HERSHA HOSPITALITY TRUST H E R S H A 2000 Annual Report Financial Highlights HERSHA In thousands except per share data. 2000 1999 Hersha Hospitality Trust Revenues Income Before Minority Interest Net Income (a) Funds From Operations (FFO) (a) FFO Per Share Diluted BALANCE SHEET HIGHLIGHTS: Total Assets Total Debt Total Minority Interest Total Shareholder’s Equity $ 12,824 2,755 847 6,647 0 .99 $ 94,531 61,450 17,679 11,014 $ 7,370 3,045 1,338 5,109 0.79 $56,382 27,754 18,980 11,805 In thousands except operating data. 2000 1999 1998 Hotel Operating Results Room Revenues Total Revenues Net Operating Income Number of Rooms (b) Average Daily Rate Revenue Per Available Room $ 29,297 32,828 11,802 2,468 $ 74.60 $ 45.73 $ 21,871 25,299 8,314 1,198 $ 69.10 $ 39.47 $ 15,185 18,086 5,577 989 $ 68.55 $ 41.02 (a) Industry Analysts and investors utilize Funds from Operations (FFO) as a tool to compare REIT performance due to the high level of depreciation and non-cash charges incorporated into Net Income and Earnings Per Share. (b) Rooms operated at year end for the respective year. Total Revenue $32,828 $25,299 $18,086 0 0 0 2 9 9 9 1 8 9 9 1 Net Operating Income Number of Rooms $11,802 $8,314 $5,577 0 0 0 2 9 9 9 1 8 9 9 1 2,468 1,198 989 0 0 0 2 9 9 9 1 8 9 9 1 Dear Fellow Shareholders: Hersha Hospitality Trust began trading publicly in January of 1999 with the well-defined mission of maximizing shareholder value by leveraging our management team's deep hotel industry expertise and by delivering consistent value through fiscally responsible growth. During the last two years, the tremendous rise in technology and internet stocks made it difficult for some investors to get excited about our industry and mission. It made growth more challenging, but it created a great opportunity for Hersha’s management expertise to shine nonetheless. Today, eight quarters and an economic cycle later, we are pleased to present the early results of our modest mission - after you read our report, I think you will agree that we have translated our vision into reality and strong results for all of our investors. Our achievements in internal growth, external growth, and rates of return are tremendous. They are particularly significant considering the volatility of the broader capital markets. Beyond the numbers, however, I am most proud of the underlying business model that produced this performance and will continue to do so well into the new millennium. It may not be especially glamorous or revolutionary, but it works. H e r s h a H o s p i t a l i t y T r u s t EXTERNAL GROWTH: We acquired eight hotels during the year, bringing our portfolio as of December 31, 2000 to 21 full and premium limited service hotels - an increase of 60% over the comparable date in 1999. These acquisitions have doubled our net asset value, expanded our diversity in brands and in geography, and strengthened our ability to withstand pressures from a potential market slowdown. While our properties vary in size, brand, and geographic location, they share one important similarity -- all are in markets that offer strong growth potential, offer multiple demand generators, and pose barriers to entry. Although we favor central business districts, we do occasionally find H E R S H A stronger opportunities in select secondary markets. We seek sturdy and sustainable cash flows, not necessarily trophy assets. INTERNAL GROWTH: In the Spring of 2000, we completed a $22 million refinancing with Lehman Brothers. This transaction was important for two reasons - it securitized almost 40% of our debt and it provided fixed-rate financing, thereby limiting our exposure to interest rate fluctuations. Currently, 75% of our debt consists of fixed rate financing. We also worked closely with the firms that operate our properties to responsibly minimize expenses and maximize vital components such as occupancy, revenue per available room (REVPAR), and average daily rates. The results were impressive. The combination of our acquisitions and internal growth helped us to achieve a industry leading REVPAR growth rate of 17.3% and an average daily rate increase of 8.7%. H e r s h a H o s p i t a l i t y T r u s t RATES OF RETURN: Our financial measures continue to be among the best for any lodging REIT. For example, our closing price of $5.56 per share on December 31, 2000 represented a return of 11.5% for the previous 52-week period. Our funds from operations (FFO) increased by over 30%. At our current dividend