Hersha Hospitality Trust
Annual Report 2001

Plain-text annual report

Hersha Hospitality Trust Annual Report 2001 H E R S H A Hersha Hospitality Trust (HT) is a self-advised Maryland real estate investment trust (REIT) that invests in income producing hotel real estate, particularly premium limited service, full service and extended stay hotels. Qualification as a REIT under the Internal Revenue Code enables the Company to distribute income to shareholders without federal income tax liability to the Company. Hersha trades under the symbol HT on the American Stock Exchange. The Company’s investment goals are: high current cash flow for dividend distribution to shareholders; growth in cash flow through increases in revenues of leased properties; and capital appreciation in the residual value of investment properties. As of December 31, 2001, the Company owned 18 mid-priced hotels in New York, Pennsylvania, and metropolitan Atlanta, Georgia. Hersha Financial Highlights In thousands except per share data. Hersha Hospitality Trust OPERATING DATA: 2001 Year Ended December 31, 2000 1999(4) Lease Revenues Total Revenues Net Income Available for Common Shareholders Funds from Operations (FFO) (1) Cash Available for Distributions (CAD) (2) Distributions to Common Shareholders (3) 14,087 $ 13,901 $ 12,773 $ 7,264 7,370 12,824 1,338 834 847 5,109 6,647 2,525 3,483 1,524 1,638 7,054 3,840 1,638 PER SHARE DATA: FFO $ 0.97 $ 0.99 1.69 1.53 CAD Common Distributions 0.72 0.72 Common Distributions as a Percentage of CAD Weighted Average Common Shares Outstanding 2,275,000 2,275,000 43% 47% $ 0.79 1.11 0.67 60% 2,275,000 BALANCE SHEET DATA (as of December 31): $ 88,100 $ 87,671 $ 51,908 Real Estate Properties, at Cost Total Assets 96,017 94,531 56,382 61,535 61,450 27,754 Total Debt 10,210 11,014 11,805 Total Shareholder’s Equity (1) Funds from Operations (FFO) represents net income (loss) (computed in accordance with generally accepted accounting principals), excluding gains (or losses) from debt structuring or sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. (2) Cash available for distribution is net income plus depreciation and amortization, minus cash reserves for capital improvements to properties. (3) Distributions presented include distributions declared with respect to the period shown for the Priority Class A common shares. (4) Operations commenced January 26, 1999. In thousands except per share data. Hotel Operating Results (a) 2001 Year Ended December 31, 1999 2000 1998 Total Revenues $ 30,755 $ 32,828 $ 25,299 $ 18,086 Net Operating Income $ 10,970 $ 11,802 $ 8,314 $ 5,577 Average Daily Rate $ 76.91 $ 74.60 $ 69.10 $ 68.55 Occupancy Revenue Per Available Room $ 47.44 $ 45.73 $ 39.47 61.70% 61.30% $ 41.02 57.12% 59.84% (a) Pertains to hotels owned at the end of the fiscal year. percent change 150 100 50 0 -50 Jan. 99 nasdaq dow s&p ht H E R S H A Jan. 00 Jan. 01 Jan. 02 Hersha Versus Indices percent change 80 hospitality property trust rfs innkeepers felcor hospitality hersha (ht) Hersha vs. Comparable REITs INVESTED ON JANUARY 26, 1999 40 0 -40 Jan. 99 Jan. 00 Jan. 01 Jan. 02 Hersha Financial Performance Funds From Operations (FFO) ($000’s) FFO Per Diluted Share $6,647 $7,054 $5,109 9 9 9 1 0 0 0 2 1 0 0 2 Compounded Annual Growth Rate 17.5% $0.99 $0.97 $0.79 9 9 9 1 0 0 0 2 1 0 0 2 Compounded Annual Growth Rate 10.8% Total Revenues ($000’s) Total Asset Value ($mm) $14,087 $12,824 $7,370 9 9 9 1 0 0 0 2 1 0 0 2 Compounded Annual Growth Rate 38.3% $115 $100 $63 9 9 9 1 0 0 0 2 1 0 0 2 Compounded Annual Growth Rate 35.1% H e r s h a H o s p i t a l i t y T r u s t To the Shareholders of Hersha Hospitality Trust It has been a very busy and intense year. It was a year of unprecedented turbulence and tragedy. We are deeply upset and saddened by the events of this year – but take comfort in the resilience of our national spirit. In light of the economic malaise and disruptions in travel plaguing our industry, we remain pleased with our financial results. We remain particularly cautious and focused on the recovery, but we feel that we have weathered the worst of the storm. ❖ recovery: Reduced demand for lodging had a significant impact on hotel operations as same store occupancy dropped to 62%. Our newest properties experienced a slower ramp-up, but our leases produced fixed returns to support our