Hersha Hospitality Trust
Annual Report 2005

Plain-text annual report

8148COV 4/11/06 8:51 AM Page 1 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 HERSHA HOSPITALITY TRUST annual report 2 0 0 5 H E R S H A 5 0 0 2 t r o p e r l a u n n a t s u r t y t i l a t i p s o h a h s r e h 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 total return board of trustees 8148COV 4/20/06 10:29 PM Page 2 400% 338.2 % 300 200 100 211.9 % 201.4 % 180.8 % 161.4 % 129.0 % 118.2 % 116.5 % 94.5 % 73.8 % 0 -10 lasalle hotel properties star w ood hersha hospitality properties m arriott international host m arriott equity inns innkeepers usa winston hotels hilton hotels -9.4 % -0.3 % do w jones s&p 500 14.9 % nasdaq Total Returns from January 26, 1999 through December 31, 2005.Assumes dividend are re-invested at ex-dividend date. Source: FactSet ht portfolio by location major metro 70% secondary 19% destination 11% ht portfolio by hotel brand marriott 43% choice 7% hilton 31% starwood 3% 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 primarily upscale hotels in metropolitan markets. Hersha trades under the symbol HT on the American Stock Exchange. As of February 28, 2006, the Company owned interests in 55 upper upscale, upscale, and midscale hotels located predominantly in the Northeastern United States. Qualification as a REIT under intercontinental 15% independent 1% the Internal Revenue Code ht portfolio by market segment upper upscale 16% upscale 34% midscale 50% enables the Company to distribute income to shareholders without federal income tax liability to the Company. Hasu P. Shah Chairman Hersha Hospitality Trust K.D. Patel Director 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. Jay H. Shah Chief Executive Officer Hersha Hospitality Trust Michael A. Leven Chairman & CEO US Franchise Systems, Inc. Donald J. Landry Former CEO and President Sunburst Hospitality, Inc. Thomas S. Capello Founder & Principal First Capital Equities corporate officers Jay H. Shah Chief Executive Officer Ashish R. Parikh Chief Financial Officer David L. Desfor Treasurer Neil H. Shah Chief Operating Officer Michael R. Gillespie Chief Accounting Officer Kiran P. Patel Corporate Secretary 2 0 0 5 c o r p o r at e i n f o r m at i o n Hersha Hospitality Trust 148 Sheraton Drive New Cumberland, PA 17070 Telephone. (717) 770-2405 Facsimile. (717) 774-7383 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 American Stock Transfer & Trust Company 10150 Mallard Creek Drive, Suite 307 Charlotte, NC 28262 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” 8148EDIT 4/7/06 8:01 AM Page 1 f i n a n c i a l h i g h l i g h t s 2 0 0 5 $ $ $ 12,359 834 7,054 0.37 0.37 0.97 0.72 96,017 61,535 20,436 10,210 Year Ended December 31, 2005 2004 2003 2002 2001 (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 $ $ 85,007 1,377 16,669 0.07 0.07 0.72 0.72 $ $ $ $ 56,144 2,049 11,571 0.13 0.13 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 Partnership Total Shareholder’s Equity $ 455,355 256,521 15,147 164,703 $ 261,021 110,819 16,779 119,792 $ 196,568 71,837 38,971 71,460 $ 101,516 65,341 20,258 11,378 (1) Total revenues consisted primarily of percentage and fixed lease revenues during 2001-2003. The Company terminated eight leases on January 31, 2004 and the remaining six leases as of April 1, 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; adding back our non-cumulative preference from Mystic Partners joint venture based upon our contributed capital; and making adjust- ments 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 $3,407 and $18,758 of hotel assets held for sale at December 31, 2005 and 2004, respectively. (4) Total debt includes $375 and $13,058 of debt or capital leases related to assets held for sale at December 31, 2005 and 2004, respectively. (In thousands, except per share data) hotel operating results Total Revenues (a) Year Ended December 31, 2005 2004 2003 2002 2001 $ 127,195 $ 72,076 $ 38,428 $ 33,384 $ 30,755 Occupancy % Average Daily Rate Revenue Per Available Room 71.32% 106.18 75.73 $ $ $ $ 67.21% 64.80% 63.81% 61.70% 97.62 65.61 $ $ 85.52 55.41 $ $ 81.66 52.11 $ $ 76.91 47.44 (a) Pertains to all hotels owned as of year end including the total results of hotels owned in a joint venture structure. 