payout rate of $0.18 per quarter our stock’s current dividend yield is approximately 12% with a price-to-FFO multiple of 6.0x. We have provided this cash dividend for eight consecutive quarters. Our robust cash flow and sustainable dividend point to the strength of our underlying business model. Our strategy and expert execution enable us to provide each of our investors with market-leading current income through cash dividends while we grow and optimize our asset portfolio for steady, long term capital appreciation. As many of you know, my family and long-term business partners remain the largest shareholders of HT. And now with two years of consistent performance, we also have an impressive track record to attract more new investors to HT. I see a very strong future for this company, and I hope this report reconfirms your decision to share in this bright future. We are a unique company in today’s public marketplace. In the following pages, I present the three questions I am most frequently asked. I hope my answers help both current and potential investors to better understand our fundamentals, our vision, and our strategy. Sincerely Yours, Hasu P. Shah Chairman & CEO H e r s h a H o s p i t a l i t y T r u s t What are the advantages of investing in REIT’s? A real estate investment trust (REIT) such as The Hersha Hospitality Trust functions like a mutual fund for real estate -- it’s a corporation or business trust that pools the capital of many investors to acquire and own income-producing commercial real estate. This structure offers several significant advantages to both retail and institutional investors: 1. High Current Income - A REIT is required by law to distribute 90% or more of its taxable income to shareholders so it usually provides a higher rate of return than a typical corporation, which makes the REIT especially attractive to income-oriented investors. Since a qualified REIT does not pay state or federal corporate taxes, shareholders avoid the “double taxation” often associated with stock investments. 2. Tangible and Appreciating Value - By investing in REITs, investors gain shares in a diversified base of assets to reduce risk, stabilize volatility, and increase the potential for capital appreciation. REITs as an investment class also provide significant diversification benefits for an individual’s portfolio due to the low historical correlation between real estate and other classes of equity. 3. Liquidity - REIT shares trade on major stock exchanges, for example those of The Hersha Hospitality Trust trade on the American Stock Exchange, so they can easily be sold and converted into cash. Investors can invest $500 to $5 Million according to the needs of their portfolio. We are monitored by independent auditors, outside directors and investment analysts, all of which provides investors with a sense of security and confidence. What is HT’s operating philosophy? Although we have a successful track record and considerable experience in hotel development and operations, we consider ourselves investment strategists -- our focus is on generating returns which H e r s h a H o s p i t a l i t y T r u s t are “high yield” yet safe. We tend to invest in new, mid-scale and premium hotels in major markets because these properties produce the strongest cash flow and strongest returns -- and because this is an industry and a market segment in which we have considerable proven expertise. We do not operate our own hotels nor do we develop new hotels - we look to our operating partners to shoulder that risk. Our core competencies are in asset management, value enhancement, and acquisition financing. The industry calls our model a “Paper Clip”structure. Basically, Hersha Hospitality Trust owns the real estate underlying our hotel portfolio while separate and distinct management companies actually H E R S H A operate the hotels. The majority of our properties are operated by Hersha Hospitality Management LP (“HHMLP”), one of the leading hotel management companies in the northeastern United States. Last year, we began a new strategic alliance with Noble Investment Group, Ltd. based in Atlanta, Georgia. Noble is one of the leading hotel development and management companies in the south- eastern United States. The relationship between the Trust and entrepreneurial management companies is a symbiotic one. By acquiring newly developed or repositioned assets from leading management companies, Hersha gains market-leading assets at attractive