<PAGE>
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 June 30, 2000
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: 005-55249
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland 251811499
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
148 Sheraton Drive, Box A
New Cumberland, Pennsylvania 17070
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (717) 770-2405
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 2000, the number of outstanding Priority Class A Common
Shares of Beneficial Interest outstanding was 2,275,000.
<PAGE>
HERSHA HOSPITALITY TRUST
INDEX
<TABLE>
<CAPTION>
Form 10-Q
Report
Item No. Page
-------- ----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Hersha Hospitality Trust
Independent Accountant's Report......................................................1
Consolidated Balance Sheets as of June 30, 2000 [Unaudited]
and December 31, 1999................................................................2
Consolidated Statement of Operations for the three months and six months
ended June 30, 2000 and 1999 [Unaudited].............................................3
Consolidated Statement of Cash Flows for the six months ended
June 30, 2000 and 1999 [Unaudited]...................................................4
Notes to Consolidated Financial Statements...........................................6
Hersha Hospitality Management, L.P.
Independent Accountant's Report......................................................14
Balance Sheets as of June 30, 2000 [Unaudited] and
December 31, 1999....................................................................15
Statement of Operations for the three months and six months ended
June 30, 2000 and 1999 [Unaudited]...................................................16
Statement of Cash Flows for the six months ended
June 30, 2000 and 1999 [Unaudited]...................................................17
Notes to Financial Statements........................................................18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................20
Results of Operations, Three Months and Six Months Ended
June 30, 2000 and 1999...............................................................21
Liquidity and Capital Resources......................................................22
Inflation............................................................................23
Seasonality..........................................................................23
Subsequent Events....................................................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................23
PART II. Other Information
Item 1. Legal Proceedings....................................................................24
Item 2. Changes in Securities and Use of Proceeds............................................24
Item 3. Defaults Upon Senior Securities......................................................24
Item 4. Submission of Matters to a Vote of Security Holders..................................24
Item 5. Other Information....................................................................24
Item 6. Exhibits and Reports on Form 8-K.....................................................24
(a) Exhibits...................................................................24
(b) Reports on Form 8-K........................................................24
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania
We have reviewed the accompanying consolidated balance sheet,
consolidated statement of operations and consolidated statement of cash flows of
Hersha Hospitality Trust and subsidiaries as of June 30, 2000, and for the three
month and six month periods then ended. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying consolidated financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31, 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended [not presented herein]; and in our report
dated February 16, 2000, except as to Note 13[B] as to which the date is
February 25, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1999, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
August 4, 2000
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
<TABLE>
<CAPTION>
June 30, 2000 December 31,
Assets: [Unaudited] 1999 (1)
----------- --------
<S> <C>
Investment in Hotel Properties, Net of Accumulated Depreciation $ 83,874 $ 51,908
Cash and Cash Equivalents -- 124
Escrow and Lease Deposits 1,116 --
Lease Payments Receivable - Related Party 3,382 2,116
Intangibles, Net of Accumulated Amortization 1,787 855
Due from Related Party -- 1,028
Other Assets 72 351
------------------ ------------------
Total Assets $ 90,231 $ 56,382
================== ==================
Liabilities and Shareholders' Equity:
Cash Overdraft $ 217 $ 84
Lines of Credit 10,102 6,096
Mortgages Payable 46,066 18,658
Dividends Payable 410 410
Lease Deposits 1,000 --
Due to Related Party 1,868 188
Accounts Payable and Accrued Expenses 281 161
------------------ ------------------
Total Liabilities 59,944 25,597
------------------ ------------------
Minority Interest 18,801 18,980
------------------ ------------------
Commitments and Contingencies -- --
------------------ ------------------
Shareholders' Equity:
Preferred Shares, $.01 par value, 10,000 Shares authorized, None Issued and
Outstanding -- --
Common Shares - Priority Class A, $.01 Par Value, 50,000,000 Shares 23 23
Authorized, 2,275,000 Shares Issued and Outstanding at June 30, 2000 and
December 31, 1999
Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized,
2,275,000 and -0- Shares Issued and Outstanding at June 30, 2000 and
December
31, 1999, Respectively -- --
Additional Paid-in Capital 11,968 11,968
Distributions in Excess of Net Earnings (505) (186)
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 90,231 $ 56,382
================== ==================
</TABLE>
(1) Operations commenced on January 26, 1999
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
2
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] (1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C>
Revenue:
Percentage Lease Revenue $ 3,212 $ 1,888 $ 5,564 $ 3,034
Other Revenue 4 24 4 63
---------- ---------- ---------- ----------
Total Revenue 3,216 1,912 5,568 3,097
Expenses:
Interest expense 1,139 288 1,951 554
Land lease 4 5 8 9
Real Estate and Personal Property
Taxes and Property Insurance 209 112 354 204
General and Administrative 134 95 300 173
Early Payment Penalty - - 107 -
Depreciation and Amortization 961 502 1,758 838
---------- ---------- ---------- ----------
Total Expenses 2,447 1,002 4,478 1,778
Income Before Minority Interest 769 910 1,090 1,319
Income Allocated to Minority Interest 562 529 590 661
---------- ---------- ---------- ----------
Net Income $ 207 $ 381 $ 500 $ 658
========== ========== ========== ==========
Basic Earnings Per Common Share $ 0.09 $ 0.17 $ 0.22 $ 0.29
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.11 $ 0.14 $ 0.16 $ 0.21
========== ========== ========== ==========
Weighted Average Shares:
Basic 2,275,000 2,275,000 2,275,000 2,275,000
Diluted 6,715,996 (2) 6,307,431 (2) 6,715,996 (2) 6,307,431 (2)
</TABLE>
(1) Operations commenced on January 26, 1999
(2) Includes 4,440,996 and 4,032,431 units at June 30, 2000 and 1999,
