annual report 2 0 0 4 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 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 h o s p i t a l i t y t r u s t 2004 2003 Year Ended December 31, 2002 2001 2000 (In thousands except per share data) hersha hospitality trust (1) OPERATING DATA: Total Revenues (Including Discontinued Operations) 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 $ $ 56,144 2,049 11,571 0.12 0.12 0.57 0.72 $ $ 18,601 785 7,728 0.17 0.17 0.69 0.72 $ $ 14,762 1,292 8,293 0.51 0.51 1.09 0.72 BALANCE SHEET DATA (as of December 31): Total Assets (3) Total Debt (4) Minority Interest in Operating Partnership Total Shareholder’s Equity $ 261,021 110,819 16,779 119,792 $ 196,568 71,837 38,971 71,460 $ 101,516 65,341 20,258 11,378 $ $ $ 12,359 834 7,054 0.37 0.37 0.97 0.72 96,017 61,535 20,436 10,210 $ $ $ 11,573 847 6,754 0.37 0.37 0.99 0.72 94,531 61,450 17,679 11,014 (1) Total revenues consisted primarily of percentage and fixed lease revenues during 1999-2003. Six leases terminated on January 31st, 2004 and the remaining eight leases terminated on April 1st, 2004. (2) Funds from Operations (FFO) as defined by NAREIT represents net income (loss) (computed in accordance with generally accepted accounting principles), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We present Adjusted Funds From Operations (AFFO), which reflects FFO in accordance with the NAREIT definition plus the following additional adjustments: adding back income allocated to units of partnership interest in its operating partnership, because we report AFFO to common shareholders on a fully diluted basis assuming conversion of those units to common shares; adding back income allocated to units of partnership interest in its operating partnership related to discontinued operations; adding back depreciation related to discontinued operations; adding back distributions to holders of preferred units of partnership interest in its operating partnership, which are expensed on our income statement; and making adjustments to ground lease payments, which are required by GAAP to be amortized on a straight-line basis over the term of the lease, to reflect the actual lease payment. (3)Total assets includes $18,758 of hotel assets held for sale. (4)Total debt includes $13,058 of debt related to assets held for sale. (In thousands, except per share data) 2004 2003 2002 2001 2000 Year Ended December 31, hotel operating results Total Revenues (a) $ 72,076 $ 38,428 $ 33,384 $ 30,755 $ 32,828 Average Daily Rate Occupancy Revenue Per Available Room $ $ 97.62 67.21% 65.61 $ $ 85.52 64.80% 55.41 $ $ 81.66 63.81% 52.11 $ $ 76.91 61.70% 47.44 $ $ 74.60 61.30% 45.73 (a) Pertains to all hotels owned as of year end including the total results of hotels owned in a joint venture structure. 2 0 0 4 c o r p o r at e i n f o r m at i o n Hersha HospitalityTrust Penn MutualTowers 510 Walnut Street Philadelphia, PA 19106 Telephone. (215) 238-1046 Facsimile. (215) 238-0157 i n d e p e n d e n t a u d i to r s KPMG LLP Certified Public Accountants 30 NorthThird Street Harrisburg, Pennsylvania 17108-1190 Telephone (717) 260-4600 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 Telephone: (804) 788-8200 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” f i n a n c i a l h i g h l i g h t s 2 0 0 4 total return 158.2 % 158.1 % 63.1 % -3.2 % nareit co mposite s&p 500 rms 267.4 % 255.6 % 205.6 % 181.5 % 300 200 100 119.3 % 115.4 % 102.4 % 97 % 94.5 % 0 -10 hersha star w ood hotels & resorts m arriott international equity inns innkeepers usa winston hotels hospitality properties trust lasalle hotel properties host m arriott hilton hotels Total Returns from January 26, 1999 through December 31, 2004. Assumes dividends are re-invested at ex-dividend date. Source: FactSet ht rooms by region boston, ma 8% philadelphia, pa 4% connecticut area 7% hershey/harrisburg pa 18% new york city 18% central pennsylvania 9% 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 acquisition 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, 2004, the Company owned interests in 29 upscale and mid-scale hotels located primarily in the new jersey 11% washington dc-md/va 17% atlanta, ga 8% ht rooms by brand Northeastern United States. hilton 43% marriott 20% Qualification as a REIT under the Internal Revenue Code enables the Company to intercontinental 19% distribute income to starwood 5% choice 13% shareholders without federal income tax liability to the Company. Includes properties owned, financed and under definitive agreement for purchase as of March 31, 2005. Dear Fellow Shareholders, H e r s h a H o s p i t a l i t y T r u s t The past year bore out that the springtime of this economic cycle had finally arrived and with it came the crisp optimism so often associated with the