to maintain its initial
distribution rate. In addition, if the Company's actual cash available for
distribution after a period (the "Priority Period") beginning on the date of the
closing of the initial public offering and ending on the earlier of: (i) the
date that is 15 trading days after the Company sends notice to the record
holders of the Priority Common Shares that their priority rights will terminate
in 15 trading days, provided that the closing bid price of the Priority Common
Shares is at least $7.00 on each trading day during such 15-day period, or (ii)
the fifth anniversary of the closing of the initial public offering, does not
increase above its anticipated cash available for distribution, the Company will
not be able to maintain its initial distribution rate after such period.
Distribution of substantially all of the Company's cash available for
distribution will limit the funds available to the Company for capital
expenditures to maintain its properties or to finance acquisitions of future
hotels.
INABILITY TO OPERATE THE PROPERTIES
As a result of its status as a REIT, the Company will not be able to
operate any hotels. The Company will be unable to make and implement strategic
business decisions with respect to its properties, such as decisions with
respect to the repositioning of a franchise, repositioning of food and beverage
operations and other similar decisions, even if such decisions are in the best
interests of a particular property. Accordingly, there can be no assurance that
the Lessee will operate the hotels in a manner that is in the best interests of
the Company.
DEPENDENCE ON THE LESSEE
In order to generate revenues to enable it to make distributions to
shareholders, the Company will rely on the Lessee to make rent payments under
the percentage lease. The Lessee's obligations under the percentage leases,
including the obligation to make rent payments, are unsecured. The Lessee had a
loss of $386,000 for the year ended December 31, 1999. Reductions in revenues
from the hotels or in the net operating income of the Lessee may adversely
affect the ability of the Lessee to make such rent payments and thus the
Company's ability to make anticipated distributions to its shareholders.
Although failure on the part of the Lessee to comply materially with the terms
of a percentage lease would give the Company the right to terminate any or all
of the percentage leases, to repossess the applicable properties and to enforce
the payment obligations under the percentage leases, the Company then would be
required to find another lessee. There can be no assurance that the Company
would be able to find another lessee or that, if another lessee were found, the
Company would be able to enter into a lease on favorable terms.
NEWLY-ORGANIZED ENTITIES
The Company, the Partnership and the Lessee all have been recently
organized and have short operating histories. Although the officers and Trustees
of the Company have experience in developing, financing and operating hotels,
most of them have limited experience in operating a REIT or a public company.
LIMITED NUMBERS OF INITIAL HOTELS
The Company owns only 16 hotels, four of which are operated as Holiday
Inn Express(R) hotels, four as Hampton Inn(R) hotels, two as Holiday Inn(R)
hotels, four as Comfort Inn(R) hotels, one as a Best Western(R) hotel and one as
a Clarion Suites(R) hotel. Significant adverse changes in the operations of any
hotel could have a material adverse effect on the Lessee's ability to make rent
payments and, accordingly, on the Company's ability to make expected
distributions to its shareholders.
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GUARANTORS OF ASSUMED INDEBTEDNESS
The Hersha Affiliates guarantee the indebtedness secured by several of
the Company's hotels, and the bankruptcy of any of the guarantors would
constitute a default under the related loan documents, which default would cause
some or all of the indebtedness assumed in connection with the purchase of the
hotels to become immediately due and payable. In the event that the lender
accelerates the payment, such acceleration could adversely affect the Company's
cash available for distribution. If the Company is unable to make such payment,
the Company may be forced to sell the hotels that serve as collateral for such
indebtedness in order to make such payment.
SUBSTANTIAL DILUTION
Purchasers of Priority Common Shares sold in the initial public
offering experienced immediate and substantial dilution of $2.14, or 35.7% of
the initial public offering price, in the net tangible book value per Priority
Common Share. In addition, in the event that any of the purchase prices of the
hotels that have been newly developed or newly renovated are increased, owners
of the Priority Common Shares at such time will experience further dilution.
TAX RISKS
FAILURE TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service that it qualifies as a
REIT, the Company has received an opinion of its counsel, Hunton & Williams,
that, based on certain assumptions and representations, it will so qualify.