cash flow. Our lessees reacted quickly to maintain profitability at the property level. A strong direct sales effort and the resilience of our ‘drive to’ markets protected cash flow. On a same store basis, we ultimately experienced a slight increase in average daily rate. Although RevPar did fall, FFO increased 6.1% for the year. ❖ dividends: Our portfolio showed a surprising resilience, and our lease and capital structure protected the dividend. We were one of the few lodging REITs that continued to pay its full quarterly dividend of $0.18 per share. This marks our 12th consecutive dividend payment of this amount since our initial public offering. Even in this challenging environment, a shareholder investing in HT at the beginning of 2001 realized an approximate 15% return on their investment, including dividends. H e r s h a H o s p i t a l i t y T r u s t Across the year, we continued to execute on our business plan to increase the value and growth rate of HT. ❖ asset value: We continued to actively manage our portfolio to take advantage of attractive acquisitions. We sold several properties in smaller, tertiary markets to acquire newly built hotels in the metropolitan Philadelphia and New York markets. Our asset sales maintain a portfolio that boasts a median age of only three years, and clearly enhances long-term growth. We are hopeful that our market value will soon reflect the growth prospects and premium asset value of our portfolio. taxable reit subsidiaries (trs): Many Hotel REITs have purchased their leases and assumed operating risk into their business model. H e r s h a H o s p i t a l i t y T r u s t ❖ We believe that our investors seek more consistent returns from their investment in HT. At this time, the assumption of leases by a TRS would introduce significant volatility to our cash flows and expose our shareholders to additional risk. We structure leases to capture both base and percentage revenues, and our returns exceed the overall market and the lodging REIT sector – why take on additional risk? ❖ acquisition pipeline: Across the year, we have also identified an attractive pipeline of acquisitions. Many are newly built assets in our target markets of metropolitan New York, Philadelphia, Boston, and Washington DC. We are currently evaluating our strategic capital raising activities to enable these accretive and growth oriented acquisitions. H e r s h a H o s p i t a l i t y T r u s t Periods of economic uncertainty test the fundamentals of a business model and the quality of its execution. During our first three years of operation we have been challenged by numerous unforeseen events and have proven that we can still produce consistently market-leading returns. HT’s quarterly yield alone beats the market, but as capital appreciates and our trading multiple expands, we are executing on our business plan and should emerge with an optimally positioned portfolio of assets in the highest value markets in the U.S. As you may know, my family and long term business partners are the largest shareholders of HT. We believe in our business model and will execute it. Prior to our financial data this year, I have included a discussion on our strategy and plan for the coming 12-18 months. I believe that transparency is the most persuasive style. It is a privilege to have you as a shareholder, and I hope your investments and value grow over time. Sincerely yours, Hasu P. Shah Chairman and CEO H E R S H A H e r s h a H o s p i t a l i t y T r u s t Producing Premium Returns A well-located hotel portfolio, acquired at an attractive cost basis, will produce above market returns if effectively leased or managed. The business model is centered around the high cash flows of mid-priced hotels, but is refined – its volatility reduced and value enhanced – by its leasing and capital decisions. 