<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 September 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 September 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>
Item No. Form 10-Q
-------- Report
Page
---------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Hersha Hospitality Trust
Independent Accountant's Report........................................... 1
Consolidated Balance Sheets as of September 30, 2000 [Unaudited]
and December 31, 1999..................................................... 2
Consolidated Statement of Operations for the three months and nine months
ended September 30, 2000 and 1999 [Unaudited]............................. 3
Consolidated Statement of Cash Flows for the nine months ended
September 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 September 30, 2000 [Unaudited] and
December 31, 1999........................................................ 15
Statement of Operations for the three months and nine months ended
September 30, 2000 and 1999 [Unaudited].................................. 16
Statement of Cash Flows for the nine months ended
September 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 Nine Months Ended
September 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 of Hersha
Hospitality Trust and subsidiaries as of September 30, 2000, and the related
consolidated statements of operations for the three month and nine month periods
ended September 30, 2000 and the consolidated statement of cash flows for the
nine months ended September 30, 2000. 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 not reviewed the accompanying consolidated statements of operations
for the three and nine month periods ended September 30, 1999 or the
consolidated statement of cash flows for the nine months ended September 30,
1999 and give no assurance on them.
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
November 2, 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>
September 30, December 31,
------------- ------------
2000 1999 (1)
---- --------
(Unaudited)
-----------
<S> <C> <C>
Assets:
Investment in Hotel Properties, Net of Accumulated Depreciation $ 83,183 $ 51,908
Cash and Cash Equivalents -- 124
Escrow Deposits 1,386 --
Lease Payments Receivable - Related Party 3,515 2,116
Intangibles, Net of Accumulated Amortization 1,773 855
Due from Related Party 819 1,028
Other Assets 20 351
--------------------- -------------------
Total Assets $ 90,696 $ 56,382
===================== ===================
Liabilities and Shareholders' Equity:
Cash Overdraft $ -- $ 84
Lines of Credit 10,862 6,096
Mortgages Payable 46,450 18,658
Dividends and Distributions Payable 1,209 410
Lease Deposits 1,000 --
Due to Related Parties 1,627 188
Accounts Payable and Accrued Expenses 316 161
--------------------- -------------------
Total Liabilities 61,464 25,597
--------------------- -------------------
Minority Interest 17,886 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 23 23
Shares Authorized, 2,275,000 Shares Issued and Outstanding at
September 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
September 30, 2000 and December 31, 1999, Respectively -- --
Additional Paid-in Capital 11,968 11,968
Distributions in Excess of Net Earnings (645) (186)
--------------------- -------------------
Total Liabilities and Shareholders' Equity $ 90,696 $ 56,382
===================== ===================
</TABLE>
(1) Operations commenced on January 26, 1999
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
2
<PAGE>
--------------------------------------------------------------------------------
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS] (1)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Percentage Lease Revenue $ 3,667 $ 2,105 $ 9,231 $ 5,138
Other Revenue 20 9 24 71
---------- --------- --------- ---------
Total Revenue 3,687 2,114 9,255 5,209
Expenses:
Interest expense 1,324 363 3,275 916
Land lease 4 5 11 14
Real Estate and Personal Property
Taxes and Property Insurance 187 117 541 321
General and Administrative 147 90 447 263
Early Payment Penalty - - 107 -
Depreciation and Amortization 1,032 574 2,790 1,411
---------- --------- --------- ---------
Total Expenses 2,694 1,149 7,171 2,925
Income Before Minority Interest 993 965 2,084 2,284
Income Allocated to Minority Interest 724 590 1,314 1,252
---------- --------- --------- ---------
Net Income $ 269 $ 375 $ 770 $ 1,032
========== ========= ========= =========
Basic Earnings Per Common Share $ 0.12 $ 0.16 $ 0.34 $ 0.45
========== ========= ========= =========
Diluted Earnings Per Common Share $ 0.12 $ 0.16 $ 0.31 $ 0.36
========== ========= ========= =========
Weighted Average Shares:
Basic 2,275,000 2,275,000 2,275,000 2,275,000
Diluted 6,715,996 (2) 6,365,209 (2) 6,715,996 (2) 6,326,690 (2)
</TABLE>
(1) Operations commenced on January 26, 1999
(2) Includes 4,440,996 and 4,205,764 units at September 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 These Consolidated Financial
Statements.