Investors should be aware, however, that opinions of counsel are not binding on
the Internal Revenue Service or any court. The REIT qualification opinion only
represents the view of counsel to the Company based on counsel's review and
analysis of existing law, which includes no controlling precedent. Furthermore,
both the validity of the opinion and the continued qualification of the Company
as a REIT will depend on the Company's continuing ability to meet various
requirements concerning, among other things, the ownership of its outstanding
shares of beneficial interest, the nature of its assets, the sources of its
income, and the amount of its distributions to its shareholders.
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to its
shareholders in computing its taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Unless entitled to relief under certain
Internal Revenue Code provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, amounts available for distribution to
shareholders would be reduced for each of the years involved. Although the
Company currently intends to operate in a manner designed to qualify as a REIT,
it is possible that future economic, market, legal, tax or other considerations
may cause the Trustees, with the consent of two-thirds of the shareholders, to
revoke the REIT election.
REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company generally will be required
each year to distribute to its shareholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
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of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain
net income for that year, and (iii) 100% of its undistributed taxable income
from prior years. To the extent that the Company elects to retain and pay income
tax on its net long-term capital gains, such retained amounts will be treated as
having been distributed for purposes of the 4% excise tax.
The Company intends to make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income will consist primarily of its share of the income of the
Partnership, and the Company's cash available for distribution to shareholders
will consist primarily of its share of cash distributions from the Partnership.
Differences in timing between the recognition of taxable income and the receipt
of amounts available for distribution due to the seasonality of the hotel
industry could require the Company, through the Partnership, to borrow funds on
a short-term basis to meet the 95% distribution requirement and to avoid the
nondeductible excise tax. For federal income tax purposes, distributions paid to
shareholders may consist of ordinary income, capital gains, nontaxable return of
capital, or a combination thereof. The Company will provide its shareholders
with an annual statement as to its designation of the taxability of
distributions.
Distributions by the Partnership will be determined by the Trustees and
will be dependent on a number of factors, including the amount of the
Partnership's distributable cash, the Partnership's financial condition, any
decision by the Trustees to reinvest funds rather than to distribute such funds,
the Partnership's capital expenditures, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code and such other factors as
the Trustees deem relevant.
POTENTIAL ADVERSE EFFECTS OF LEVERAGE AND LACK OF LIMITS ON INDEBTEDNESS
The Company has assumed certain indebtedness in connection with the
purchase of the hotels that is secured by some of the hotels. There can be no
assurance that the Company will be able to meet its debt service obligations
and, to the extent that it cannot, the Company risks the loss of some or all of
its assets to foreclosure. Although the Company's policy is to limit
consolidated indebtedness to less than 67% of the total purchase prices paid by
the Company for the hotels in which it has invested, there is no limit on the
Company's ability to incur debt contained in the Declaration of Trust or Bylaws.
The indebtedness assumed in connection with the purchase of the hotels will
limit the Company's ability to acquire additional hotels without issuing equity
securities.
THE PRICE PAID FOR THE HOTELS MAY EXCEED THEIR VALUE
No arm's-length negotiations were conducted and no independent
appraisals were obtained in connection with the purchase of the Company's
hotels. There can be no assurance that the price paid by the Company will not
exceed the fair market value of the hotels acquired by the Company.
EMPHASIS ON FRANCHISE HOTELS
The Company intends to place particular emphasis in its acquisition
strategy on hotels similar to the hotels currently owned by the Company. The
Company owns six hotels licensed under the Holiday Inn/Holiday Inn Express
franchise brand and thus will be subject to risks inherent in concentrating
investments in a particular franchise brand, which could have an adverse effect
on the Company's lease revenues and amounts available for distribution to
shareholders. These risks include, among others, the risk of a reduction in
hotel revenues following any adverse publicity related to the franchise brand.
CONCENTRATION OF INVESTMENTS IN PENNSYLVANIA
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All of the Company's hotels are located in Pennsylvania. As a result,
localized adverse events or conditions, such as an economic recession, could
have a significant adverse effect on the operations of the hotels, and
ultimately on the amounts available for distribution to shareholders.
HOTEL INDUSTRY RISKS
OPERATING RISKS
The Company's hotels are subject to all operating risks common to the
hotel industry. The hotel industry has experienced volatility in the past, as
have the Company's hotels, and there can be no assurance that such volatility
will not occur in the future. These risks include, among other things,
competition from other hotels; over-building in the hotel industry that could
adversely affect hotel revenues; increases in operating costs due to inflation
and other factors, which increases may not be offset by increased room rates;
dependence on business and commercial travelers and tourism; strikes and other
labor disturbances of hotel employees; increases in energy costs and other
expenses of travel; and adverse effects of general and local economic
conditions. These factors could reduce revenues of the hotels and adversely
affect the Lessee's ability to make rent payments under the percentage leases,
and therefore, the Company's ability to make distributions to its shareholders.