respectively, that are redeemable on a one-for one basis for Class B
common shares
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
3
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
June 30, June 30,
2000 1999 (1)
---------- ----------
Operating Activities:
Net Income $ 500 $ 658
---------- ----------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,758 838
Income Allocated to Minority Interest 590 661
Change in Assets and Liabilities:
(Increase) Decrease in:
Escrow Deposits (1,116) -
Lease Payments Receivable (1,266) (1,966)
Other Assets 279 (523)
Due from Related Party - -
Increase (Decrease):
Due to Related Party 272 -
Lease Deposits Payable - -
Accounts Payable and Accrued Expenses 120 468
---------- ----------
Total Adjustments 637 (522)
---------- ----------
Net Cash provided by Operating Activities 1,137 136
Investing Activities:
Purchase of Hotel Property Assets (10,872) (631)
Purchase of Intangible Assets (1,013) (582)
---------- ----------
Net Cash used in Investing Activities (11,885) (1,213)
Financing Activities:
Cash Overdraft 133 -
Proceeds from borrowings under line of credit 13,516 -
Repayment of borrowings under line of credit (9,510) -
Net Proceeds from Issuance of Stock - 11,991
Borrowings from Mortgages Payable 24,550 -
Principal Repayment of Mortgages Payable (16,734) (5,117)
Dividends Paid (819) (469)
Limited Partnership Unit Distributions Paid (1,920) -
Borrowings from Related Party 1,408 -
Repayment of Related Party Loans - (3,735)
---------- ----------
Net Cash provided by Financing Activities 10,624 2,670
Net Increase (Decrease) in Cash and Cash Equivalents (124) 1,593
Cash and Cash Equivalents - Beginning of Period 124 -
---------- ----------
Cash and Cash Equivalents - End of Period $ - $ 1,593
---------- ----------
(1) Operations commenced on January 26, 1999
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
4
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
June 30, June 30,
2000 1999
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period:
Interest $991 $537
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
We have acquired an Investment in Hotel Properties with an approximate value, at
the commencement of operations, of $40,307 in exchange for (i) 4,032,431
subordinated units of limited partnership interest in the partnership that are
redeemable for the same number of Class B Common Shares with a value of
approximately $24.2 million based on the initial offering price and (ii) the
assumption of approximately $23.3 million of indebtedness of which approximately
$6.1 million was repaid immediately after the acquisition of the hotels and
approximately $2.8 million was repaid prior to June 30, 1999.
On January 1, 2000, we have purchased three hotels from the Hersha Affiliates.
These hotels consist of the Hampton Inn, Hershey, the Best Western, Indiana and
the Comfort Inn, McHenry. The purchase prices paid for these hotels were $7.5
million, $2.2 million and $1.8 million, respectively. We have assumed mortgages
payable of $5.0 million, $1.4 million and $1.2 million, respectively in
connection with the acquisitions of these hotels. We have also assumed related
party debt of $1.0 million related to the purchase of the Hampton Inn, Hershey.
The Hersha Affiliates have received cash of approximately $1.5 million, $0.8
million and $0.6 million, respectively, for the remainder of the proceeds from
the sale of these hotels.
On May 19, 2000, we completed the acquisition of four hotels from Noble
Investment Group, Ltd. ("Noble"). We have simultaneously entered into
purchase-leaseback agreements with Noble for the four properties. We leased the
properties to entities owned by Noble pursuant to percentage leases that provide
for rent based, in part, on the room revenues from the hotels. The leases for
the Comfort Suites, Duluth, and the Holiday Inn Express, Duluth, are effective
as of May 19, 2000. The leases for the Hampton Inn hotels located in Newnan and
Peachtree City are effective as of April 20, 2000.
On June 28, 2000 we declared a $0.18 per Class A Common Share dividend of
$410 that was paid on July 27, 2000 and a distribution of $0.18 to the holders
of limited partnership units.
We have also issued an additional 235,026 units of limited partnership interest
in connection with the repricing of the Holiday Inn, Milesburg, the Comfort Inn,
Denver and the Holiday Inn Express, Riverfront. The total number of units
outstanding as of March 31, 2000 was 4,440,996.
The Accompanying Notes Are an Integral Part of This Consolidated Financial
Statement.
5
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[1] Organization and Basis of Financial Presentation
Hersha Hospitality Trust was formed in May 1998 to acquire equity interests in
ten existing hotel properties. We are a self-administered, Maryland real estate
investment trust for federal income tax purposes. On January 26, 1999, we
completed an initial public offering of 2,275,000 shares of $.01 par value
Priority Class A Common Shares. The offering price per share was $6 resulting in
gross proceeds of $13,650. Net of underwriters discount and offering expenses,
we received net proceeds of $11,991.
Upon completion of the initial public offering, we contributed substantially all
of the net proceeds to Hersha Hospitality Limited Partnership [the
"Partnership"] in exchange for a 36.1% general partnership interest in the
Partnership. The Partnership used these proceeds to acquire an equity interest
in ten hotels [the "Initial Hotels"] through subsidiary partnerships, and to
retire certain indebtedness relating to these hotels. The Partnership acquired
these hotels in exchange for (i) units of limited partnership interest in the
Partnership which are redeemable, subject to certain limitations, for an
aggregate of 4,032,431 Priority Class B Common Shares, with a value of
approximately $24.2 million based on the initial public offering, and (ii) the
assumption of approximately $23.3 million of indebtedness of which approximately
$6.1 million was repaid immediately after the acquisition of the hotels. Hasu P.
Shah and certain affiliates [the "Hersha Affiliates"] received units of limited
partnership interests in the Partnership aggregating a 63.9% equity interest in
the Partnership. The Partnership owns a 99% limited partnership interest and
Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability company, owns a
1% general partnership interest in the subsidiary partnerships. The Partnership
is the sole member of HHLLC. We began operations on January 26, 1999; therefore,
the financial results for the six months ended June 30, 1999 include activity
from January 26, 1999 to June 30, 1999.
We lease 16 of our hotel facilities to Hersha Hospitality Management, LP,
["HHMLP"], a limited partnership owned by certain members of the Hersha
Affiliates. HHMLP operates and leases the hotel properties pursuant to separate
percentage lease agreements [the "Percentage Leases"] that provide for initial
fixed rents or percentage rents based on the revenues of the hotels. The hotels
are located principally in the Mid-Atlantic region of the United States. We have
also entered into percentage leases with Noble Investment Group, Ltd. ["Noble"],
an independent third party management company, to manage four hotels in the
metropolitan Atlanta market.
