annual report 2 0 0 3 hersha hospitality trust 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 In thousands except per share data. hersha hospitality trust OPERATING DATA: Total Revenues Net Income Adjusted Funds from Operations (AFFO) (2) PER SHARE DATA: Basic Earnings Per Common Share Diluted Earnings Per Common Share AFFO Distributions to Common Shareholders BALANCE SHEET DATA (as of December 31): Total Assets Total Debt Minority Interest in Partnership Total Shareholder’s Equity (1) Operations commenced January 26, 1999. Year Ended December 31, 2003 2002 2001 2000 1999(1) $ $ 19,386 785 9,151 0.17 0.17 0.82 0.72 $ $ 14,448 1,292 8,293 0.51 - 1.09 0.72 $ 196,568 71,837 38,971 71,460 $ 101,516 65,341 20,258 11,378 $ $ $ $ $ $ 12,545 834 7,054 0.37 - 0.97 0.72 96,017 61,535 20,436 10,210 11,624 847 6,754 0.37 0.37 0.99 0.72 94,531 61,450 17,679 11,014 $ $ $ 7,370 1,338 5,109 0.59 0.48 0.79 0.67 56,382 24,754 18,980 11,805 (2) Funds from Operations (FFO) represents net income (loss) (computed in accordance with generally accepted accounting principals), excluding gains (or loss- es) from debt structuring or sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We also adjust FFO for preferred stock distributions and have adjusted FFO to exclude non-recurring prepayment penalties and non-recurring compensation expense in 2003 related to the redemption of outstanding stock options to present AFFO applicable to common shares. In thousands except per share data. 2003 2002 2001 2000 1999(1) Year Ended December 31, 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. $ $ $ $ 38,428 10,735 85.52 64.80% 55.41 $ $ $ $ 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 f i n a n c i a l h i g h l i g h t s 2 0 0 3 200 100 0 -20 186.9 % 156.3 % five year total return 105.3 % 78.0 % 66.9 % 58.5 % 49.2 % 47.1 % hersha HPT star w ood hotels & resorts winston hotels lasalle Hotel Properties equity inns host m arriott m arriott international hilton hotels 22.3 % innkeepers 14.4 % s&p 500 -11.2 % Assumes dividend reinvestment as of the date paid. Source: FactSet management, trustees & affiliates 20% institutional investors 49% shareholder base retail investors 31% 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 (HT) is a real estate investment trust (REIT) focused on the acquisitions and aggressive management of mid-priced hotels in primarily metropolitan markets. 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, 2003, the Company owned 22 mid-priced hotels located primarily in the Northeastern United States. 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. h e r s h a h o s p i t a l i t y t r u s t dear fellow shareholders: Trends that began to form in the final quarter of 2003 give us the confidence to believe that our industry has moved through the trough of the cycle and the long awaited recovery is slowly underway. Nonetheless, the strength demonstrated in the fourth quarter was preceded by three difficult quarters for our industry. Our peers were beleaguered with consumer uncertainty aggravated by unanswered domestic and international political questions, trepidation associated with the threat of exogenous events, and hesitation caused by inexplicable macro- economic circumstances. Despite these challenging conditions, Hersha had a very strong year. Our company outperformed the broader equities markets, the real estate equities markets and our peers in the publicly traded hotel REIT market. Our shareholders enjoyed a total return last year, including stock price appreciation and dividends of 70%. Since our 1999 IPO we have provided one of the highest returns of any hotel REIT - 2 0 0 3 a total return of 186.9% over five years. We stay true to our objective of building a great company - being the most profitable hotel REIT, not necessarily the largest. We focus on institutional grade real estate in deep and resilient markets in the northeastern United States with the highest barriers to entry. We acquire brands like Hampton Inn and Hilton Garden Inn - category-killers with rate integrity and superlative customer loyalty. We invest primarily in newly-built hotels that suggest an inherent upside in the portfolio as assets mature towards stabilization. And we look forward to continue executing on our unique Northeastern franchise through our relationships and to build on our reputation as preferred acquirers and local sharpshooters. operations In 2003, our Adjusted Funds from Operations (AFFO) for the full year, increased to $9.15 million from $8.29 million the prior year. AFFO per h e r s h a h o s p i t a l i t y t r u s t share was $0.82 on 11,137,894 weighted average shares outstanding, compared to $1.09 per share on 7,619,542 weighted average shares outstanding for the previous year due to the equity offering completed in the fall. RevPAR increased 3.6% to $54.10, based on