prices, while the management companies garner new capital to develop future assets. We take the real estate ownership risk, they take the hotel H e r s h a H o s p i t a l i t y T r u s t operating risk - we all concentrate on what we do best. All these benefits translate directly to our bottom line -- profits for today and stability for tomorrow. Why is HT a good investment? By almost every measure, our financial performance is among the best of any REIT -- not just any lodging REIT, but any REIT in any industry. Lodging assets can deliver superior risk adjusted returns - our exceptional management ensures robust cash flows and a sustainable and growing income stream. H E R S H A 1. Strong Income and Consistent Returns: The current yield at the current share price approximates 12%, which exceeds the yield on 30-year Treasury bonds by more than 650 basis points; The company has paid eight consecutive dividends since its initial public offering in January of 1999, which demonstrates considerable stability during an especially volatile market period. 2. Strong and Sustained Growth: In number of assets, from 10 properties to 21 properties in 24 months, or an increase of 110% without further equity financing; H e r s h a H o s p i t a l i t y T r u s t ❐ ❐ ❑ In FFO per share - the industry’s leading metric, from $0.79 to $0.99, or an increase of 25.3% from 1999 to 2000; In Revenue per Available Room, from $39.47 to $45.73, an increase of 17.3% from 1999 to 2000. 3. Exceptional Management: Our corporate officers, board of trustees, and operating partners bring over a hundred years of combined industry experience and relationships to access the most lucrative acquisitions and maximize each properties’ yield; Lease Revenues Funds from Operations (FFO) $12,773 $7,264 0 0 0 2 9 9 9 1 $6,674 $5,109 0 0 0 2 9 9 9 1 We are not bankers trying to engineer returns out of hotels, but hoteliers creating returns that savvy investors crave. Moreover, we are among the largest shareholders of HT, and are significantly vested in its success. H e r s h a H o s p i t a l i t y T r u s t ❐ ❐ ❐ ❐ H E R S H A Included within this annual report are selected pages from the Company’s 2000 audited financial statements. For a complete copy of the financial statements along with the footnotes please reference the company’s 2000 Form 10-K as filed with the SEC. Hersha Hospitality Trust & Subsidiaries Consolidated Balance Sheets (1) In thousands except share amounts. December 31, 2000 December 31, 1999 Assets Investment in Hotel Properties, Net of Accumulated Depreciation Cash and Cash Equivalents Escrow Deposits Lease Payments Receivable, Related Party Intangibles, Net of Accumulated Amortization Due to Related Party Other Assets $ 87,671 1,178 2,877 1,720 849 236 $ 51,908 124 2,116 855 1,028 351 Total Assets: $94,531 $56,382 Liabilities & Shareholders’ Equity Line of Credit Deposits Payable Mortgages Payable Dividends Payable Due to Related Party Accounts Payable and Accrued Expenses Total Liabilities: Minority Interest: Commitments and Contingencies: Shareholders’ Equity: Preferred Shares, $.01 Par Value; 10,000,000 Shares authorized; None Issued and Outstanding Common Shares - Priority Class A, $.01 Par Value; 50,000,000 Shares Authorized; 2,275,000 Shares Issued and Outstanding at December 31, 2000 and 1999; (Aggregate Liquidation Preference $13,650) Common Shares -Class B, $.01 Par Value, 50,000,000 Shares Authorized; -0- Shares Issued and Outstanding at December 31, 2000 and 1999 Additional Paid-In Capital Distributions in Excess of Net Earnings Total Shareholders’ Equity: Total Liabilities & Shareholders’ Equity: (1) Operations commenced on January 26, 1999. $ 11,400 1,000 50,050 1,209 1,650 529 $65,838 $17,679 $ 6,096 18,658 410 188 245 $25,597 $18,980 23 23 11,968 (977) $11,014 $94,531 11,968 (186) $11,805 $56,382 H e r s h a H o s p i t a l i t y T r u s t Hersha Hospitality Trust & Subsidiaries Consolidated Statements of Operations Years Ended December 31, 2000 and 1999(1) In thousands except share and per share amounts. 