On May 19, 2000, we completed our acquisition of four hotel properties in
metropolitan Atlanta, Georgia from various entities owned by Noble. The four
properties acquired and their respective purchase prices are as follows:
Hotel Property Rooms Location Purchase Price
-------------- ----- -------- --------------
Comfort Suites 85 Duluth, GA. $5,207,857
Holiday Inn Express 68 Duluth, GA. $3,735,413
Hampton Inn 91 Newnan, GA. $7,117,092
Hampton Inn 61 Peachtree City, GA. $3,939,640
The Partnership acquired the Hampton Inn, Newnan and Hampton Inn, Peachtree City
through the assumption of existing debt, held by General Electric Capital
Corporation, of $3.6 million and $2.4 million, respectively. In addition,
approximately $5.0 million was utilized from our outstanding line of credit. The
Comfort Suites, Duluth and the Holiday Inn Express, Duluth were purchased
through mortgages from Lehman Brothers Bank totaling $6.0 million in addition to
$2.7 million from our outstanding line of credit.
Since the completion of the initial public offering we have issued an additional
173,539 units of limited partnership interest in connection with the acquisition
of the Hampton Inn, Danville, PA. We have also issued an additional 235,026
units of limited partnership interest in connection with the repricing of the
Holiday Inn, Milesburg, the Comfort Inn, Denver and the Holiday Inn Express,
Riverfront. The total number of units of limited partnership interest
outstanding as of June 30, 2000 and 1999 was 4,440,996 and 4,032,431
respectively.
6
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[2] Summary of Significant Accounting Policies
Revenue Recognition - Percentage lease income is recognized when earned from the
Lessee under the agreements from the date of acquisition of each hotel property.
Contingent rent is recognized when the contingency is met. Lease income is
recognized under fixed rent agreements ratably over the lease term.
Minority Interest - Minority interest in the Partnership represents the limited
partners proportionate share of the equity of the Partnership. Income is
allocated to minority interest based on weighted average percentage ownership
throughout the year.
Earnings Per Common Share - We compute earnings per share in accordance with
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per
Share."
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share," and replaces its primary earnings per share with new basic earnings
per share representing the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. Diluted earnings
per share reflects the amount of earnings for the period available to each share
of common stock outstanding during the reporting period, while giving effect to
all dilutive potential common shares that were outstanding during the period,
such as common shares that could result from the potential exercise or
conversion of securities into common shares.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share. The dilutive effect of outstanding options and
warrants and their equivalents is reflected in diluted earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earning per share. It assumes that any proceeds would be used to
purchase common shares at the average market price during the period. Options
and warrants will have a dilutive effect only when the average market price of
the common shares during the period exceeds the exercise price of the option or
warrants.
Potential future dilutive securities include 4,440,996 shares issuable under
limited partnership units and 534,000 shares issuable under outstanding options.
[3] Commitments and Contingencies and Related Party Transactions
The Priority Class A Common Shares have priority as to the payment of dividends
until dividends equal $.72 per share on a cumulative basis and shares equally in
additional dividends after the Class B Common Shares have received $.72 per
share in each annual period. The Priority Class A Common Shares carry a
liquidation preference of $6.00 per share plus unpaid dividends and votes with
the Class B Common Shares on a one vote per share basis. The Priority period of
the Class A Shares will commence on the date of the closing of the initial
public offering and end on the earlier of (i) five years after the initial
public offering of the Priority Common Shares, or (ii) the date that is 15
trading days after we send notice to the holders of the Priority Common Shares,
provided that the closing bid price of the Priority Common Shares is at least $7
on each trading day during such 15-day period.
Under the Percentage Leases with HHMLP and Noble, we are obligated to pay the
costs of certain capital improvements, real estate and personal property taxes
and property insurance, and to make available to the Lessee an amount equal to
4% [6% for some hotels] of room revenues per quarter, on a cumulative basis, for
the periodic replacement or refurbishment of furniture, fixtures and equipment.
7
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[3] Commitments and Contingencies and Related Party Transactions [Continued]
Pursuant to the Hersha Hospitality Limited Partnership agreement, the limited
partners have certain redemption rights that enable them to cause the
partnership to redeem their units of limited partnership interest in exchange
for Class B Common Shares or for cash at our election. In the event the Class B
Common Shares are converted into Priority Class A Common Shares prior to
redemption of the units, the units will be redeemable for Priority Class A
Common Shares. If we do not exercise our option to redeem the units for Class B
Common Shares, then the limited partner may make a written demand that we redeem
the units for Class B Common Shares. These redemption rights may be exercised by
the limited partners over time periods ranging form one to two years from
January 26, 1999. At June 30, 2000 and June 30, 1999, the aggregate number of
Class B Common Shares issuable to the limited partners upon exercise of the
redemption rights is 4,440,996 and 4,032,431, respectively. The number of shares
issuable upon exercise of the redemption rights will be adjusted upon the
occurrence of stock splits, mergers, consolidation or similar pro rata share
transactions, that otherwise would have the effect of diluting the ownership
interest of the limited partners or our shareholders.
We are the sole general partner in the Partnership, which is the sole general
partner in the Subsidiary Partnerships and, as such, are liable for all recourse
debt of the Partnership to the extent not paid by the subsidiary partnerships.
In the opinion of management, we do not anticipate any losses as a result of our
obligations as general partner.
We have entered into percentage leases relating to 16 hotels with HHMLP. Each
percentage lease will have an initial non-cancelable term of five years. All,
but not less than all, of the Percentage Leases for these 16 hotels may be
extended for an additional five-year term at the lessee's option. At the end of
the first extended term, the Lessee, at its option, may extend some or all of
the Percentage Leases for these hotels for an additional five-year term.