1. Resilient Portfolios - Markets, Brands, Asset Quality In my twenty years of real estate experience, I have found that mid-priced hotels produce more cash flow than upscale hotels, apartments, and office buildings. Mid-priced hotels not only have a loyal customer base in road warriors and leisure travelers, but also benefit from “trading down” by increasing numbers of corporate travellers. Several risks have prevented large- scale public ownership in the sector before. HT systematically reduces this risk: Supply Risk: HT focuses investments in high barrier to entry markets – markets that are difficult to build in and expensive to acquire. New York City, Philadelphia, Boston, and Washington DC are our primary targets across the next 12-18 months. We strive for clusters of assets in central business districts, primary suburban office locations, and select market leaders in ‘drive-to’ regional markets. These markets preserve growth and offer premium rents. ❖ Obsolescence: Many mid-priced hotels suffer from mediocre construction, disrepair, and ultimately lower economic uses. HT invests in newly built premium hotels and aggressively manages its portfolio to maintain a new and vibrant collection of assets. Our operators must reserve 4-6% of H e r s h a H o s p i t a l i t y T r u s t ❖ annual hotel revenues to fund on-going capital expenditures to maintain institutional-grade quality in our portfolio. ❖ Commoditization: Every reader must have had the rather unpleasant experience of driving down a nameless interstate with imposing signs for every chain hotel under the sun. In an age of mass segmentation, it is not enough to have a brand. To ensure robust returns you need a ‘category-killer.’ Brands like Hampton Inn, Holiday Inn, and Comfort Suites earn differentiated, premium returns over time. 2. Prudent Investing - Strict Underwriting Our investment strategy breaks the compromise between current cash flow and long term growth. I have always been an overly discerning buyer, and this personal ‘problem’ has carried into HT’s underwriting criteria. You have to make your money going into the deal. H e r s h a H o s p i t a l i t y T r u s t The cost-basis in our properties is low enough and potential lease income high enough to produce steady yields. We only purchase ‘accretive’ hotels – hotels throwing off sufficient lease income to maintain level dividends to shareholders for the investment. Economic cycles and unforeseen events are a part of the economy forever – prices need to reflect long term demand. We garner opportunities for growth through our relationships rather than through development risk or momentum pricing. Our relationships with leading hotel developers and operators provide access to recently built or repositioned hotels with growth above premium quarterly distributions. We price hotels at their current yield but buy hotels with upside. It is an underwritten, nearly transparent method to generate growth and current cash flow. H e r s h a H o s p i t a l i t y T r u s t 3. Structured Leasing – Entrepreneurial Operators Our lease structure reduces a significant portion of the volatility encountered in the earnings stream for lodging assets. Our leases are structured to yield largely fixed lease revenues during a property’s initial ramp-up – when cash flows are more uncertain and less accretive. As a property matures, percentage leases and incentive thresholds are triggered to provide revenue growth for the REIT and incentive for the operator. Our affiliate Hersha Hospitality Management, LP, leases the majority of our hotels. HHMLP has emerged as one of the strongest management companies in the Northeast and is establishing a strong presence in New York and Philadelphia – two of our primary markets. The sale-leaseback arrangement we entered into with Noble Investment Group in Atlanta will be a model for future growth. Top regional operators, driven by profits not revenue, produce strong, consistent returns for HT. In turn, entrepreneurial operators enjoy a ‘refinancing’ of their equity for their next project – and HT’s next acquisition. Management has proven across the last three years that it can execute this business model to produce consistently, premium returns. We plan to extend this business model and continue our promise in the coming years. We hope you will join us. H E R S H A 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 Balance Sheets HERSHA In thousands except share amounts. December 31, 2001 December 31, 2000 Assets Cash and Cash Equivalents Investment in Hotel Properties, Net of Accumulated Depreciation Escrow Deposits Lease Payments Receivable, Related Party Intangibles, Net of Accumulated Amortization Due to Related Party Other Assets Total Assets: 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, 2001 and 2000; (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, 2001 and 2000 $ 167 88,100 1,647 2,376 1,515 1,884 328 $ 96,017 $ 7,058 1,000 54,477 1,325 1,093 418 $ 65,371 $ 20,436 $ 87,671 1,178 2,877 1,720 849 236 $ 94,531 $ 11,400 1,000 50,050 1,209 1,650 529 $ 65,838 $ 17,679 23 23 Additional Paid-In Capital Distributions in Excess of Net Earnings Total Shareholders’ Equity: Total Liabilities & Shareholders’ Equity: 11,968 (1,781) $ 10,210 $ 96,017 11,968 (977) $ 11,014 $ 94,531 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, 2001, 2000 and 1999(1) In thousands except share and per share amounts. 