COMPETITION FOR GUESTS
The hotel industry is highly competitive. The hotels will compete with
other existing and new hotels in their geographic markets. Many of the Company's
competitors have substantially greater marketing and financial resources than
the Company and the Lessee.
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Company's current growth strategy is to acquire hotels primarily in
the upper-economy and mid-scale segments of the hotel industry. The Company will
not seek to invest in assets selected to reduce the risks associated with an
investment in that segment of the hotel industry, and, therefore, is subject to
risks inherent in concentrating investments in a single industry and in specific
market segments within that industry. The adverse effect on rent under the
percentage leases and amounts available for distribution to shareholders
resulting from a downturn in the hotel industry in general or the upper-economy
and mid-scale segments in particular would be more pronounced than if the
Company had diversified its investments outside of the hotel industry or in
additional hotel market segments.
SEASONALITY OF HOTEL BUSINESS AND THE INITIAL HOTELS
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
The hotels' operations historically reflect this trend. The Company believes
that it will be able to make its forecasted distributions to shareholders.
RISKS OF OPERATING HOTELS UNDER FRANCHISE LICENSES
The continuation of the franchise licenses for the Company's hotels is
subject to specified operating standards and other terms and conditions. Holiday
Inn Express(R), Holiday Inn(R), Hampton Inn(R), Best Western(R) and Choice
Hotels International, Inc.(R), the franchisor of Comfort Inns(R) and Clarion
Suites(R), periodically inspect their licensed properties to confirm adherence
to their operating standards. The failure of the Partnership or the Lessee to
maintain such standards respecting the hotels or to adhere to such other terms
and conditions could result in the loss or cancellation of the applicable
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franchise license. It is possible that a franchisor could condition the
continuation of a franchise license on the completion of capital improvements
which the Trustees determine are too expensive or otherwise not economically
feasible in light of general economic conditions or the operating results or
prospects of the affected hotel. In that event, the Trustees may elect to allow
the franchise license to lapse or be terminated.
There can be no assurance that a franchisor will renew a franchise
license at each option period. If a franchise license is terminated, the
Partnership and the Lessee may seek to obtain a suitable replacement franchise,
or to operate the hotel independent of a franchise license. The loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the related hotel because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor. Although the percentage leases require the Lessee to maintain
the franchise licenses for each hotel, the Lessee's loss of a franchise license
for one or more of the hotels could have a material adverse effect on the
Partnership's revenues under the percentage leases and the Company's amounts
available for distribution to shareholders.
OPERATING COSTS AND CAPITAL EXPENDITURES; HOTEL RENOVATION
Hotels, including the Company's hotels, generally have an ongoing need
for renovations and other capital improvements, particularly in older
structures, including periodic replacement of furniture, fixtures and equipment.
Under the terms of the percentage leases, the Partnership is obligated to pay
the cost of expenditures for items that are classified as capital items under
generally accepted accounting principles that are necessary for the continued
operation of the hotels. If these expenses exceed the Company's estimate, the
additional cost could have an adverse effect on amounts available for
distribution to shareholders. In addition, the Company may acquire hotels in the
future that require significant renovation. Renovation of hotels involves
certain risks, including the possibility of environmental problems, construction
cost overruns and delays, uncertainties as to market demand or deterioration in
market demand after commencement of renovation and the emergence of
unanticipated competition from hotels.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS OF INVESTING IN REAL ESTATE
The Company's hotels will be subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the hotels and the Company's income and ability to make distributions to its
shareholders are dependent upon the ability of the Lessee to operate the hotels
in a manner sufficient to maintain or increase revenues in excess of operating
expenses to enable the Lessee to make rent payments. Hotel revenues may be
adversely affected by adverse changes in national economic conditions, adverse
changes in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, competition from other hotels,
changes in interest rates and in the availability, cost and terms of mortgage
funds, the impact of present or future environmental legislation and compliance
with environmental laws, the ongoing need for capital improvements, particularly
in older structures, changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse changes
in zoning laws, and other factors that are beyond the control of the Company.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
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conditions will be limited. No assurances can be given that the fair market
value of any of the Company's hotels will not decrease in the future.