3
<PAGE>
--------------------------------------------------------------------------------
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999 (1)
------------- -------------
<S> <C> <C>
Operating Activities:
Net Income $ 770 $ 1,032
-------- -------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 2,790 1,411
Income Allocated to Minority Interest 1,314 1,252
Change in Assets and Liabilities:
(Increase) Decrease in:
Escrow Deposits (1,386) -
Lease Payments Receivable (1,399) (2,312)
Other Assets 331 (183)
Due from Related Party (19) -
Increase (Decrease):
Due to Related Parties 31 -
Accounts Payable and Accrued Expenses 155 255
-------- -------
Total Adjustments 1,817 423
-------- -------
Net Cash provided by Operating Activities 2,587 1,455
Investing Activities:
Purchase of Hotel Property Assets (11,152) (7,319)
Purchase of Intangible Assets (1,057) (751)
Loan to Related Party (800) -
-------- -------
Net Cash used in Investing Activities (13,009) (8,070)
Financing Activities:
Cash Overdraft (84) -
Proceeds from borrowings under line of credit 16,479 5,076
Repayment of borrowings under line of credit (11,713) -
Net Proceeds from Issuance of Stock - 11,991
Borrowings from Mortgages Payable 25,050 -
Principal Repayment of Mortgages Payable (16,850) (5,273)
Dividends Paid (1,229) (1,444)
Limited Partnership Unit Distributions Paid (2,763) -
Borrowings from Related Party 1,408 -
Repayment of Related Party Loans - (3,735)
-------- -------
Net Cash provided by Financing Activities 10,298 6,615
Net Increase (Decrease) in Cash and Cash Equivalents (124) -
Cash and Cash Equivalents - Beginning of Period 124 -
-------- -------
Cash and Cash Equivalents - End of Period $ - $ -
======== =======
</TABLE>
(1) Operations commenced on January 26, 1999
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
4
<PAGE>
-------------------------------------------------------------------------------
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
-------------------------------------------------------------------------------
September 30, September 30,
2000 1999
---- ----
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash Paid During the Period:
Interest $3,013 $890
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 purchased three hotels from Hasu P. Shah and certain
affiliates and other officers and trustees of our Company, [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 lease
agreements with Noble for the four properties. We lease 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, GA. and the Holiday Inn Express, Duluth, GA. 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 September 28, 2000 we declared a $0.18 per Class A Common Share dividend of
$410 and a distribution of $0.18 per unit totaling $799 to the holders of
limited partnership units that was paid on October 23, 2000.
We have also issued an additional 235,026 units of limited partnership interest
in connection with final settlement of the purchase prices for the Holiday Inn,
Milesburg, the Comfort Inn, Denver and the Holiday Inn Express, Riverfront. The
total number of units outstanding as of September 30, 2000 was 4,440,996.