Pursuant to the terms of the Percentage Leases, the Lessee is required to pay
initial fixed rent, base rent or percentage rent and certain other additional
charges and is entitled to all profits from the operations of the hotels after
the payment of certain specified operating expenses.
We have future lease commitments from HHMLP through December 2004. Minimum
future rental income under these noncancellable operating leases at June 30,
2000, is as follows:
December 31, 2000 $ 3,888
December 31, 2001 6,420
December 31, 2002 4,604
December 31, 2003 4,604
December 31, 2004 1,280
Thereafter 0
-------------
Total $ 20,796
=============
We have entered into percentage leases relating to 4 hotels with Noble. Each
percentage lease will have an initial non-cancelable term of three years. All,
but not less than all, of the Percentage Leases for these 4 hotels may be
extended for an additional three-year term at Noble's option. At the end of the
first extended term, HHLP or Noble may extend all, but not less than all, of the
Percentage Leases for these hotels for an additional three-year term. Pursuant
to the terms of the Percentage Leases, the Lessee is required to pay initial
fixed rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses.
8
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[3] Commitments and Contingencies and Related Party Transactions [Continued]
We have future lease commitments from Noble through May 19, 2003. Minimum future
rental income under these noncancellable operating leases at June 30, 2000, is
as follows:
December 31, 2000 $ 1,400
December 31, 2001 2,801
December 31, 2002 2,801
December 31, 2003 943
------------
Total $ 7,945
============
For the period January 1, 2000 through June 30, 2000, we earned initial fixed
rents of $3,368 and earned percentage rents of $2,196. For the period January
26, 1999 through June 30, 1999, we earned initial fixed rents of $1,627 and
earned percentage rents of $1,407.
The hotel properties are operated under franchise agreements assumed by the
lessee that have 10 to 20 year lives but may be terminated by either the
franchisee or franchisor on certain anniversary dates specified in the
agreements. The agreements require annual payments for franchise royalties,
reservation, and advertising services, which are based upon percentages of gross
room revenue. These fees are paid by the lessee.
We have acquired seven of the Initial Hotels and three other hotels, since the
commencement of operations, for prices that will be adjusted at either December
31, 1999, 2000 or 2001. The purchase price adjustments are calculated by
applying the initial pricing methodology to such hotels' cash flows as shown on
our and the Lessee's audited financial statements. The adjustments must be
approved by a majority of our independent trustees. If the repricing produces a
higher aggregate value for such hotels, the Hersha Affiliates receive an
additional number of units of limited partnership interest that, when multiplied
by the offering price, equals the increase in value. If, however, the repricing
produces a lower aggregate value for such hotels, the Hersha Affiliates forfeit
to the Partnership that number of units that, when multiplied by the offering
price, equals the decrease in value. Any adjustments arising from the issuance
or forfeiture of shares will adjust the cost of the property acquired based on
the fair value of the shares on the date of the adjustment.
The purchase prices for the Holiday Inn, Milesburg, Comfort Inn, Denver and the
Holiday Inn Express, Riverfront were adjusted based upon the financial results
of the hotels for the twelve months ended December 31, 1999. Based upon the
financial results of these hotels and their respective cash flows the properties
were repriced at higher aggregate values of $588, $471 and $351, respectively.
Based upon the $6.00 offering price, the Hersha Affiliates received an
additional 98,050, 78,427 and 58,549 units of limited partnership interest for
the three hotels, respectively. These hotels gave rise to an additional
investment in hotel properties of $485, $388 and $290, respectively.
The repricing was performed based upon the initial pricing methodology to such
hotels' cash flows shown on the respective property's audited financial
statement. The Board of Trustees has approved a resolution to change the
management fee to be utilized for repricing purposes to 3%. The repricing was
performed utilizing a management fee of 3% instead of the 4% management fee per
the contribution agreements. The Hersha Affiliates were entitled to receive an
additional number of Units that, when multiplied by the Offering Price, equals
the increase in value plus the value of any distributions that would have been
made with respect to such Units if such Units had been issued at the time of the
acquisition of such hotels. In consideration for this change, the Hersha
Affiliates have agreed to forgive the dividends owed to them on the additional
number of Units issued upon repricing.
9
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[3] Commitments and Contingencies and Related Party Transactions [Continued]
On January 26, 1999, we executed an administrative services agreement with HHMLP
to provide accounting and securities reporting services for the Company. The
terms of the agreement provided for a fixed fee of $55 with an additional $10
per property (prorated from the time of acquisition) for each hotel added to the
Company's portfolio. As of June 30, 2000 and 1999, $110 and $65 has been charged
to operations.
We have approved the lending of up to $3.0 million to the Hersha Affiliates to
construct hotels and related improvements on specific hotel projects at an
interest rate of 12.0%. As of June 30, 2000 and June 30, 1999, the Hersha
Affiliates did not have any outstanding loans to us and we have not recorded any
interest income related to this agreement during the six months ended June 30,
2000 and June 30, 1999.
We have borrowed approximately $4,200 from Shreenathji Enterprises, Ltd. ("SEL")
during the six months ended June 30, 2000. Of these borrowings, $1,408 was
outstanding at June 30, 2000. We incurred interest expense of approximately $111
related to these borrowings from SEL. We borrow from SEL at a fixed rate of 10%
per annum.
[4] Debt
Debt is comprised of the following at June 30, 2000 and 1999:
2000 1999
---- ----
Mortgages Payable $46,066 14,429
Revolving Credit Facility 10,102 -0-
--------- ---
Total Long Term Debt $56,168 $14,429
Substantially all of our long-term debt is collateralized by property and
equipment and in certain situations is personally guaranteed by the Hersha
Affiliates. During March 2000, we completed a portfolio refinancing of $22,050
with Lehman Brothers Bank. We have repaid $15,450 of mortgages payable and
$2,000 of related party debt with proceeds from the refinancing. The remainder
of the funds were utilized for acquisition of hotel properties and general
corporate purposes. These funds are collateralized by seven of our hotel
properties.
Outstanding borrowings under the refinancing bear interest at an annual interest
rate of 8.94% and have a total loan amortization period of 23.5 years. The first
eighteen months of the loan period is structured to be interest only financing
with no principal payoff during the period. We have incurred one-time early
prepayment penalties of $107 in connection with the portfolio refinancing.
