Hersha Hospitality Trust H E R S H A www.hersha.com Hersha Hospitality Trust 148 Sheraton Drive New Cumberland, PA 17070 Telephone. 717.770.2405 Facsimile. 717.774.7383 Hersha Hospitality Trust Annual Report 2002 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 ( H T ) Hersha Hospitality Trust H E R S H A (HT) is a real estate investment trust (REIT) focused on the acquisitions and aggressive management of mid-priced hotels in primarily metropolitan markets in the Northeastern U.S. HT has offered its investors among the highest returns in the REIT sector since its IPO in January 1999. Hersha trades under the symbol HT on the American Stock Exchange. As of December 31, 2002, the Company owned 18 mid-priced hotels in New York, Pennsylvania, Maryland, and metropolitan Atlanta, Georgia. 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. percent change 150 100 50 0 -50 Jan. 99 Hersha Versus Indices nasdaq dow nareit hersha (ht) Jan. 00 Jan. 01 Jan. 02 Jan. 03 percent change Hersha vs. Hotel REITs 80 40 0 --40 Jan. 99 hospitality property trust innkeepers boykin equity inns hersha (ht) Jan. 00 Jan. 01 Jan. 02 Jan. 03 H T F i n a n c i a l H i g h l i g h t s In thousands except per share data. Hersha Hospitality Trust OPERATING DATA: Total Revenues Net Income Funds from Operations (FFO) (1) Distributions to Common Shareholders (2) PER SHARE DATA: FFO Distributions to Common Shareholders Common Distributions as a Percentage of FFO BALANCE SHEET DATA (as of December 31): Total Assets Total Debt Minority Interest Total Shareholder’s Equity 2002 Year Ended December 31, 2001 2000 1999(3) $ $ 14,448 1,292 8,293 1,838 1.09 0.72 66.1% $ 101,516 65,341 20,258 11,378 $ $ $ 12,545 834 7,054 1,638 0.97 0.72 74.2% 96,017 61,535 20,436 10,210 $ $ $ 11,624 847 6,647 1,638 0.99 0.72 72.7% 94,531 61,450 17,679 11,014 $ $ $ 7,370 1,338 5,109 1,524 0.79 0.67 84.8% 56,382 27,754 18,980 11,805 (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) Distributions presented included distributions declared with respect to the period shown for the Priority Class A Common Shares. (3) Operations commenced January 26, 1999. In thousands except per share data. Hotel Operating Results Total Revenues (a) Net Operating Income Average Daily Rate Occupancy Revenue Per Available Room (a) Pertains to hotels owned at the end of the fiscal year. 2002 Year Ended December 31, 2001 2000 1999 $ $ $ $ 33,384 10,502 81.66 63.80% 52.11 $ $ $ $ 30,755 10,970 76.91 61.70% 47.44 $ $ $ $ 32,828 11,802 74.60 61.30% 45.73 $ $ $ $ 25,299 8,314 69.10 57.12% 39.47 De a r Fe ll ow Sha r eh o ld e r s S TAY I N G T H E C O U R S E The clouds of national tragedy and the malaise of economic recession did not lift in 2002. Geopolitical uncertainty and investors’ skepticism and mistrust led to another disappointing year for U.S. equities. We are pleased to have worked diligently in the meantime, staying the course on our strategy and creating new platforms for growth as the economy recovers. Our rather simple business model and enduring values of current income and accretive growth offered some measure of clarity and performance in an otherwise lackluster economic environment. As we have since we went public four years ago, we continued to offer our shareholders one of the highest dividends in the investment universe. A shareholder investing in HT at the beginning of 2001 earned a 12% cash return from dividend income alone. Including capital appreciation, our investors realized an approximate 24% return on their investment for the year. H e r s h a H o s p i t a l i t y T r u s t We stayed the course on our strategy and turned in good results despite experiencing what may have been the poorest market conditions in the hotel industry since the early 1990s. We managed to increase revenues by 6.3% and experienced a 12.4% increase in funds from operations per diluted share. Our focus on mid-priced hotels serves us well in challenging economic environments by capitalizing on the loyalty of the mass market and the influx of new corporate travelers seeking more affordable (and justifiable) accommodations. Category killing brands further bolster yields. Even in this challenging operating environment our portfolio of hotels managed to maintain its