2001 2000 1999 Revenue Percentage Lease Revenues $ 13,901 Interest Interest - Related Party 50 21 1 $ 12,773 $ 7,264 78 28 165 14,087 12,824 7,370 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 Gain on Sale of Assets Gain on Sale of Assets 5,422 13 1,044 554 4,476 4,712 15 753 590 107 3,892 11,509 10,069 2,578 598 2,755 1,428 20 450 363 2,064 4,325 3,045 3,045 1,707 Income Before Minority Interest 3,176 2,755 Income Allocated to Minority Interest 2,342 1,908 Net Income $ 834 $ 847 $ 1,338 Basic Earnings Per Common Share $ 0.37 $ 0.37 $ 0.59 Diluted Earnings Per Common Share and Units $ 0.37 $ 0.37 $ 0.48 Weighted Average Shares Basic Diluted 2,275,000 2,275,000 2,275,000 7,296,596(2) 6,715,996(2) 6,326,690(2) (1) Operations commenced on January 26, 1999. (2) Includes 5,093,220, 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, 2001, 2000 and 1999(1) HERSHA In thousands except share and per share amounts. Operating Activities Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization Gain on Sale of Assets Income Allocated to Minority Interest 2001 2000 1999 $ 834 $ 847 $ 1,338 4,476 (598) 2,342 3,892 2,064 1,908 1,707 Change in Assets and Liabilities (Increase) Decrease in: Escrow Deposits Lease Payments Receivable - Related Party 501 (761) (2,116) Other Assets (351) Due from Related Party 115 (21) (92) 122 (1,178) (469) Increase (Decrease): Due to Related Parties Accounts Payable and Accrued Expenses (179) (109) 54 176 188 245 Total Adjustments 5,994 4,185 1,737 Net Cash Provided by Operating Activities $ 6,828 $ 5,032 $ 3,075 Investing Activities Purchase of Hotel Property Assets Sale of Hotel Property Assets Purchase of Intangible Assets Loans to Related Party (5,017) 12,599 (13,017) (7,209) (69) (1,078) (2,000) (800) (940) (1,000) Net Cash Provided by/(Used in) Investing Activities 5,513 (14,895) (9,149) Financing Activities Net Proceeds from Issuance of Stock Proceeds from Borrowings Under Line of Credit Repayment of Borrowings Under Line of Credit 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 10,766 5,496 (15,108) 11,991 6,096 25,050 (5,460) (2,729) (17,016) (1,638) (1,638) (1,114) (3,495) (3,561) (1,580) 1,408 30 (3,735) Net Cash Provided by/ (Used in) Financing Activities (12,174) 9,739 6,198 Net Increase (Decrease) in Cash & Cash Equivalents 167 (124) 124 Cash & Cash Equivalents - Beginning of Year 124 Cash & Cash Equivalents - End of Year (1) Operations commenced on January 26, 1999. $ 167 $ $ 124 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 Hersha Hospitality Trust Thomas S. Capello Founder & Principal First Capital Equities Donald J. Landry Former CEO and President Sunburst Hospitality, Inc. Michael A. Leven Chairman & CEO US Franchise Systems, Inc. L. McCarthy Downs, III Chairman Anderson & Strudwick William Lehr, Jr. Former Senior Vice President Hershey Foods Corporation K.D. Patel President Hersha Hospitality Management, L.P. Corporate Officers Hasu P. Shah Chief Executive Officer Ashish R. Parikh Chief Financial Officer Kiran P. Patel Corporate Secretary Rajendra O. Gandhi Treasurer Contact Information CORPORATE HEADQUARTERS 148 Sheraton Drive, Box A New Cumberland, PA 17070 Telephone: (717) 770-2405 Fax: (717) 774-7383 INDEPENDENT AUDITORS Moore Stephens, P.C. 331 Madison Avenue New York, NY 10071 LEGAL COUNSEL Hunton & Williams 951 East Byrd Street Richmond, Virginia 23219 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 COMMON STOCK INFORMATION The Common Stock of Hersha Hospitality Trust is traded on the American Stock Exchange under the symbol “HT” 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 Hersha Hospitality Trust One Forty Eight Sheraton Drive New Cumberland, PA 17070 Telephone. 717.770.2405 Facsimile. 717.774.7383 

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