10
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[5] Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C>
Net Income for Basic Earnings Per Share $207 $381 $501 $658
Add: Income Attributable to Minority Interest 562 529 597 661
-------------- ------------- -------------- -------------
Net Income for Diluted Earnings Per Share $769 $910 $1,090 $1,319
----------------------------------------- ============== ============ ============== =============
Weighted Average Shares for Basic Earnings Per Share 2,275,000 2,275,000 2,275,000 2,275,000
Dilutive Effect of Limited Partnership Units 4,440,996 4,032,431 4,440,996 4,032,431
-------------- ------------- --------------- ------------
Weighted Average Shares for Diluted Earnings Per Share 6,715,996 6,307,431 6,715,996 6,307,431
------------------------------------------------------ ============= ============= =============== ============
</TABLE>
Options to purchase 534,000 and 533,975 shares of Class B common shares for the
six months ended June 30, 2000 and June 30, 1999, respectively, were outstanding
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
11
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[6] Pro Forma Information
The following pro forma information is presented for information purposes as if
the acquisition of all hotels by the Partnership and the commencement of the
Percentage Leases had occurred on January 1, 2000 and 1999, respectively. The
unaudited pro forma condensed statements of operations are not necessarily
indicative of what actual results of operations of the Company would have been
assuming such operations had commenced as of January 1, 2000 and 1999,
respectively, nor does it purport to represent the results of operations for
future periods.
Pro Forma Condensed Statement of Operations
For the three and six months ended June 30, 2000 and 1999
[In Thousands, Except Share and Per Share Amounts]
[Unaudited]
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ------------------------------
June 30, June 30, June 30, June 30,
Revenue: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Percentage Lease Revenue $ 3,462 $ 1,857 $ 6,514 $ 3,465
Other Revenue 24 24 24 82
------------ ------------ ------------ -----------
Total Revenue 3,486 1,881 6,538 3,547
------------ ------------ ------------ -----------
Expenses:
Interest 1,222 310 2,282 576
Property Tax 226 112 418 249
Land Lease 4 5 8 11
General and Administrative 138 94 421 205
Depreciation and Amortization 1,019 502 2002 1,006
------------ ------------ ------------ -----------
Total Expenses 2,609 1,023 5,131 2,047
------------ ------------ ------------ -----------
Income Before Minority Interest 877 858 1,407 1,500
Income Allocated to Minority Interest 569 447 569 788
------------ ------------ ------------ -----------
Net Income $ 308 $ 411 $ 838 $ 712
============ ============= ============ ===========
Basic Earning Per Common Share 0.14 0.18 0.37 0.31
============ ============= ============ ===========
Diluted Earning Per Common Share 0.13 0.14 0.22 0.24
============ ============= ============ ===========
Weighted Average for Basic EPS 2,275,000 2,275,000 2,275,000 2,275,000
Weighted Average Shares for Diluted EPS 6,715,996 6,307,431 6,715,996 6,307,431
</TABLE>
12
<PAGE>
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
[7] Unaudited Interim Information
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with our customary accounting
practices. In the opinion of management, the information presented reflects all
adjustments [consisting of normal recurring accruals] considered necessary for a
fair presentation of our financial position as of June 30, 2000, and the results
of our operations for the three month and six months ended June 30, 2000 and
1999. The results of operations for the three month and six months ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. The unaudited financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 1999.
[8] Subsequent Events
The quarterly dividend pertaining to the second quarter of 2000 was paid on July
27, 2000 at the rate of $.18 per share which represents an annualized rate of
$0.72 per annum.
. . . . . . . .
13
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Partners of
Hersha Hospitality Management L.P.
New Cumberland, Pennsylvania
We have reviewed the accompanying balance sheet, statement of
operations and statement of cash flows of Hersha Hospitality Management L.P. as
of June 30, 2000, and for the three and six month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet as of December 31, 1999, and the related
statements of operations, partners' capital, and cash flows for the year then
ended [not presented herein]; and in our report dated March 9, 2000, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
1999, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
August 4, 2000
14
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS
[IN THOUSANDS]
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
[Unaudited]
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 476 $ 778
Accounts Receivable, less allowance for doubtful accounts
of $135 and $135 at June 30, 2000 and December 31,
1999, respectively 1,082 817
Prepaid Expenses 44 60
Due from Related Party - HHLP 460 188
Due from Related Parties 2,004 796
Other Assets 272 184
-------------------- ------------------
Total Current Assets 3,862 2,823
Franchise Licenses [Net of accumulated amortization of
$116 and $97 at June 30, 2000 and December 31, 1999,
respectively] 323 287
Construction in Progress 94
Property and Equipment 974 894
-------------------- ------------------
Total Assets $5,253 $ 4,004
==================== ==================
Liabilities and Partners' Capital:
Current Liabilities:
Cash Overdraft $ 784 $ 694
Accounts Payable 606 660
Accounts Payable Related Party 48 30
Accrued Expenses 955 432
Other Liabilities 4 -
Lease Payments Payable - Related Party - HHLP 3,382 2,116
-------------------- ------------------
Total Current Liabilities 5,779 3,932
Commitments - -
Partners' Capital (526) 72
-------------------- ------------------
Total Liabilities and Partners' Capital $5,253 $ 4,004
==================== ==================
</TABLE>
The Accompanying Notes Are an Integral Part of This Financial Statement.