season. The pall of the previous season lifted in 2004 and was replaced by an eagerness to deal. A quickening pace of hotel trades and at times unbridled enthusiasm by our industry peers left us a bit skeptical, but the improving market conditions and fading concern with travel and safety clearly enabled the hotel industry to regain firm footing in 2004. Fueled by robust increases in room night demand during a period of minimal supply growth, the industry registered strong revenues per available room and consequent flow-throughs to the bottom line leading to impressive growth in margins. We remained focused and steadfast in our strategy to own and aggressively manage institutional grade mid-scale and upscale hotels in central business districts, primary suburban office markets and stable destination markets in the high barrier to entry Northeastern and Mid-Atlantic regions. Our more measured and organic assembly of assets and our high quality, new construction bias will serve us well in the coming years. During the year we continued to execute on our strategy with additional new acquisitions, enhanced performance of our existing portfolio and increased overall market capitalization. We did this with an eye on long-term market leadership, not necessarily short term earnings. We are building a company that creates long term value for its investors. This strategic focus enabled us to provide our shareholders with one of the highest returns of any hotel REIT. In the six years since our 1999 IPO, we have provided one of the sector’s leading returns - a total return of 255.6%. In 2004, our shareholders enjoyed a total return of 20.5% including stock appreciation and dividends. Most importantly, the quality and youth of our platform promises substantial growth in the years ahead. performance At our hotels, performance was strong and showed signs of continuing strength. For the 2004 full year, our portfolio-wide revenue per available room (RevPAR) increased by 18.4% to $65.61, based on a 3.7% increase in occupancy to 67.2% and a 14.2% rise in average daily rate (ADR) to $97.62. In 2004, our Adjusted Funds from Operations (AFFO) increased to $11.57 million from $7.73 million in the prior year. AFFO per share was $0.57 based on 20,255,027 weighted average shares and units outstanding, compared to $0.69 based on 11,137,894 weighted average shares and units outstanding for the previous year. The difference in the weighted average 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 H o s p i t a l i t y T r u s t shares outstanding is the result of a 9,775,000 share follow-on stock offering in October 2003 and an additional offering of 3,900,000 shares in September 2004, which impacted the common shares outstanding and AFFO per share for 2004. Overall we had a very solid year of growth fueled by recovering market fundamentals coupled with our ability to drive higher room rates in the markets where we operate. Our portfolio’s urban exposure and top brands uniquely position HT to take advantage of a sustained period of growth in the industry and the ramp up of our newest assets in the coming two years. capital In 2004, we executed two important capital markets transactions. In the second quarter of the year, a secondary offering of 2.8 million shares was completed to buyout the CNL Hospitality convertible preferred securities in the Company. Although we continue to own a property in a joint venture partnership with CNL, the overhang of the preferred equity was no longer necessary for our balance sheet strategy since our growth puts us in a position to raise less expensive capital from a variety of sources. We continue to maintain a very open dialogue with CNL, and we will look forward to the next mutually beneficial opportunity to work together with that fine company. Additionally, in September of 2004 we completed an offering of 3.9 million shares with net proceeds of $36.3 million. The liquidity from the offering gives us the flexibility to take advantage of the many attractive acquisition opportunities that we believe will be brought to market in 2005. Our ability to respond to these opportunities quickly and creatively is of great importance in securing these acquisitions in what is proving to be a very competitive seller’s market. We are aggressively sourcing opportunities to continue to assemble a portfolio with market leading value, while creating scale with stabilized assets in this very active market. acquisitions In the last year, we purchased 6 hotels directly, acquired 2 hotels with joint venture partners, and developed an impressive pipeline of assets that will become a part of our acquisitions in 2005. We bought two upscale extended stay hotels - both Marriott Residence Inns - in metropolitan Boston and metro Washington, D.C. These more