8148EDIT 4/7/06 8:01 AM Page 2 h e r s h a h o s p i t a l i t y t r u s t Letter to Since our IPO in Hersha Hospitality Trust had a record 2005 posting growth and performance that firmly established our position as the leading owner of upscale lodging real estate in the Northeastern United States. Our portfolio is well balanced with a combination of stabilized properties that provide the Company with current income to fuel our dividend and newly developed hotels that lead to capital appreciation for our shareholders. We continue to see opportunities to expand our portfolio, but remain highly selective to ensure both a strategic fit with our portfolio and enhanced long-term shareholder value. While we continue to look forward to 2006 and beyond, we pause to acknowledge the accomplishment of several important objectives in 2005: • We added 20 hotels with 2,712 high barrier-to-entry markets in New York City; Boston, Massachusetts; Washington, DC; Philadelphia, Pennsylvania and Hartford, Connecticut; • We acquired hotels primarily within the market leading Marriott and Hilton family of brands; • We sold 2 non-core hotels and plan several more dispositions this coming year; • We raised $110 million of equity and debt through the issuance of preferred stock and trust preferred securities at favorable rates; • We arranged a $60 million credit facility with terms that provide flexibility to respond to opportunistic investments in today's fast paced market environment; rooms with an aggregate fair market value of $370 million to our portfolio in our core, • We paid our 27th consecutive quarterly dividend since our IPO in 1999 8148EDIT 4/7/06 8:01 AM Page 3 a n n u a l r e p o r t 2 0 0 5 our Shareholders 1999, Hersha Hospitality Trust has been one of the fastest growing REITs in the country. Marriott Hotel & Spa, Mystic, Connecticut Marriott Hotel & Spa, Mystic, Connecticut 8148EDIT 4/7/06 8:01 AM Page 4 a n n u a l r e p o r t 2 0 0 5 ...remarkable Our portfolio, including joint venture interests, produced remarkable revenue per available room (RevPAR) growth revenue per available room (revPAR) growth. Hilton Garden Inn, Edison, New Jersey 8148EDIT 4/7/06 8:01 AM Page 5 h e r s h a h o s p i t a l i t y t r u s t for a current annual dividend yield of nearly 8%, maintaining our position as the highest dividend yielding Company in the lodging sector; and • We added experienced senior managers to our accounting, acquisitions, and asset management teams to respond to the increasing complexity of public reporting and to bolster our infrastructure as we continue to grow. Since our IPO in 1999, we have been one of the fastest growing REITs in the of 16.2% over last year compared to 8.4% for the industry. country while still producing total returns for shareholders in excess of 200%. And while we believe these are extraordinary results, we see that the Company's best interests and value creation opportunities are still ahead. Moreover, with management's ownership of 15% of the outstanding stock, the second highest ownership position in the Company, the alignment between management and shareholders is the highest in the sector. PERFORMANCE Our position in high barrier-to-entry metropolitan markets and ownership of market leading assets and brands led to strong operating results for the year. Our consolidated hotel portfolio produced remarkable revenue per available room (RevPAR) growth of 16.2% over last year compared to 8.4% for the industry. System-wide, our average daily rate (ADR), the most profitable component of growth, improved 8.5% from last year while occupancy grew by 7.0%. The full portfolio produced gross operating profit margins of 41.4% in 2005, versus 38.5% in 2004. Our earnings before interest, taxes, depreciation and amortization (EBITDA) from consolidated investments grew a strong 62% to $27.7 million. Our EBITDA growth benefited from our strong RevPAR growth, offset somewhat by the newly developed assets, which will post above market performance in the coming years. The newly developed assets require additional spending during their ramp-up period, but deliver strong returns as they reach stabilization. Our adjusted funds from operations (Adjusted FFO) for the full year benefited from our same store sales growth and acquisition-led sales growth. For the full year 2005, our Adjusted FFO increased a strong 26% to $0.72 per diluted share compared to $0.57 for the full year 2004. STRATEGIC DISCIPLINE Hersha's value proposition remains simple: we provide superior investment returns