2000 1999 Revenue Percentage Lease Revenues Interest Interest - Related Party Total Revenue: Expenses Interest Expense Land Lease - Related Party Real Estate and Personal Property Taxes and Property Insurance General and Administrative Early Payment Penalty Depreciation and Amortization Total Expenses Income Before Minority Interest Income Allocated to Minority Interest Net Income Basic Earnings Per Common Share Diluted Earnings Per Common Share Weighted Average Shares Basic Diluted $12,773 50 1 $12,824 $ 4,712 15 753 590 107 3,892 $10,069 2,755 1,908 $ 847 $ 0.37 $ 0.37 $ 7,264 78 28 $ 7,370 $ 1,428 20 450 363 2,064 $ 4,325 3,045 1,707 $ 1,338 $ 0.59 $ 0.48 2,275,000 2,275,000 6,715,996(2) 6,326,690(2) (1) Operations commenced on January 26, 1999. (2) Includes 4,440,996 and 4,205,970 units of limited partnership interest that are redeemable on a one-for-one basis for Class B Common Shares. H e r s h a H o s p i t a l i t y T r u s t Hersha Hospitality Trust & Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2000 and 1999(1) In thousands except share and per share amounts. 2000 1999 Operating Activities Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization Income Allocated to Minority Interest Change in Assets and Liabilities (Increase) Decrease in: Escrow Deposits Lease Payments Receivable - Related Party Other Assets Due from Related Party Increase (Decrease): Due to Related Parties Accounts Payable and Accrued Expenses Total Adjustments $ 847 $ 1,338 3,892 1,908 (1,178) ( 761) 115 (21) 54 176 4,185 2,064 1,707 (2,116) (351) 188 245 1,737 Net Cash Provided by Operating Activities $ 5,032 $ 3,075 Investing Activities Purchase of Hotel Property Assets Purchase of Intangible Assets Loans to Related Party Net Cash Used in Investing Activities Financing Activities Proceeds from Borrowings Under Line of Credit Net Proceeds from Issuance of Stock Borrowings from Mortgages Payable Principal Repayment of Mortgages Payable Dividends Paid Limited Partnership Unit Distributions Paid Borrowings from Related Party Repayment of Related Party Loans Net Cash Provided by Financing Activities Net Increase (Decrease) in Cash & Cash Equivalents Cash & Cash Equivalents - Beginning of Year Cash & Cash Equivalents - End of Year (1) Operations commenced on January 26, 1999. ($13,017) (1,078) (800) ($14,895) $ 5,496 25,050 (17,016) (1,638) (3,561) 1,408 $9,739 (124) 124 $ ($7,209) (940) (1,000) ($9,149) $ 6,096 11,991 (5,460) (1,114) (1,580) (3,735) $6,198 124 $124 H e r s h a H o s p i t a l i t y T r u s t The Hersha Promise: The investment landscape changes. First, a period of contraction in the real estate capital markets. Now, a slowing economy. Through it all, HT’s fundamentals remain solid and our growth continues. Even in the most uncertain of times, our land, bricks and mortar hold a real, tangible value. Investing is a marathon, not a sprint. So while stock prices may rise and fall, H E R S H A some of your assets and net worth requires more care, more prudence. REIT shares are designed to hold up better than other equities over the long term - and the Hersha Hospitality Trust’s portfolio is designed to deliver investment returns at the highest, most consistent, most dependable levels. Look at the confidence of our management. Look at our past performance. And watch out for our future. H e r s h a H o s p i t a l i t y T r u s t Board of Trustees Hasu P. Shah Chairman and CEO Hersha Hospitality Trust Everette G. Allen, Jr. Chairman & Senior Partner Hirschler,Fleischer, Weinberg, Cox & Allen Thomas S. Capello Founder & Principal First Capital Equities L. McCarthy Downs, III Chairman Anderson & Strudwick Corporate Officers Hasu P. Shah Chief Executive Officer Kiran P. Patel Corporate Secretary Bharat C. Mehta Principal Hersha Enterprises, Ltd. Mark R. Parthemer Partner McNees, Wallace & Nurick K.D. Patel President Hersha Hospitality Management, L.P. Rajendra O. Gandhi Treasurer Ashish R. Parikh Chief Financial Officer CORPORATE HEADQUARTERS 148 Sheraton Drive, Box A New Cumberland, PA 17070 Telephone: (717) 770-2405 Fax: (717) 774-7383 REGISTRAR AND STOCK TRANSFER AGENT First Union National Bank 1525 West W.T. Harris Boulevard, 3C3 Charlotte, North Carolina 28288-1179 Telephone: (800) 829-8432 INDEPENDENT AUDITORS Moore Stephens, P.C. 331 Madison Avenue New York, NY 10071 COMMON STOCK INFORMATION The Common Stock of Hersha Hospitality Trust is traded on the American Stock Exchange under the symbol “HT” LEGAL COUNSEL Hunton & Williams Riverfront Plaza 951 East Byrd Street Richmond, Virginia 23219 For more information about our operations or for additional information about investing, contact us at: Hersha Hospitality Trust 148 Sheraton Drive New Cumberland, PA 17070 Attention: Ashish Parikh H e r s h a H o s p i t a l i t y T r u s t H E R S H A www.hersha.com One Forty Eight Sheraton Drive New Cumberland, PA 17070 Telephone. 717.770.2405 Facsimile. 717.774.7383