stabilized hotels provide predictable income streams and their recent construction preserves longer term market leadership. We also added two more hotels to our joint venture program: the Sheraton Four Points at Logan Airport in Boston and the Marriott Courtyard near Princeton, New Jersey. The hotels were acquired in preferred equity joint ventures with the original owners, both of whom are well-regarded, high quality developers in their respective regions. Our partners remain in the transactions to take advantage of improving hotel performance and HT’s strong asset management and financing capabilities. At the same time, HT protects its downside risk with preferred equity and a more consistent yield. We have developed strong, programmatic relationships with five partner companies and we continue to seek out additional high quality partners for our joint venture program. Last year we also invested a significant amount of capital in the form of development loans in hotel projects in New York City and other core markets. In addition to being accretive to earnings, development financing secures HT a first right of offer on these cluster assets. As acquisition costs begin to exceed replacement costs in the transactions market, this unique structure affords HT the opportunity to secure attractive acquisitions in hard to source markets. We acquired the Hilton Garden Inn- Gettysburg at the hotel’s opening last summer, and as of this writing, we are purchasing the Hampton Inn Manhattan/Madison Square Garden and continue to finance the recently opened Hilton Garden JFK Airport in New York City. Industry pundits expect 6-8% growth in many of our markets for 2005. A fact even more encouraging considering that 50% of our hotels are less than 24 months old and the median asset age across the portfolio is only three years. Our portfolio is well positioned to benefit from these assets as their performance continues to mature in 2005 and 2006. We will also benefit from the timing of our acquisitions last year, which occurred in the early stages of a major recovery in the hotel industry. We are very optimistic about our prospects for 2005. With strong demand and limited supply growth, we expect to have significant increases in RevPAR, earnings, and FFO per share, which will result in meaningful growth for our stockholders. We believe that the combination of our unique vision, strategic focus and disciplined approach to capital allocation will continue to result in increasing shareholder value for the long term. 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 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 & CEO 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 Phoenix Health Systems, Inc. corporate officers Hasu P. Shah Chairman & CEO Hersha Hospitality Trust Jay H. Shah President & COO Hersha Hospitality Trust Ashish R. Parikh Chief Financial Officer Kiran P. Patel Corporate Secretary David L. Desfor Treasurer Neil H. Shah Executive Vice President ht properties 2004 BOSTON AREA Sheraton Four Points, Boston/Logan Airport Marriott Residence Inn, Framingham CONNECTICUT Hilton Garden Inn, Hartford South/ Glastonbury Holiday Inn Express, Hartford NEW YORK CITY Hampton Inn, Manhattan/Chelsea Doubletree Club, JFK International Airport Holiday Inn Express, Long Island City NEW JERSEY Courtyard by Marriott, Ewing/Princeton Hampton Inn, Linden/Newark Airport Hilton Garden Inn, Edison/Raritan Center PHILADELPHIA AREA Mainstay Suites, King of Prussia/ Valley Forge Sleep Inn, King of Prussia/Valley Forge HERSHEY/HARRISBURG, PA Hampton Inn & Suites, Hershey Holiday Inn Express, Hershey Comfort Inn, West Hanover/Hershey Hilton Garden Inn, Gettysburg Holiday Inn Conference Center, Harrisburg West Holiday Inn Express Hotel and Suites, Harrisburg Hampton Inn, Carlisle CENTRAL PA Hampton Inn, Danville Hampton Inn, Selinsgrove Holiday Inn Express, New Columbia WASHINGTON D.C. METRO/MARYLAND Marriott Residence Inn, Greenbelt Mainstay Suites, Frederick Comfort Inn, Frederick ATLANTA AREA Holiday Inn Express, Duluth Comfort Suites, Duluth Hampton Inn, Peachtree City Hampton Inn, Newnan 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 4 c o r p o r at e i n f o r m at i o n Hersha Hospitality Trust Penn Mutual Towers 510 Walnut Street Philadelphia, PA 19106 Telephone. (215) 238-1046 Facsimile. (215) 238-0157 i n d e p e n d e n t a u d i to r s KPMG LLP Certified Public Accountants 30 North Third Street Harrisburg, Pennsylvania 17108-1190 Telephone (717) 260-4600 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 Telephone: (804) 788-8200 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” H E R S H A hersha hospitality trust penn mutual towers 510 walnut street philadelphia, pa 19106 telephone. 215.238.1046 facsimile. 215.238.0157 www.hersha.com