UNINSURED AND UNDERINSURED LOSSES
Each percentage lease specifies comprehensive insurance to be
maintained on each of the Company's hotels, including liability and fire and
extended coverage in amounts sufficient to permit the replacement of the hotels
in the event of a total loss, subject to applicable deductibles. Management of
the Company believes that such specified coverage is of the type and amount
customarily obtained by owners of hotels similar to the Company's hotels.
percentage leases for hotels subsequently acquired by the Company will contain
similar provisions. However, there are certain types of losses, generally of a
catastrophic nature, such as earthquakes, floods and hurricanes, that may be
uninsurable or not economically insurable. Inflation, changes in building codes
and ordinances, environmental considerations, and other factors also might make
it infeasible to use insurance proceeds to replace the applicable hotel after
such applicable hotel has been damaged or destroyed. Under such circumstances,
the insurance proceeds received by the Company might not be adequate to restore
its economic position with respect to the applicable hotel.
PROPERTY TAXES
Each of the Company's hotels is subject to real and personal property
taxes. The real and personal property taxes on hotel properties in which the
Company invests may increase or decrease as property tax rates change and as the
properties are assessed or reassessed by taxing authorities. If property taxes
increase, the Company's ability to make expected distributions to its
shareholders could be adversely affected.
ENVIRONMENTAL MATTERS
Operating costs may be affected by the obligation to pay for the cost
of complying with existing environmental laws, ordinances and regulations, as
well as the cost of future legislation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
complying with environmental laws could materially adversely affect amounts
available for distribution to shareholders. Phase I environmental assessments
have been obtained on all of the Company's hotels. The purpose of Phase I
environmental assessments is to identify potential environmental contamination
that is made apparent from historical reviews of the hotels, reviews of certain
public records, preliminary investigations of the sites and surrounding
properties, and screening for the presence of hazardous substances, toxic
substances and underground storage tanks. The Phase I environmental assessment
reports have not revealed any environmental contamination that the Company
believes would have a material adverse effect on the Company's business, assets,
results of operations or liquidity, nor is the Company aware of any such
liability. Nevertheless, it is possible that these reports do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS
Under the Americans with Disabilities Act of 1993 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. While the Company believes that its
hotels are substantially in compliance with these requirements, a determination
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that the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the hotels, including changes to building codes and fire and
life-safety codes, may occur. If the Company were required to make substantial
modifications at the hotels to comply with the ADA or other changes in
governmental rules and regulations, the Company's ability to make expected
distributions to its shareholders could be adversely affected.
MARKET FOR PRIORITY COMMON SHARES
There can be no assurances that the Company will continue to meet the
criteria for continued listing of the Priority Common Shares on The American
Stock Exchange.
EFFECT OF MARKET INTEREST RATES ON PRICE OF PRIORITY COMMON SHARES
One of the factors that may influence the price of the Priority Common
Shares in public trading markets will be the annual yield from distributions by
the Company on the Priority Common Shares as compared to yields on other
financial instruments. Thus, an increase in market interest rates will result in
higher yields on other financial instruments, which could adversely affect the
market price of the Priority Common Shares.
EFFECT OF MARKET INTEREST RATES ON INTEREST EXPENSE
One of the factors that may influence the Company's interest expense is
the prevailing market interest rate for variable rate debt instruments. The
Company currently maintains a $7.0 million line of credit with Sovereign Bank
which bears interest at the bank's prime rate. An increase in the bank's prime
rate will result in higher interest expenses for the Company.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT, LIMITED PARTNER CONSENTS, STAGGERED
BOARD, POWER TO ISSUE ADDITIONAL SHARES AND CERTAIN PROVISIONS OF MARYLAND LAW
OWNERSHIP LIMITATION
The Declaration of Trust generally prohibits direct or indirect
ownership of more than 9.9% of the number of outstanding shares of any class of
securities of the Company, including the Priority Common Shares, by any person
(the "Ownership Limitation"). Generally, Priority Common Shares owned by
affiliated owners will be aggregated for purposes of the Ownership Limitation.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a change in control or other transaction in which holders of some, or
a majority, of Priority Common Shares might receive a premium for their Priority
Common Shares over the then prevailing market price or which such holders might
believe to be otherwise in their best interests.