a 2.5% increase in occupancy to 65.5% and a 1.1% rise in ADR to $82.56. The company's portfolio also outperformed its local competitive set for the full year. According to Smith Travel Research, our portfolio achieved a 107.7% market share in 2003. capital The Company consummated two significant equity transactions in 2003. CNL Hospitality Properties invested approximately $20 million in Hersha in convertible preferred securities and also invested approximately $8 million in a joint venture established to jointly purchase the New York City Hampton Inn in Chelsea. By aligning with a strategic partner like CNL, our company gained access to a 2 0 0 3 consistent stream of capital, a leveraged acquisition pipeline, and a close friend in the industry. The joint venture portion of the relationship involves Hersha investing 33% of the capital and leverages our expertise through asset management fees and a promoted equity interest. We also executed a follow on offering of 9.775 million common shares in October 2003, raising approximately $77 million of net proceeds through this very successful offering. Hersha can now boast a roster of the leading institutions in the real estate investment community. Both the CNL transaction and our follow on offering give us the present ability to make acquisitions that will provide Hersha with even greater breadth with which to participate in the imminent economic recovery. acquisitions We continued to make on-strategy acquisitions during the year purchasing the Manhattan Hampton Inn, the Hilton Garden Inn, Edison, h e r s h a h o s p i t a l i t y t r u s t New Jersey, the Hampton Inn Linden/Newark, New Jersey, and the Hilton Garden Inn, Glastonbury, Connecticut. Each hotel embodies our strategic criteria - quality income streams, strong room rates that allow for margin growth, heavy barriers to new competition, and ages of less than one year. We continue to purchase hotels in clusters, which allows our managers to rapidly integrate new acquisitions into the portfolio and realize efficiencies of scale and scope trans- lating to more robust margins. Moreover, as we continue to expand our portfolio in this focused, clustered approach, we are exposed to new opportunities in those same markets. In our small world, we intend to be market leaders while remaining local sharpshooters. We are proud of our performance - our fourth quarter 2003 dividend payment was our 20th consecutive $0.18 dividend representing a $0.72 dividend per year for each of the five 2 0 0 3 years since our initial public offering in 1999. During this same period, we have amassed one of the highest quality portfolios of assets in the hotel REIT sector. We were able to accomplish this with the support of our highly vested and passionate management team, our experienced Board of Trustees and our faithful shareholders. We fully intend to further execute our focused strategy, taking advantage of our unique franchise and positioning our company to leverage the recovering market. We believe that 2004 will be another successful year for Hersha Hospitality Trust and we look forward to your continued confidence in this fine company that we have built together over the years. Hasu P. Shah Jay H. Shah Chairman and President and Chief Executive Officer Chief Operating Officer h e r s h a h o s p i t a l i t y t r u s t 2 0 0 3 board of trustees Hasu P. Shah Chairman & Chief Executive Officer Hersha Hospitality Trust Thomas S. Capello Founder & Principal First Capital Equities Michael A. Leven Chairman & CEO US Franchise Systems, Inc. Donald J. Landry Former CEO and President Sunburst Hospitality, Inc. K.D. Patel President Hersha Hospitality Management, L.P. William Lehr, Jr. Former Senior Vice President Hershey Foods Corporation John M. Sabin CFO and General Counsel Novascreen Biosciences Corporation corporate officers Hasu P. Shah Chairman & Chief Executive Officer Hersha Hospitality Trust Jay H. Shah President & Chief Operating Officer Hersha Hospitality Trust Ashish R. Parikh Chief Financial Officer Kiran P. Patel Corporate Secretary David L. Desfor Treasurer Neil H. Shah Vice President of Acquisitions & Development h e r s h a h o s p i t a l i t y t r u s t 2 0 0 3 c o r p o r at e i n f o r m at i o n 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 Reznick Fedder & Silverman Certified Public Accountants Two Hopkins Plaza, Suite 2100 Baltimore, MD 21202 (410) 783-4900 r e g i s t r a r a n d s to c k t r a n s f e r a g 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 c o u n s e l Hunton & Williams Riverfront Plaza 951 East Byrd Street Richmond, Virginia 23219 c o m m o n s to 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” hersha hospitality trust H E R S H A hersha hospitality trust 148 sheraton drive new cumberland, pa 17070 telephone. 717.770.2405 facsimile. 717.774.7383 www.hersha.com