to our investors through appreciation in real estate values and growth in FFO and dividends. We have delivered this performance across the last several years by executing on a focused and disciplined strategic plan - to acquire institutional grade, branded hotels in urban and primary suburban markets with high barriers to new competition in the northeastern United States. This enables our operators to drive the highest rates in our peer set, leading to above market profitability. In order to realize this vision we place great emphasis on our capital structure and an effective balance sheet strategy maintaining appropriate levels of debt and equity. Last year we chose to fix or cap a large portion of our debt to take advantage of historically low interest 8148EDIT 4/7/06 8:01 AM Page 6 h e r s h a h o s p i t a l i t y t r u s t Hersha’s value proposition remains simple: we provide superior investment returns to our investors rates. At the end of 2005, roughly 90% of our debt was fixed or capped and our weighted average cost of debt stood at an attractive 6.98% with a comfortable average debt maturity of 10.5 years. Our liquidity at the 2005 year-end was strong enabling investments in 8 hotels with an aggregate value of $212 million since the beginning of this year, including the Hampton Inn Philadelphia Center City and the Hilton Garden Inn JFK International Airport in New York City. We will continue to take advantage of favorable capital markets to balance our overall leverage and increase our liquidity to fuel our acquisition of accretive and long- term value enhancing hotel investments. SUPERIOR CAPITAL ALLOCATION We have systematically allocated our capital in investments that create near-term and long-term shareholder value through greater profitability and strong real estate value. We continue to focus our acquisitions program on best-in-class assets that achieve higher RevPAR than our peers and consequentially, achieve among the highest margins in our sector. In the early spring, we acquired the 136-room Hampton Inn Herald Square, Manhattan in New York City. This asset enjoyed a market with contracting supply and the highest demand growth in the nation leading to a RevPAR of $160 and an EBITDA margin of 51% in its first year of operation. Later in the summer, we purchased the Brookline, Massachusetts Marriott Courtyard Hotel. Located in the Coolidge Corner commercial district, this 188-room hotel benefits from corporate, medical and leisure demand generators operating at a $122 RevPAR and an EBITDA margin of 53%. Earlier this year we acquired the Marriott Residence Inn in Tysons Corner, Virginia, one of the most dynamic corporate markets in the Washington, DC metro. This 96-room hotel occupies some of the most valuable real estate in the market and performs at a RevPAR of $122 with an operating profit margin of 47%. These are just several examples of our best-in-class 8148EDIT 4/4/06 10:49 AM Page 7 a n n u a l r e p o r t 2 0 0 5 through appreciation in real estate values and growth in FFO and dividends. ...superior investment returns to investors. Courtyard by Marriott, Brookline, Massachusetts 8148EDIT 4/4/06 10:49 AM Page 8 a n n u a l r e p o r t 2 0 0 5 ...profitability Driving continued revenue growth and profitability through aggressive asset management is an through aggressive asset Management. Residence Inn, Framingham, Massachusetts Residence Inn, Framingham, Massachusetts 8148EDIT 4/4/06 10:49 AM Page 9 h e r s h a h o s p i t a l i t y t r u s t acquisitions, which are difficult to duplicate, in outstanding physical condition, and positioned to deliver value to shareholders currently and well into the future. Additionally, we were very active with our value enhancing joint-venture program in 2005. In the competitive acquisitions marketplace, our JV program has provided Hersha with a competitive advantage in sourcing newly developed hotels before they reached the open market. During 2005, we purchased integral component of the Hersha Plan. interests in 12 hotels through our joint-venture program including the Mystic Marriott Hotel and Spa. The benefits of the JV program are clear: Hersha earns an attractive preferred cash return on and of invested equity and participates in value growth, with mitigated downside risk. We offer our joint venture partners development line financing and mezzanine loans to build hotels in our core