LIMITED PARTNER CONSENTS
The holders of at least two-thirds of the interests in the Partnership,
including the Company, must approve, subject to certain conditions, a sale of
all or substantially all of the assets of the Partnership or a merger or
consolidation of the Partnership, which could result in the disapproval of a
transaction that would be beneficial to the shareholders of the Company.
STAGGERED BOARD
The Company's Board of Trustees is divided into two classes. The
initial terms of the first and second classes will expire in 1999 and 2000,
respectively. Beginning at the annual meeting of shareholders in 1999, Trustees
of each class will be chosen for two-year terms upon the expiration of their
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current terms and each year one class of Trustees will be elected by the
shareholders. The staggered terms of Trustees may delay, defer or prevent a
tender offer, a change in control of the Company or other transaction, even
though such a transaction might be in the best interest of the shareholders.
ISSUANCE OF ADDITIONAL SHARES
The Company's Declaration of Trust authorizes the Board of Trustees,
without shareholder approval, to (i) amend the Declaration of Trust to increase
or decrease the aggregate number of shares of beneficial interest or the number
of shares of beneficial interest of any class that the Company has the authority
to issue, (ii) cause the Company to issue additional authorized but unissued
Priority Common, Class B Common or Preferred Shares and (iii) classify or
reclassify any unissued Common or Preferred Shares and to set the preferences,
rights and other terms of such classified or reclassified shares, including the
issuance of additional Priority Common Shares or preferred shares that have
preference rights over the Priority Common Shares with respect to dividends,
liquidation, voting and other matters. Future equity offerings may cause the
purchasers of Priority Common Shares to experience further dilution. The Company
has no current plans for future equity offerings. Although the Board of Trustees
has no such intention at the present time, it could establish a series of
Preferred Shares that could, depending on the terms of such series, delay, defer
or prevent a transaction or a change in control of the Company that might
involve a premium price for the Priority Common Shares or otherwise be in the
best interest of the shareholders. The Declaration of Trust and Bylaws of the
Company also contain other provisions that may have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company that
might involve a premium price for the Priority Common Shares or otherwise be in
the best interest of the shareholders.
MARYLAND BUSINESS COMBINATION LAW
Under the Maryland General Corporation Law, as amended ("MGCL"), as
applicable to real estate investment trusts, certain "business combinations"
(including certain issuances of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares (an "Interested Shareholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Shareholder becomes an Interested Shareholder. Thereafter,
any such business combination must be approved by two super-majority shareholder
votes unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its common shares.
DEPENDENCE UPON EXTERNAL FINANCING
The Company anticipates that its growth and acquisition strategies will
be largely financed through externally generated funds such as borrowings under
the Line of Credit and other secured and unsecured debt financing and from
issuance of equity securities. Because the Company must distribute 95% of its
taxable income to maintain its qualification as a REIT, the Company's ability to
rely upon income from operations or cash flow from operations to finance its
growth and acquisition activities will be limited. Accordingly, were the Company
unable to obtain the Line of Credit or other funds from borrowings or to access
the capital markets to finance its growth and acquisition activities, the
Company's ability to grow could be curtailed, cash available for distribution to
shareholders of the Company could be adversely affected and the Company could be
required to reduce distributions.
ASSUMPTION OF CONTINGENT LIABILITIES
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Because the Partnership has acquired partnership interests in certain
entities in its acquisition of the hotels, the Partnership has assumed all
contingent liabilities of those entities. The Hersha Affiliates are managing
partners of the entities and have made representations and warranties that the
entities have no liabilities, debts or obligations except for liabilities
arising under operating agreements, equipment leases, loan agreements or
proration credits on the closing date of the initial public offering. There is,
however, a risk that unforeseen liabilities could exist and could adversely
affect amounts available for distribution to shareholders.
POSSIBLE INCREASE IN GROUND LEASE PAYMENTS FOR COMFORT INN, DENVER, PENNSYLVANIA
The Company is leasing the land under the Comfort Inn, Denver,
Pennsylvania from Hasu P. Shah and Bharat C. Mehta for $6,000 per year for 99
years. Messrs. Shah and Mehta have pledged their interests in the land to a
lender to secure a loan from the lender. Pursuant to the terms of the loan
agreement, in the event of a default on the loan, the ground lease with the
Company will not terminate, but the lender has the option to adjust the payments
to fair rental value at the time of the loan default based on a third-party
appraisal. Accordingly, in the event of a default by Messrs. Shah and Mehta on
the loan that is secured by the land, the Company's rental obligations under the
ground lease may increase.