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
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 Class B Common Shares 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. 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
nine months ended September 30, 1999 include activity from January 26, 1999 to
September 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 lease and 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:
<TABLE>
<CAPTION>
Hotel Property Rooms Location Purchase Price
-------------- ----- -------- --------------
<S> <C> <C> <C>
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
</TABLE>
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 final settlement of the
purchase price 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 September 30, 2000 and 1999 was 4,440,996
and 4,205,970 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 share 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 ends on the earlier of (i) five years after the initial
public offering of the Priority Class A Common Shares, or (ii) the date that is
15 trading days after we send notice to the holders of the Priority Class A
Common Shares, provided that the closing bid price of the Priority Class A
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 from one to two years from
January 26, 1999. At September 30, 2000 and September 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 4,205,970, 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 has 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 HHMLP's option. At the end of the first
extended term, HHMLP, at its option, may extend some or all of the Percentage
Leases for these hotels for an additional five-year term. Pursuant to the terms
of the Percentage Leases, HHMLP is required to pay 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 September
30, 2000, is as follows:
<TABLE>
<S> <C>
December 31, 2000 $ 1,944
December 31, 2001 6,420
December 31, 2002 4,604
December 31, 2003 4,604
December 31, 2004 1,280
Thereafter 0
---------
Total $ 18,852
=========
</TABLE>
We have entered into percentage leases relating to 4 hotels with Noble. Each
percentage lease has an initial non-cancelable term of three years. All, but
not less than all, of the Percentage Leases for these 4 hotels may be extended
for an additional three-year term at Noble's option. At the end of the first
extended term, we or Noble may extend all, but not less than all, of the
Percentage Leases for these hotels for an additional three-year term. Pursuant
to the terms of the Percentage Leases, Noble is required to pay 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 September
30, 2000, is as follows:
<TABLE>
<S> <C>
December 31, 2000 $ 700
December 31, 2001 2,801
December 31, 2002 2,801
December 31, 2003 943
--------
Total $ 7,245
========
</TABLE>
For the period January 1, 2000 through September 30, 2000, we earned initial
fixed rents of $5,527 and earned percentage rents of $3,704. For the period
January 26, 1999 through September 30, 1999, we earned initial fixed rents of
$2,889 and earned percentage rents of $2,249.
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 were or will be adjusted at 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 initial public offering price for the Priority Class A Common Shares,
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 units 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 hotel's audited financial statement.
The Board of Trustees has approved a resolution to change the imputed 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
original 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 us to pay HHMLP a fixed fee of $55 with an
additional $10 per property (prorated from the time of acquisition) for each
hotel added to our portfolio. As of September 30, 2000 and 1999, $174 and $111
has been charged to operations.
We have approved the lending of up to $3,000 to the Hersha Affiliates to
construct hotels and related improvements on specific hotel projects at an
interest rate of 12.0%. As of September 30, 2000 and September 30, 1999, the
Hersha Affiliates owed us $800 and $0, respectively. Interest income from these
advances was $19 and $0 for the nine months ending September 30, 2000 and 1999,
respectively.
We have borrowed approximately $4,200 from Shreenathji Enterprises, Ltd.
("SEL"), an affiliated company, during the nine months ended September 30, 2000.
Of these borrowings, $1,408 was outstanding at September 30, 2000. We incurred
interest expense of approximately $145 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 September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Mortgages Payable $46,450 18,845
Revolving Credit Facility 10,862 5,076
------- -------
Total Long Term Debt $57,312 $23,921
</TABLE>
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 was utilized for acquisition of hotel properties and general
corporate purposes. These funds are collateralized by seven of our hotel
properties.
Outstanding borrowings under the refinancing bear interest at 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 Nine Months Ended
------------------------------ ------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net Income for Basic Earnings Per Share $ 269 $ 375 $ 770 $ 1,032
Add: Income Attributable to Minority Interest 724 590 1,314 1,252
------------- ------------ ------------- -------------
Net Income for Diluted Earnings Per Share $ 993 $ 965 $ 2,084 $ 2,284
----------------------------------------- ============= ============ ============= =============
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 4,090,209 4,440,996 4,090,209
------------- ------------ ------------- -------------
Weighted Average Shares for Diluted Earnings Per Share 6,715,996 6,365,209 6,715,996 6,326,690
------------------------------------------------------ ============= ============ ============= =============
</TABLE>
Options to purchase 534,000 and 533,975 shares of Class B common shares for the
nine months ended September 30, 2000 and September 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.