overall occupancy percentages and average daily rates. Our commitment to high quality assets and the maintenance of one of the newest portfolios of assets in the REIT sector embeds the seeds for future growth and performance. Today, the median age of our portfolio is less than three years old. Our properties are poised to be the newest and best positioned as the economy recovers and reaches new cyclical highs in the coming years. Our goal is to assemble the most profitable portfolio of hotels in the nation – not the largest. We actively recycle capital to shed assets whose returns have been maximized and re-deploy those funds into properties with stronger growth prospects in high barrier to entry Northeastern markets. In 2002, we HT Financial Performance Total Revenues ($mm) $14.5 $12.5 $11.6 $7.4 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 Compounded Annual Growth Rate 25.2% Total Asset Value ($mm) $100 $115 $115 $63 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 Compounded Annual Growth Rate 22.2% sold older hotels in mature locations within the Pittsburgh, PA and Philadelphia markets and purchased recently built, institutional quality properties in New York City and Maryland. In this era of corporate excess and free agent management teams, it is worthwhile to consider the organization that has produced these market-leading returns. I take tremendous pride in the depth of our board of trustees and management team - capital markets discipline coupled with deep hotel operating and transactional expertise. It is the accountability and responsibility that this organization feels towards its fellow shareholders that gives me the most confidence in the trajectory of HT. Our SG&A expense ratio remains among the lowest in the publicly-traded sector, and I personally do not draw a salary. Our management team owns a significant portion of the outstanding equity of HT - our reward will be in its long-term appreciation. As the industry and the broader investment community begins to take notice of our market- leading performance, we expect this coming year - our fifth as a public company - to reflect a significant inflection point in the growth of HT. We are currently negotiating a substantial placement into HT by a H e r s h a H o s p i t a l i t y T r u s t HT Financial Performance Funds From Operations (FFO) $8,293 $6,647 $7,054 $5,109 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 Compounded Annual Growth Rate 17.5% FFO Per Share $0.99 $0.97 $1.09 $0.79 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 Compounded Annual Growth Rate 11.3% highly reputable and strategically aligned institution. Not only will the investment provide capital to consummate our impressive acquisition pipeline in leading Northeastern markets, but it also offers institutional credibility and ultimately will increase liquidity for our shareholders. We are trying to build a great company at HT, and it is a privilege to share ownership in this enterprise with you. We will continue to thank you with current dividends, but we believe that we are now in the position to build substantial capital value for our investors. We went public with the ambition to be the most productive and reliable security in our shareholders’ portfolio. After four years of consistently premium returns in trying economic times, I hope that we have earned a long-term place in yours. Sincerely, H E R S H A Hasu P. Shah Chairman & Chief Executive Officer H e r s h a H o s p i ta l i t y Tr u s t & S u b s i d i a r i e s C o n s o l i d at e d B a l a n c e S h e e t s December 31, 2002 December 31, 2001 H E R S H A In thousands except share amounts. Assets Cash and Cash Equivalents Investment in Hotel Properties, Net of Accumulated Depreciation Escrow Deposits Lease Payments Receivable, Related Party Lease Payments Receivable, Other Intangibles, Net of Accumulated Amortization Due to Related Party Other Assets $ 140 93,814 1,749 2,562 233 1,165 1,130 723 $ 167 88,100 1,647 2,376 1,515 1,884 328 Total Assets: $ 101,516 $ 96,017 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: 3,803 1,000 61,538 1,382 1,303 854 69,880 20,258 $ $ 7,058 1,000 54,477 1,325 1,093 418 65,371 20,436 $ $ 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; 