ABILITY OF BOARD OF TRUSTEES TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect
to acquisitions, financing, growth, operations, debt limitation and
distributions, will be determined by the Trustees. The Trustees may amend or
revise these and other policies from time to time without a vote of the holders
of the Priority Common Shares. Although three of the Trustees are required to be
independent Trustees, a majority of the Board of Trustees are not independent
Trustees and thus such policies may be changed by the non-independent Trustees.
The effect of any such changes may be positive or negative. Under the
Declaration of Trust, the Company cannot change its policy of seeking to
maintain its qualification as a REIT without the approval of the holders of
two-thirds of the outstanding Priority Common Shares.
GROWTH STRATEGY
COMPETITION FOR ACQUISITIONS
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives, as well as other purchasers of hotels. The Company
will be competing for such investment opportunities with entities that have
substantially greater financial resources than the Company, including access to
capital or better relationships with franchisors, sellers or lenders. The
Company's policy is to limit consolidated indebtedness to less than 67% of the
total purchase prices paid by the Company for the hotels in which it has
invested. Because of the amount of the indebtedness assumed by the Company in
connection with the purchase of the hotels, the success of the Company's
acquisition strategy will depend primarily on its ability to access additional
capital through issuances of equity securities. The Company's competitors may
generally be able to accept more risk than the Company can manage prudently and
may be able to borrow the funds needed to acquire hotels. Competition may
generally reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell.
ACQUISITION RISKS
The Company intends to pursue acquisitions of additional hotel
properties. Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that estimates of the cost of improvements
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necessary to market and acquire properties will prove inaccurate, as well as
general investment risks associated with any new real estate investment. The
Company anticipates that its growth and acquisition strategies will be largely
financed through externally generated funds such as borrowings under credit
facilities and other secured and unsecured debt financing and from issuance of
equity securities. Because the Company must distribute 95% of its taxable income
to maintain its qualification as a REIT, the Company's ability to rely upon
income from operations or cash flow from operations to finance its growth and
acquisition activities will be limited. Accordingly, were the Company unable to
obtain funds from borrowings or the capital markets to finance its growth and
acquisition activities, the Company's ability to grow could be curtailed,
amounts available for distribution to shareholders could be adversely affected
and the Company could be required to reduce distributions.
RELIANCE ON TRUSTEES AND MANAGEMENT
Common shareholders have no right or power to take part in the
management of the Company except through the exercise of voting rights on
certain specified matters. The Trustees will be responsible for managing the
Company. The Company will rely upon the services and expertise of its Trustees
for strategic business direction.
In addition, there may be conflicting demands on Mr. Shah caused by his
overlapping management of the Company and Hersha Enterprises Ltd. Hersha
Enterprises Ltd. owns and operates properties other than the Company's hotels,
and Mr. Shah, who serves as Chairman of the Board and Chief Executive Officer of
the Company and President of Hersha Enterprises, Ltd., may experience a conflict
in allocating his time between such entities.
POSSIBLE ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON PRICE OF PRIORITY
COMMON SHARES
After termination of the Priority Period, the Class B Common Shares
will automatically be converted into Priority Common Shares on a one-for-one
basis. Sales of a substantial number of Priority or Class B Common Shares, or
the perception that such sales could occur, could adversely affect prevailing
market prices of the Priority Common Shares. Approximately 4 million
subordinated units of limited partnership interest in the Partnership have been
issued to The Hersha Affiliates in addition to the Priority Common Shares
offered by the Company in the initial public offering. In general, the
subordinated units become redeemable for cash or, at the option of the Company,
Class B Common Shares one year after their issuance. In the event the Class B
Common Shares are converted into Priority Common Shares prior to redemption of
the subordinated units, such outstanding subordinated units will become
redeemable for Priority Common Shares. At the conclusion of such periods and
upon the subsequent redemption of units, the Class B Common Shares or Priority
Common Shares received therefor may be sold in the public market pursuant to
shelf registration statements that the Company is obligated to file on behalf of
limited partners of the Partnership, or pursuant to any available exemptions
from registration.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HERSHA HOSPITALITY TRUST
Date: March 30, 2000 By: /s/ Hasu P. Shah
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Hasu P. Shah
Chief Executive Officer