For the three month periods ended September 30, 2000 and 1999 the effect on
earnings per share of the Limited Partnership Units is 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 nine months ended September 30, 2000 and 1999
----------------------------------------------------------------
[In Thousands, Except Share and Per Share Amounts]
--------------------------------------------------
[Unaudited]
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Revenue: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Percentage Lease Revenue $ 3,667 $ 3,471 $ 10,200 $ 9,455
Other Revenue 20 20 44 44
--------------- --------------- --------------- ----------------
Total Revenue 3,687 3,491 10,244 9,499
--------------- --------------- --------------- ----------------
Expenses:
Interest 1,324 1,250 3,641 3,329
Property Tax 187 173 541 486
Land Lease 4 5 11 14
General and Administrative 147 140 567 540
Depreciation and Amortization 1,032 990 3,034 2,867
--------------- --------------- --------------- ----------------
Total Expenses 2,694 2,558 7,794 7,236
--------------- --------------- --------------- ----------------
Income Before Minority Interest 993 933 2,450 2,263
Income Allocated to Minority Interest 724 680 1,763 1,628
--------------- --------------- --------------- ----------------
Net Income $ 269 $ 253 $ 687 $ 635
=============== =============== =============== ================
Basic Earnings Per Common Share 0.12 0.11 0.30 0.28
=============== =============== =============== ================
Diluted Earnings Per Common Share 0.12 0.11 0.30 0.28
=============== =============== =============== ================
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 6,480,764 6,715,996 6,480,764
</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 September 30, 2000, and the
results of our operations for the three month and nine months ended September
30, 2000 and 1999. The results of operations for the three month and nine
months ended September 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
We entered into a definitive contractual agreement to purchase a 143 room Sleep
Inn located near the Pittsburgh International Airport. The purchase price for
this hotel is $5,500 and the purchase will be made effective as of October 1,
2000. This property is expected to add lease revenues of approximately $840 per
annum.
The quarterly dividend and unit distributions pertaining to the third quarter of
2000 were paid on October 23, 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 of Hersha Hospitality
Management L.P. as of September 30, 2000, and the related statement of
operations for the three month and nine month periods ended September 30, 2000,
and the statement of cash flows for the nine months ended September 30, 2000.
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 not reviewed the accompanying statements of operations for the
three and nine month periods ended September 30, 1999 or the statement of cash
flows for the nine months ended September 30, 1999 and give no assurance on
them.
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
November 2, 2000
14
<PAGE>
--------------------------------------------------------------------------------
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS
[IN THOUSANDS]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
---- ----
[Unaudited]
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 448 $ 778
Accounts Receivable, less allowance for doubtful accounts
of $95 and $135 at September 30, 2000 and December 31,
1999, respectively 1,365 817
Prepaid Expenses - 60
Due from Related Party - HHLP 186 188
Due from Related Parties 4,053 796
Other Assets 301 184
------------- -------------
Total Current Assets 6,353 2,823
Franchise Licenses [Net of accumulated amortization of
$125 and $97 at September 30, 2000 and December 31,
1999, respectively] 314 287
Property and Equipment 940 894
------------- -------------
Total Assets $7,607 $4,004
============= =============
Liabilities and Partners' Capital:
Current Liabilities:
Cash Overdraft $ 977 $ 694
Accounts Payable 694 660
Accounts Payable - Related Party 720 30
Accrued Expenses 795 432
Lease Payments Payable - Related Party - HHLP 3,515 2,116
------------- -------------
Total Current Liabilities 6,701 3,932
Commitments - -
Partners' Capital 906 72
------------- -------------
Total Liabilities and Partners' Capital $7,607 $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 NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from Hotel Operations
Room Revenue $ 9,677 $ 7,151 $ 22,425 $ 16,365
Restaurant Revenue 477 462 1,513 1,516
Other revenue 569 713 1,280 1,446
-------- -------- --------- ---------
Total Revenues from Hotel Operations $ 10,723 $ 8,326 $ 25,218 $ 19,327
Expenses:
Hotel Operating Expenses 3,286 2,925 8,827 7,193
Restaurant Operating Expenses 435 750 1,279 1,577
Advertising and Marketing 543 380 1,552 924