15
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS]
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Revenues from Hotel Operations
Room Revenue $ 7,980 $ 5,664 $ 12,747 $ 9,214
Restaurant Revenue 559 560 1,037 1,054
Other revenue 408 483 711 733
--------- --------- --------- ---------
Total Revenues from Hotel Operations $ 8,947 $ 6,707 $ 14,495 $ 11,001
Expenses:
Hotel Operating Expenses 3,107 2,423 5,541 4,268
Restaurant Operating Expenses 437 475 844 827
Advertising and Marketing 545 366 1,009 544
Bad Debts 10 - 25 -
Depreciation and Amortization 45 - 86 3
General and Administrative 1,182 812 2,152 1,397
General and Admin. - Related Parties 5 358 21 807
Lease Expense - HHLP 2,704 1,888 5,415 3,034
--------- --------- --------- ---------
Total Expenses $ 8,035 $ 6,322 $ 15,093 $ 10,880
--------- --------- --------- ---------
Net Income (Loss) $ 912 $ 385 $ (598) $ 121
--------- --------- --------- ---------
</TABLE>
The Accompanying Notes Are an Integral Part of This Financial Statement.
16
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS]
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
------------------ -----------------
<S> <C>
Operating Activities:
Net Income (Loss) $ (598) $ 121
------------------ -----------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 86 3
Allowance for Doubtful Accounts - -
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (265) (1,368)
Prepaid Expenses 16 (145)
Other Assets (88) (16)
Due from Related Parties (1,480) -
Increase (Decrease):
Accounts Payable (54) 140
Accounts Payable - Related Party 18 -
Lease Payments Payable 1,266 1,966
Accrued Expenses 523 581
Other Liabilities 4 623
------------------ -----------------
Total Adjustments 26 1,784
------------------ -----------------
Net Cash Provided by (Used in) Operating Activities (572) 1,905
Investing Activities:
Property and Equipment (241) (608)
Franchise Licenses (55) -
------------------ -----------------
Net Cash Used in Investing Activities (296) (608)
Financing Activities:
Cash Overdraft 566 38
Advances to Affiliates - (1,735)
Repayment of advance from Partners - 400
------------------ -----------------
Net Cash Provided by (Used in) Financing Activities 566 (1,297)
Net Increase (Decrease) in Cash and Cash Equivalents (302) -
Cash and Cash Equivalents - Beginning of Period 778 -
------------------ -----------------
Cash and Cash Equivalents - End of Period $ 476 $ -
================== =================
</TABLE>
(1) Operations commenced on January 26, 1999
The Accompanying Notes Are an Integral Part of This Financial Statement.
17
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]
[1] Organization
Hersha Hospitality Management, L.P., [the "Lessee"], was organized under the
laws of the State of Pennsylvania in May 1998 to lease and operate ten existing
hotel properties, principally in the Harrisburg and Central Pennsylvania area,
from Hersha Hospitality Limited Partnership ["HHLP" or the "Partnership"]. The
Lessee is owned by Mr. Hasu P. Shah and certain affiliates, [the "Hersha
Affiliates"], some of whom have ownership interests in the Partnership. We also
manage certain other properties owned by the Hersha Affiliates that are not
owned by the Partnership. We commenced operations on January 1, 1999 and as of
June 30, 2000 leased 16 hotel properties from the Partnership.
[2] Commitments and Contingencies
We have assumed the rights and obligations under the terms of existing franchise
licenses relating to the hotels upon acquisition of the hotels by the
partnership. The franchise licenses generally specify certain management,
operational, accounting, reporting and marketing standards and procedures with
which the franchisee must comply and provide for annual franchise fees based
upon percentages of gross room revenues.
We have entered into percentage leases [the "Percentage Leases"] with HHLP. Each
Percentage Lease will have an initial non-cancelable term of five years and may
be extended for an additional five-year term at our option. Pursuant to the
terms of the Percentage Leases, we are required to pay the greater of the base
rent or the percentage rent for hotels with established operating histories. The
base rent is 6.5 percent of the purchase price assigned to each hotel. The
percentage rent for each hotel is comprised of (i) a percentage of room revenues
up to a certain threshold amount for each hotel up to which we receive a certain
percentage of room revenues as a component of percentage rent, (ii) a percentage
of room revenues in excess of the threshold amount, but not more than a certain
incentive threshold amount for each hotel in excess of the threshold amount up
to which we receive a certain percentage of the room revenues in excess of the
threshold amount as a component of percentage rent (iii) a percentage for room
revenues in excess of the incentive threshold amount and (iv) a percentage of
revenues other than room revenues. For hotels with limited operating histories,
the leases provide for the payment of an initial fixed rent for certain periods
as specified in the leases and the greater of base rent or percentage rent
thereafter. The leases commenced on January 26, 1999.
Minimum future lease payments due during the noncancellable portion of the
leases as of December 31, 1999 is as follows:
2000 $ 7,775
2001 6,420
2002 4,604
2003 4,604
2004 1,280
Thereafter 0
---------------
Total $ 24,683
===============
On January 26, 1999, we executed an agreement with HHLP to provide accounting
and securities reporting services. The terms of the agreement provided for a
fixed fee of $55 with an additional $10 per property (prorated from the time of
acquisition) for each hotel added to the Company's portfolio.
For the six months ended June 30, 2000 and 1999 we incurred lease expense of
$5,415 and $3,034, respectively. As of June 30, 2000 and 1999 the amount due to
the Partnership for lease payments was $3,382 and 1,888 respectively.
18
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]
[3] Pro Forma Financial Information [Unaudited]
The following pro forma information is presented for information purposes as if
the acquisition of all hotels by the Partnership and the commencement of the
Percentage Leases had occurred on January 1, 2000 and 1999, respectively. The
unaudited pro forma condensed statements of operations is not necessarily
indicative of what actual results of operations of the Lessee would have been
assuming such operations had commenced as of January 1, 2000 and 1999,
respectively, nor does it purport to represent the results of operations for
future periods.
Pro Forma Condensed Statements of Operations
For the six months ended June 30, 2000 and 1999
[In Thousands]
[Unaudited]
2000 1999 (1)
------------ --------------
Revenue from Hotel Operations:
Room Revenue $ 12,747 $ 9,214
Food & Beverage 1,037 1,054
Telephone and Other 728 733
------------ --------------
Total Revenue from Hotel Operations 14,512 11,001
Expenses:
Hotel Operations Expenses 5,541 4,268
Restaurant Operating Expenses 844 827
Advertising and Marketing 1,009 544
Bad Debts 25 0
General and Administrative 2,152 1,400
General and Administrative - Related Parties 21 595
Lease Payments 5,415 3,465
------------ --------------
Total Expenses 15,007 11,099
------------ --------------
Net Loss $ (495) $ (98)
============ ==============
(1) The 1999 Pro Forma results vary from the historical results due to the
assumption that Lease Payments expense was incurred for the entire six
month period per the pro forma results instead of from January 26, 1999
per the historical results. Pro forma Related Party Management Fees have
been reduced as these fees would not have been applicable for the entire
pro forma period.
