Hersha Hospitality Trust Annual Report 2001

FY2001 Annual Report · Hersha Hospitality Trust

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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
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
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

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

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

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

$ 0.59

Diluted Earnings Per Common Share and Units

$ 0.37

$ 0.48

Weighted Average Shares

Basic

Diluted

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

(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