Bad Debts (Recoveries) (25) 18 - 18
Depreciation and Amortization 47 4 133 7
General and Administrative 1,489 991 3,641 2,371
General and Admin.-Related Parties 821 478 842 1,285
Lease Expense - HHLP 2,695 2,105 8,110 5,138
-------- -------- --------- ---------
Total Expenses $ 9,291 $ 7,651 $ 24,384 $ 18,513
======== ======== ========= =========
Net Income $ 1,432 $ 675 $ 834 $ 814
======== ======== ========= =========
</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 NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 [UNAUDITED]
[IN THOUSANDS]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
Operating Activities:
<S> <C> <C>
Net Income (Loss) $ 834 814
------------- -------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 133 7
Allowance for Doubtful Accounts (40) 7
Change in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable (508) (1,473)
Prepaid Expenses 60 (96)
Other Assets (117) (28)
Due from Related Parties (3,255) -
Increase (Decrease):
Accounts Payable 34 680
Accounts Payable - Related Party 690 -
Lease Payments Payable 1,399 2,312
Accrued Expenses 362 505
Other Liabilities - 655
------------- -------------
Total Adjustments (1,242) 2,569
------------- -------------
Net Cash Provided by (Used in) Operating Activities (408) 3,383
Investing activities
Property and Equipment (149) (639)
Franchise Licenses (56) -
------------- -------------
Net Cash Used in Investing Activities (205) (639)
Financing Activities
Cash Overdraft 283 -
Advances to Affiliates - (2,920)
Repayment of advance from Partners - 400
------------- -------------
Net Cash Used in Financing Activities 283 (2,520)
Net Increase (Decrease) in Cash and Cash Equivalents (330) 224
Cash and Cash Equivalents - Beginning of Period 778 -
------------- -------------
Cash and Cash Equivalents - End of Period $ 448 $ 224
============= =============
</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 and other third
party owners that are not owned by the Partnership. We commenced operations on
January 1, 1999 and as of September 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 September 30, 2000 are as follows:
<TABLE>
<S> <C>
2000 $ 1,944
2001 6,420
2002 4,604
2003 4,604
2004 1,280
Thereafter -
------------
Total $ 18,852
============
</TABLE>
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 HHLP's portfolio.
For the nine months ended September 30, 2000 and 1999 we incurred lease expense
of $8,110 and $5,138, respectively. As of September 30, 2000 and 1999 the
amount due to the Partnership for lease payments was $3,515 and 2,116
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 nine months ended September 30, 2000 and 1999
-----------------------------------------------------
[In Thousands]
------------
[Unaudited]
---------
<TABLE>
<S> <C> <C>
2000 1999 (1)
------------------------ ------------------------
Revenue from Hotel Operations:
Room Revenue $ 22,425 $ 16,365
Food & Beverage 1,513 1,516
Telephone and Other 1,476 1,446
------------------------ ------------------------
Total Revenue from Hotel Operations 25,644 19,327
Expenses:
Hotel Operations Expenses 8,827 7,194
Restaurant Operating Expenses 1,279 1,577
Advertising and Marketing 1,552 924
Depreciation and Amortization 133 7
General and Administrative 3,641 2,392
General and Administrative - Related Parties 842 449
Lease Payments 8,110 6,216
------------------------ ------------------------
Total Expenses 24,384 18,759
------------------------ ------------------------
Net Income $ 1,260 $ 568
======================== ========================
</TABLE>
(1) The 1999 Pro Forma results vary from the historical results due to the
assumption that Lease Payments expense was incurred for the entire nine
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 September 30,
2000 and the results of our operations for the three and nine months ended
September 30, 2000 and 1999. The results of operations for the three and nine
months ended September 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
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 additional 235,026 units in connection
with the final settlement of the purchase prices for the Holiday Inn, Milesburg,
the Comfort Inn, Denver and the Holiday Inn Express, Riverfront. The total
number of units outstanding as of September 30, 2000 and 1999 was 4,440,996 and
4,205,970, respectively.
We acquired four of the Initial Hotels and six other hotels for prices that
will be adjusted at December 31, 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 imputed 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
$6.00 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 $6.00
offering price, equals the decrease in value. Any adjustments arising from the
issuance or forfeiture of shares will adjust the cost of the property acquired
based on the fair value of the shares on the date of the adjustment.