[4] Unaudited Interim Information
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with the Lessee's customary
accounting practices. In the opinion of management, the information presented
reflects all adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation of our financial position as of June 30, 2000
and the results of our operations for the three and six months ended June 30,
2000 and 1999. The results of operations for the three and six months ended June
30, 2000, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. The unaudited financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 1999.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained in this section that are not historical facts
are based on current expectations. This includes statements regarding our 2000
anticipated revenues, expenses and returns, and future capital requirements.
Words such as "believes", "expects", "anticipates", "intends", "plans" and
"estimates" and variations of such words and similar words also identify
forward-looking statements. Such statements are forward-looking in nature and
involve a number of risks and uncertainties, including the risks described under
the caption "Risk Factors" in our registration statement on Form S-11 (File No.
333-56087). Our actual results may differ materially. We caution you not to
place undue reliance on any such forward-looking statements. We assume no
obligation to update any forward-looking statements as a result of new
information, subsequent events or any other circumstances.
Hersha Hospitality Trust was formed in May 1998 to own initially ten
hotels in Pennsylvania and to continue the hotel acquisition and development
strategies of Hasu P. Shah, Chairman of the board of trustees and Chief
Executive Officer of our Company. We are a self-advised Maryland real estate
investment trust for federal income tax purposes.
We completed an initial public offering of two million of our Class A
Priority Common Shares at $6.00 per share and commenced operations on January
26, 1999. On February 5, 1999, we sold an additional 275,000 Class A Priority
Common Shares pursuant to an over allotment option granted to the underwriter in
our initial public offering. Our Priority Class A Common Shares are traded on
the American Stock Exchange under the symbol "HT."
We contributed substantially all of the net proceeds from our initial
public offering to our operating partnership subsidiary, Hersha Hospitality
Limited Partnership, of which we are the sole general partner. We currently own
a 33.6% partnership interest in that partnership. With the proceeds of our
initial public offering, we caused the partnership to acquire ten hotels in
exchange for (1) 4,032,431 subordinated units of limited partnership interest in
the partnership that are redeemable for the same number of Class B Common Shares
with a value of approximately $24.2 million based on the initial public offering
price, and (2) the assumption of approximately $23.3 million of indebtedness of
which approximately $6.1 million was repaid immediately after the acquisition of
the hotels.
Since the completion of the initial public offering we have issued an
additional 173,539 units in connection with the acquisition of the Hampton Inn,
Danville, PA. We have also issued an addition 235,026 units in connection with
the repricing of the Holiday Inn, Milesburg, the Comfort Inn, Denver and the
Holiday Inn Express, Riverfront. The total number of units outstanding as of
June 30, 2000 and 1999 was 4,440,996 and 4,032,431, respectively.
We have acquired seven of the Initial Hotels and three other hotels,
since the commencement of operations, for prices that will be adjusted at either
December 31, 1999, 2000 or 2001. The purchase price adjustments are calculated
by applying the initial pricing methodology to such hotels' cash flows as shown
on our and the Lessee's audited financial statements. The Board of Trustees has
approved a resolution to change the management fee to be utilized for repricing
purposes to 3%. The adjustments must be approved by a majority of our
independent trustees. If the repricing produces a higher aggregate value for
such hotels, the Hersha Affiliates receive an additional number of units of
limited partnership interest that, when multiplied by the offering price, equals
the increase in value. If, however, the repricing produces a lower aggregate
value for such hotels, the Hersha Affiliates forfeit to the Partnership that
number of units that, when multiplied by the offering price, equals the decrease
in value. Any adjustments arising from the issuance or forfeiture of shares will
adjust the cost of the property acquired based on the fair value of the shares
on the date of the adjustment.
As of August 1, 2000, we owned five Holiday Inn Express(R) hotels, six
Hampton Inn(R) hotels, two Holiday Inn(R) hotels, four Comfort Inn(R) hotels,
one Comfort Suites(R) hotel, one Best Western and one Clarion Suites(R) hotel,
which contain an aggregate of 1,903 rooms.
20
<PAGE>
Six Months Ended June 30, 2000 Compared to June 30, 1999, Results of Operations
($'s in thousands)
Our revenues for the six months ended June 30, 2000 and 1999,
substantially consisted of percentage lease revenues recognized pursuant to the
Percentage Leases. Percentage lease revenues during the six month period ended
June 30, 2000 were $5,564 an increase of $2,530, or 83.4%, as compared to
percentage lease revenues of $3,034 for the same period during 1999. The
improvement in lease revenues is primarily attributable to an additional month
of operations in the current period as well as additional percentage lease
revenues derived from the increase in the number of hotels owned from 10
properties to 20. Lease revenues were slightly offset by decreases in percentage
lease revenues at certain properties.
Net income decreased by $158 or 24.0% to $500, for the six months ended
June 30, 2000 as compared to net income of $658 for the same period during 1999.
The decrease in net income is attributable to one-time early payment charges of
$107 related to a portfolio refinancing of $22,050 completed in March 2000 and
additional interest expense incurred during the period. In addition, real estate
and personal property taxes and depreciation and amortization increased over the
comparable period in 1999 primarily due to the increase in the number of hotel
properties owned by us, as mentioned above.
The Lessee's room revenues from the hotels increased by $3,533, or
38.3%, to $12,747 for the six months ended June 30, 2000, as compared to $9,214
for the same period in 1999. This increase in revenues is primarily attributable
to the increase in the number of hotels from 15 properties to 18 properties. The
increase in room revenues is also due to additional occupancy at the properties,
a higher average daily rate (ADR) and increases in the revenue per available
room (REVPAR). The Lessee maintains the ability to borrow funds from related
entities, partners and stockholders. The Lessee's borrowing costs range from
8.5% on short-term loans to 10.5% on longer term loans.