markets. This financing is accretive to our earnings in the short-term, but more importantly offers Hersha a first right of refusal on purchase of the asset. This pipeline of newly developed acquisitions represents many of our leading assets in the portfolio including, the Hampton Inn Chelsea and the Hampton Inn Madison Square Garden in Manhattan. VALUE-ADDED ASSET MANAGEMENT Driving continued revenue growth and profitability through aggressive asset management is an integral component of the Hersha program. Our position as the leading owner of multi-branded hotels in the northeastern corridor and our unique cluster based ownership strategy creates a rare opportunity to benchmark similar hotels to identify best practices, value enhancement tactics and efficiencies that can be used to better manage our hotels. We will continue our aggressive revenue management programs to optimize top line performance and focus on reducing operating costs and identifying efficiencies in expenses that can lead to higher profitability. The quality of our hotels and the markets in which they are located create high guest expectations and; therefore, we must work very closely with our operators to reduce labor costs and generate savings that do not effect the perceived quality of our hotels or the satisfaction of our guests. Nonetheless, we expect that our desirable assets and the dense, metropolitan markets where they are located, will allow our managers to drive top line revenues leading to meaningful margin growth and value creation for shareholders. ADVANCING THE HERSHA LEGACY In 2005, the Company enacted a management succession plan, which is designed to ensure continuity of the successful strategy that has led to the Company's market outperformance to date. In December, Hasu P. Shah, our Founder, CEO and Chairman of the Board of Trustees, resigned as Chief Executive Officer. At that time, the Board of Trustees appointed Jay H. Shah, previously President and Chief Operating Officer of Hersha, as Chief Executive Officer of the Company. Hasu P. Shah 8148EDIT 4/4/06 10:50 AM Page 10 h e r s h a h o s p i t a l i t y t r u s t In 2006 and 2007, analysts expect that we will be operating in remains as Chairman of the Board. On behalf of the Company and the Board of Trustees, as CEO I would like to thank Hasu P. Shah for his vision, leadership and many years of tireless effort, which have served to guide us in defining our core principles and creating the strong foundation upon which Hersha’s success has been built. We are fortunate to have continued access to his knowledge and visionary business insight as the leader of our Board of Trustees. His involvement will be invaluable as we move Hersha into the next generation of quality management and leadership. Our future is bright. The disciplined and focused strategy of acquiring upper upscale, upscale and midscale hotels in the highest barrier-to-entry markets in the northeastern U.S. has outperformed the sector over the long-term and has provided superior returns to our shareholders since our initial public offering seven years ago. In 2006 and 2007 analysts expect that we will be operating in one of the most favorable operating environments in the history of the lodging industry. Increasing demand with limited supply growth is an ideal environment for revenue and operating profit margin growth - particularly for newer hotels with the most prominent brands in the industry. As you know, the officers, Board of Trustees, and affiliates of the Company own a substantial portion of the Company's outstanding stock. In addition to our commitment and hard work, we offer the strongest alignment of management interests in the sector. We believe in the Hersha legacy and have a very strong outlook for 2006. We look forward to continuing our legacy of creating the highest total return for our shareholders in the years ahead. Hasu P. Shah Chairman Jay H. Shah Chief Executive Officer 8148EDIT 4/7/06 8:01 AM Page 11 a n n u a l r e p o r t 2 0 0 5 one of the most favorable operating environments in the history of the lodging industry. ...operating in one of the most favorable environments. Hilton Garden Inn, Glastonbury, Connecticut 8148EDIT 4/4/06 10:50 AM Page 12 h e r s h a h o s p i t a l i t y t r u s t ht properties 2006 BOSTON METRO AREA PHILADELPHIA METRO AREA Courtyard by Marriott, Brookline Residence Inn, Framingham Courtyard by