2,576,863 and 2,275,000 Shares Issued and Outstanding at December 31, 2002 and 2001; (Aggregate Liquidation Preference $15,460 and $13,650) Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, None Issued and Outstanding 26 23 Additional Paid-In Capital Distributions in Excess of Net Earnings Total Shareholders’ Equity: Total Liabilities & Shareholders’ Equity: 13,679 (2,327 ) $ $ 11,378 101,516 11,968 ) (1,781 10,210 96,017 $ $ H e r s h a H o s p i ta l i t y Tr u s t & S u b s i d i a r i e s C o n s o l i d at e d Stat e m e n t s o f O p e r at i o n s Years Ended December 31, 2002, 2001 and 2000 In thousands except share and per share amounts. 2002 2001 2000 $ 9,558 2,801 165 21 $ 9,723 1,850 50 1 12,545 11,624 Revenue Percentage Lease Revenues-HHMLP Percentage Lease Revenues-Other 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 (Gain) on Sale of Assets Depreciation and Amortization Total Expenses Income Before Minority Interest and Discontinued Operations 11,433 2,801 207 7 14,448 4,826 1,021 567 3,994 10,408 4,769 13 812 534 ) (598 3,897 9,427 4,040 3,118 4,142 15 632 578 107 3,507 8,981 2,643 1,908 Income Allocated to Minority Interest 3,238 2,342 Discontinued Operations: Gain on Sale of Discontinued Operations Income from Discontinued Operations 449 41 Net Income $ 1,292 $ 58 834 112 847 $ Earnings Per Share Data: Basic and Diluted - Before Discontinued Operations $ 0.32 $ 0.34 Discontinued Operations $ 0.19 $ 0.03 Basic and Diluted Earnings Per Common Share $ 0.51 $ 0.37 $ 0.32 $ 0.05 $ 0.37 Weighted Average Shares Basic and Diluted 2,519,820 2,275,000 2,275,000 H e r s h a H o s p i ta l i t y Tr u s t & S u b s i d i a r i e s C o n s o l i d at e d Stat e m e n t s o f C a s h F l o w Years Ended December 31, 2002, 2001 and 2000 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 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 2002 2001 2000 $ 1,292 $ 834 $ 847 4,212 (449 3,238 ) (102 (419 (395 ) ) ) (46 ) 210 436 6,685 4,476 (598 2,342 ) ) ) (469 501 (92 122 (179 (109 ) ) 3,892 1,908 (1,178 (761 115 (21 ) ) ) 54 176 5,994 4,185 Net Cash Provided by Operating Activities 7,977 6,828 5,032 Investing Activities: Purchase of Hotel Property Assets Sale of Hotel Property Assets Purchase of Intangible Assets Loans to Related Party ) (5,142 5,997 (1,000 ) (5,017 12,599 (69 (2,000 ) ) ) (13,017 ) (1,078 (800 ) ) Net Cash Provided by (used in) Investing Activities (145 ) 5,513 (14,895 ) 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 1,711 12,077 ) (15,332 2,985 ) (3,857 ) (1,774 ) (3,669 10,766 (15,108 ) (2,729 (1,638 (3,495 ) ) ) 30 5,496 25,050 (17,016 (1,638 (3,561 1,408 ) ) ) Net Cash Provided by (used in) Financing Activities (7,859 ) (12,174 ) 9,739 Net Increase (Decrease) in Cash & Cash Equivalents Cash & Cash Equivalents - Beginning of Year (27 ) 167 167 (124 ) 124 Cash & Cash Equivalents - End of Year $ 140 $ 167 $ Board of Trustees Corporate Officers Hasu P. Shah Chairman Hersha Hospitality Trust Chief Executive Officer Hersha Hospitality Trust Thomas S. Capello Founder & Principal First Capital Equities L. McCarthy Downs, III Chairman Anderson & Strudwick Donald J. Landry Former CEO and President Sunburst Hospitality, Inc. Michael A. Leven Chairman & CEO US Franchise Systems, Inc. William Lehr, Jr. Former Senior Vice President Hershey Foods Corporation K.D. Patel President Hersha Hospitality Management, L.P. Ashish R. Parikh Chief Financial Officer Kiran P. Patel Corporate Secretary David L. Desfor Treasurer Neil H. Shah Acquisitions & Development H E R S H A C o n ta c t I n f o r m at i o n CO R P O R AT E H E A D Q U A RT E R S 148 Sheraton Drive, Box A New Cumberland, PA 17070 Telephone: (717) 770-2405 Fax: (717) 774-7383 I N D E P E N D E N T A U D I TO R S Moore Stephens, P.C. 331 Madison Avenue New York, NY 10071 R E G I ST R A R A N D STO C K T R A N S F E R AG E N T Wachovia Securities 1525 West W.T. Harris Boulevard, 3C3 Charlotte, NC 28288-1179 Telephone: (800) 829-8432 L E G A L CO U N S E L Hunton & Williams Riverfront Plaza 951 East Byrd Street Richmond, Virginia 23219 CO M M O N STO C K I N F O R M AT I O N The Common Stock of Hersha Hospitality Trust is traded on the American Stock Exchange under the symbol “HT”