The following table shows certain other information for the periods indicated.
Six Months Ended
June 30,
2000 1999
------------- ---------------
Occupancy rate 60.4% 52.8%
ADR $69.69 $65.97
REVPAR $42.06 $34.84
Room revenue $12,746,605 $9,214,236
Room nights available 303,030 264,449
Room nights occupied 182,907 139,668
Rooms available 1,697 1,463
Three Months Ended June 30, 2000 Compared to June 30, 1999, Results of
Operations ($'s in thousands)
Our revenues for the three months ended June 30, 2000 and 1999,
substantially consisted of percentage lease revenues recognized pursuant to the
Percentage Leases. Percentage lease revenues during the three month period ended
June 30, 2000 were $3,212 an increase of $1,324, or 41.2%, as compared to
percentage lease revenues of $1,888 for the same period during 1999. The
improvement in lease revenues is primarily attributable to an additional month
of operations in the current quarter as well as additional percentage lease
revenues derived from the increase in the number of hotels owned from 10
properties to 20. Lease revenues were slightly offset by decreases in percentage
lease revenues at certain properties.
21
<PAGE>
Net income decreased by $174 or 45.7% to $207, for the three months
ended June 30, 2000 as compared to net income of $381 for the same period during
1999. The decrease in net income is primarily attributable to additional
interest expense incurred during the period. Real estate and personal property
taxes and depreciation and amortization increased over the comparable period in
1999 primarily due to the increase in the number of hotel properties owned by
us, as mentioned above.
The Lessee's room revenues from the hotels increased by $2,316, or
40.9%, to $7,980 for the three months ended June 30, 2000, as compared to $5,664
for the same period in 1999. This increase in revenues is primarily attributable
to the increase in the number of hotels from 15 properties to 18 properties. The
increase in room revenues is also due to additional occupancy at the properties,
a higher average daily rate (ADR) and increases in the revenue per available
room (REVPAR). The Lessee maintains the ability to borrow funds from related
entities, partners and stockholders. The Lessee's borrowing costs range from
8.5% on short-term loans to 10.5% on longer term loans.
The following table shows certain other information for the periods indicated.
Three Months Ended
June 30,
2000 1999
------------ ----------------
Occupancy rate 70.6% 61.3%
ADR $73.16 $69.37
REVPAR $51.65 $42.55
Room revenue $7,980,078 $5,664,161
Room nights available 154,507 133,133
Room nights occupied 109,081 81,655
Rooms available 1,697 1,463
Liquidity and Capital Resources
Our principal source of cash to meet its cash requirements, including
distributions to shareholders, is our share of the Partnership's cash flow. The
Partnership's principal source of revenue is rent payments under the Leases. The
Lessee's obligations under the Leases are unsecured. The Lessee's ability to
make rent payments, and the Company's liquidity, including its ability to make
distributions to common shareholders, is dependent on the Lessee's ability to
generate sufficient cash flow from the operation of the Hotels.
We note that industry analysts and investors use Funds From Operations
("FFO") as a tool to compare equity REIT performance. In accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investments Trusts ("NAREIT"), FFO represents net income (loss) (computed
in accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructuring or sales of property, plus depreciation, and
after adjustments for unconsolidated partnerships and joint ventures. FFO was
$2,848 in the six months ended June 30, 2000, which is an increase of $691, or
32.0% over FFO in the comparable period in 1999, which was $2,157. The increase
in FFO can be attributed to the increase in hotel properties owned.
FFO presented herein is not necessarily comparable to FFO presented by
other real estate companies due to the fact that not all real estate companies
use the same definition. However, the Company's FFO is comparable to the FFO of
the real estate companies that use the current definition of the NAREIT.
We expect to meet our short-term liquidity requirements generally
through net cash provided by operations, existing cash balances and, if
necessary, short-term borrowings under an unsecured line of credit. We believe
that our net cash provided by operations will be adequate to fund both operating
requirements and payment of dividends by us in accordance with REIT
requirements.
22
<PAGE>
We expect to meet our long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowing, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
Units in the Partnership.
We intend to make additional investments in hotel properties and may
incur, or cause the Partnership to incur, indebtedness to make such investments
or to meet distribution requirements imposed on a REIT under the Code to the
extent that working capital and cash flow from the Company's investments are
insufficient to make such distributions. Our policy is to limit consolidated
indebtedness to less than 67% of the total purchase prices paid by us for the
hotels in which we have invested. However, our organizational documents do not
limit the amount of indebtedness that we may incur and our board of trustees may
modify the debt policy at any time without shareholder approval.
The hotel business is seasonal, with hotel revenue generally greater in
the second and third quarters than in the first and fourth quarters. To the
extent that cash flow from operating activities is insufficient to provide all
of the estimated quarterly distributions, we anticipate that we will be able to
fund any such deficit from future working capital. As of June 30, 2000, our
lease payments receivable and due from related parties balances exceed our
current obligations and related party payables by $1,233.
Inflation
Operators of Hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the lessee's ability to raise
room rates in the face of inflation, and annual increases in average daily rates
have failed to keep pace with inflations.
Seasonality
Our hotels' operations historically have been seasonal in nature,
relecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in our quarterly lease revenue
to the extent that we receive percentage rent.
Subsequent Events
The quarterly dividend pertaining to the second quarter of 2000 was
paid on 7/27/00 at the rate of $.18 per share which represents an annualized
rate of $0.72 per annum.
Item 3. Quantitative and Qualitative Disclosures about Market risk
Pursuant to the general instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to our Company at this time.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by the
Company during the first quarter:
(i) A Current Report on Form 8-K was filed on June 5, 2000 as
a result of an event specified in Item 2 of Form 8-K.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHA HOSPITALITY TRUST
August 14, 2000 /s/ Ashish R. Parikh
-------------------------------
Ashish R. Parikh
Chief Financial Officer