Marriott, South Boston Holiday Inn Express, South Boston Sheraton Four Points, Boston/Logan Airport CONNECTICUT/RHODE ISLAND Marriott Hotel & Spa, Mystic Residence Inn, Mystic Springhill Suites, New London Courtyard by Marriott, Norwich Marriott Hotel-Hartford Convention Center Hilton City Center, Hartford Hilton Garden Inn, Hartford South/Glastonbury Holiday Inn Express, Hartford Residence Inn, Southington Residence Inn, Danbury Courtyard by Marriott, Warwick 1 NEW YORK CITY Hampton Inn, Manhattan/Chelsea Hampton Inn, Manhattan/Madison Square Garden Hilton Garden Inn, JFK International Airport/NY Metro 1 NEW JERSEY Hilton Garden Inn, Edison/Raritan Center Courtyard by Marriott, Ewing/Princeton Hampton Inn, Linden/Newark Airport Fairfield Inn & Suites, Mt. Laurel 1 DELAWARE Courtyard by Marriott, Wilmington Inn at Wilmington, Wilmington 1) Acquired subsequent to December 31, 2005. 1 1 Hampton Inn, Philadelphia Center City Courtyard by Marriott, Langhorne Holiday Inn Express, Oxford Valley Holiday Inn Express & Suites, King of Prussia Mainstay Suites, Valley Forge Sleep Inn, Valley Forge Holiday Inn Express, Malvern Fairfield Inn & Suites, Bethlehem 1 PENNSYLVANIA Hampton Inn & Suites, Hershey Holiday Inn Express, Hershey Hilton Garden Inn, Gettysburg Holiday Inn Conference Center, Harrisburg West Holiday Inn Express & Suites, Harrisburg Comfort Inn, Harrisburg Hampton Inn, Carlisle Hampton Inn, Danville Hampton Inn, Selinsgrove Holiday Inn Express, New Columbia Courtyard by Marriott, Scranton 1 WASHINGTON D.C. METRO AREA 1 Residence Inn, Tyson’s Corner/Vienna Residence Inn, Greenbelt Fairfield Inn, Laurel Mainstay Suites, Frederick Comfort Inn, Frederick VIRGINIA Residence Inn, Williamsburg Springhill Suites, Williamsburg ATLANTA METRO AREA Hampton Inn, Peachtree Hampton Inn, Newnan Comfort Suites, Duluth Holiday Inn Express, Duluth 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 total return board of trustees 8148COV 4/20/06 10:29 PM Page 2 400% 338.2 % 300 200 100 211.9 % 201.4 % 180.8 % 161.4 % 129.0 % 118.2 % 116.5 % 94.5 % 73.8 % 0 -10 lasalle hotel properties star w ood hersha hospitality properties m arriott international host m arriott equity inns innkeepers usa winston hotels hilton hotels -9.4 % -0.3 % do w jones s&p 500 14.9 % nasdaq Total Returns from January 26, 1999 through December 31, 2005.Assumes dividend are re-invested at ex-dividend date. Source: FactSet ht portfolio by location major metro 70% secondary 19% destination 11% ht portfolio by hotel brand marriott 43% choice 7% hilton 31% starwood 3% 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 primarily upscale hotels in metropolitan markets. Hersha trades under the symbol HT on the American Stock Exchange. As of February 28, 2006, the Company owned interests in 55 upper upscale, upscale, and midscale hotels located predominantly in the Northeastern United States. Qualification as a REIT under intercontinental 15% independent 1% the Internal Revenue Code ht portfolio by market segment upper upscale 16% upscale 34% midscale 50% enables the Company to distribute income to shareholders without federal income tax liability to the Company. Hasu P. Shah Chairman Hersha Hospitality Trust K.D. Patel Director 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. Jay H. Shah Chief Executive Officer Hersha Hospitality Trust Michael A. Leven Chairman & CEO US Franchise Systems, Inc. Donald J. Landry Former CEO and President Sunburst Hospitality, Inc. Thomas S. Capello Founder & Principal First Capital Equities corporate officers Jay H. Shah Chief Executive Officer Ashish R. Parikh Chief Financial Officer David L. Desfor Treasurer Neil H. Shah Chief Operating Officer Michael R. Gillespie Chief Accounting Officer Kiran P. Patel Corporate Secretary 2 0 0 5 c o r p o r at e i n f o r m at i o n Hersha Hospitality Trust 148 Sheraton Drive New Cumberland, PA 17070 Telephone. (717) 770-2405 Facsimile. (717) 774-7383 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 American Stock Transfer & Trust Company 10150 Mallard Creek Drive, Suite 307 Charlotte, NC 28262 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” 8148COV 4/11/06 8:51 AM Page 1 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 HERSHA HOSPITALITY TRUST annual report 2 0 0 5 H E R S H A 5 0 0 2 t r o p e r l a u n n a t s u r t y t i l a t i p s o h a h s r e h 

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