As of September 30, 2000, we owned twenty hotels comprising of four Holiday
Inn Express(R) hotels, two Holiday Inn(R) hotels, five Hampton Inn(R) hotels,
one Hampton Inn and Suites(R) hotel, five Comfort Inn(R) hotels, one Comfort
Suites(R) hotel, one Best Western(R) and one Clarion Suites(R) hotel, which
contain an aggregate of 1,797 rooms.
20
<PAGE>
Nine Months Ended September 30, 2000 Compared to September 30, 1999, Results of
Operations ($'s in thousands)
Our revenues for the nine months ended September 30, 2000 and 1999,
substantially consisted of percentage lease revenues recognized pursuant to the
Percentage Leases. Percentage lease revenues during the nine month period ended
September 30, 2000 were $9,231 an increase of $4,093, or 79.7%, as compared to
percentage lease revenues of $5,138 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.
Net income decreased by $326 or 31.6% to $706, for the nine months ended
September 30, 2000 as compared to net income of $1,032 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 as a
result of higher debt levels. 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 increased by $6,285 or 38.4%, to $22,425 for the
nine months ended September 30, 2000, as compared to $16,323 for the same period
in 1999. This increase in revenues is primarily attributable to the increase in
the number of hotels leased and managed from 17 properties to 23 properties.
These new hotels came on line during various times during the year. 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 lessee for the
periods indicated.
Nine Months Ended
September 30,
<TABLE>
<S> <C> <C>
2000 1999
-------------------- -----------------
Occupancy rate 64.9% 58.6%
ADR $75.10 $68.87
REVPAR $48.76 $40.38
Room revenue $22,425,426 $16,323,212
Room nights available 459,890 404,269
Room nights occupied 298,592 237,016
Rooms available 1,679 1,480
</TABLE>
Three Months Ended September 30, 2000 Compared to September 30, 1999, Results of
Operations ($'s in thousands)
Our revenues for the three months ended September 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 September 30, 2000 were $3,667 an increase of $1,562, or 74.2%, as
compared to percentage lease revenues of $2,105 for the same period during 1999.
The improvement in lease revenues is primarily attributable to an increase in
the number of hotels owned from 10 properties to 20.
Net income decreased by $106 or 28.3% to $269, for the three months ended
September 30, 2000 as compared to net income of $375 for the same period during
1999. The decrease in net income is primarily attributable to additional
interest expense incurred during the period as a result of higher levels of
debt. 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.
21
<PAGE>
The Lessee's room revenues increased by $2,751, or 38.5%, to $9,902 for the
three months ended September 30, 2000, as compared to $7,151 for the same period
in 1999. This increase in revenues is primarily attributable to the increase in
the number of hotels leased to the lessee from 17 properties to 20 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 lessee for the
periods indicated.
Three Months Ended
September 30,
<TABLE>
2000 1999
----------------- ----------------
<S> <C> <C>
Occupancy rate 71.1% 69.8%
ADR $83.67 $ 73.86
REVPAR $59.52 $ 51.58
Room revenue $9,902,445 $7,151,000
Room nights available 166,376 138,640
Room nights occupied 118,357 96,809
Rooms available 1,808 1,633
</TABLE>
Liquidity and Capital Resources
Our principal source of cash to meet 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 our liquidity, including our 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
$4,874 in the nine months ended September 30, 2000, which is an increase of
$1,179, or 31.9% over FFO in the comparable period in 1999, which was $3,695.
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.
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.
22
<PAGE>
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 current 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 September 30, 2000, our
lease payments receivable and due from related parties balances exceed our
current obligations and related party payables by $2,391.
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
We entered into a definitive contractual agreement to purchase a 143 room
Sleep Inn located near the Pittsburgh International Airport. The purchase
price for this hotel is $5,500 and the purchase be will made effective as of
October 1, 2000. This property is expected to add lease revenues of
approximately $840 per annum.
The quarterly dividend pertaining to the third quarter of 2000 was paid on
October 23, 2000 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
November 13, 2000 /s/ Ashish R. Parikh
--------------------
Ashish R. Parikh
Chief Financial Officer
25
