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H E R S H A
www.hersha.com
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hersha hospitality trust
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H E R S H A
Hersha Portfolio by Location
(1)
Hersha Hospitality Trust (HT) is a real estate
investment trust (REIT) focused on the
acquisition and aggressive management of
New York Metro & New Jersey 50%
Boston Metro & New England 19%
Philadelphia Metro & Pennsylvania 17%
Washington, D.C. Metro & Mid-Atlantic 11%
West Coast & Arizona 3%
primarily select service and extended stay
Hersha Portfolio by Market Segment
(1)
hotels in metropolitan markets. Hersha trades
under the symbol HT on the New York Stock
Exchange. As of December 31, 2010, the
Company owned interests in 77 upper
upscale, upscale and midscale hotels located
predominantly 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.
Upscale Transient 27%
Upscale Extended Stay 22%
Midscale 49%
Upper Upscale 2%
Hersha Portfolio by Hotel Brand
(1)
Hilton 33%
Marriott 27%
InterContinental 21%
Hyatt 10%
Other 9%
Hersha Portfolio by Destination
(1)
Major Metro 84%
Secondary 9%
Destination 7%
(1) Based on pro-rata ownership share of 2010 EBITDA.
Management Team
Jay H. Shah
Chief Executive Officer
Neil H. Shah
President and Chief Operating Officer
Ashish R. Parikh
Chief Financial Officer
Michael R. Gillespie
Chief Accounting Officer
David L. Desfor
Treasurer and Corporate Secretary
William J. Walsh
Vice President of Asset Management
Robert C. Hazard III
Vice President of Acquisitions and Development
Bennett Thomas
Vice President of Finance
H E R S H A
Board of Trustees
Hasu P. Shah
Chairman,
Hersha Hospitality Trust
Jay H. Shah
Chief Executive Officer,
Hersha Hospitality Trust
Donald J. Landry
Lead Director, Hersha Hospitality Trust
Former President & CEO, Sunburst Hospitality Inc.
Thomas S. Capello
Founder and Principal,
First Capital Equities
Eduardo S. Elsztain
Chairman,
IRSA Inversiones y Representaciones, S.A.
Thomas J. Hutchison III
Former CEO,
CNL Hotels & Resorts, Inc.
Dianna F. Morgan
Former Senior Vice President,
Walt Disney World Co.
Kiran P. Patel
Partner,
Hersha Development Corp.
John M. Sabin
Executive Vice President,
Phoenix Health Systems, Inc.
Corporate Headquarters
44 Hersha Drive
Harrisburg, PA 17102
Telephone: (717) 236-4400
Facsimile: (717) 774-7383
Independent Auditors
KPMG LLP
Certified Public Accountants
1601 Market Street
Philadelphia, PA 19103
Telephone: (267) 256-7000
Legal Counsel
Hunton & Williams
Riverfront Plaza
951 East Byrd Street
Richmond, VA 23219
Telephone: (804) 788-8200
Philadelphia Executive Offices
Penn Mutual Towers
510 Walnut Street, 9th Floor
Philadelphia, PA 19106
Telephone: (215) 238-1046
Facsimile: (215) 238-0157
Registrar & Stock Transfer Agent
American Stock Transfer & Trust Company
10150 Mallard Creek Drive, Suite 307
Charlotte, NC 28262
Telephone: (800) 829-8432
Common Stock Information
The Common Stock of
Hersha Hospitality Trust is traded on
the New York Stock Exchange under the
Symbol “HT”
53502 Part 2 4c Text:53502 Part 2 4c Text 4/8/11 5:54 PM Page 1
2010 Financial Highlights
(In thousands, except per share data)
Hotel Operating Results
(a)
Total Revenues
Average Daily Rate
Occupancy
Revenue Per Available Room
Year Ended December 31,
2010
2009
2008
2007
2006
$
$
$
373,356
324,473
378,338
366,314
259,502
136.22
69.88%
95.19
126.33
66.66%
84.21
139.48
71.44%
99.64
134.12
73.07%
98.00
117.91
71.75%
84.60
(a) Pertains to all hotels owned as of year end including the total results of hotels owned in a joint venture structure.
(In thousands except per share data)
Hersha Hospitality Trust
Operating Data: (Excluding Impairment Charges) (1)
Total Revenues (Including Discontinued Operations)
Net Income applicable to Common Shareholders
Adjusted EBITDA(2)
Adjusted Funds from Operations (3)
Per Share Data: (Excluding Impairment Charges) (1)
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
AFFO
Distributions to Common Shareholders
Balance Sheet Data: (as of December 31st)
Total Assets
Total Debt
Noncontrolling Interest in Partnership
Total Shareholder’s Equity
2010
2009
2008
2007
2006
Year Ended December 31,
$
$
$
283,597
(18,871
)
108,329
52,067
230,930
(17,382
)
97,350
33,956
265,399
5,829
120,018
61,308
248,813
13,047
117,164
56,001
153,887
298
71,978
29,888
)
(0.14
)
(0.14
0.36
0.20
)
)
(0.35
(0.35
0.57
0.33
0.07
0.07
1.15
0.72
0.22
0.22
1.21
0.72
)
(0.04
)
(0.04
0.97
0.72
1,457,277
694,720
39,304
683,434
1,111,044
745,443
41,859
302,197
1,178,405
743,781
53,520
349,963
1,067,607
663,008
42,845
330,405
968,208
580,542
25,933
331,619
(1) Operating and Per Share Data exclude charges recorded during 2010, 2009 and 2008 relating to impairment losses on development loans, land parcels, investment in unconsolidated
joint ventures, and one wholly owned hotel property.
(2) Adjusted Earnings Before Interest, Taxes, and Depreciation and Amortization (EBITDA) is a non-GAAP financial measure within the meaning of the Securities and Exchange
Commission rules. Our Adjusted EBITDA computation may not be comparable to EBITDA or Adjusted EBITDA reported by other companies that interpret the definition of EBITDA
differently than we do. Management believes Adjusted EBITDA to be a meaningful measure of a REIT's performance because it is widely followed by indusry analysts, lenders and
investors and that it should be considered along with, but not as an alternative to, net income, cash flow, FFO and AFFO as a measure of the company's operating performance.
(3) 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 partnerhips 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 write-offs of deferred financing costs on debt extinguishment, both for consolidated and unconsolidated properties, adding back amortization of
deferred financing costs, adding back non-cash stock expense, adding back impairment charges, adding back FFO attributed to our partners in consolidated joint ventures, 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.
53502 Part 2 4c Text:53502 Part 2 4c Text 4/8/11 5:55 PM Page 2
Hilton Garden Inn,Tribeca,
New York, New York
“Our portfolio, which is highly leveraged to the recovery,
experienced an early and steep resurgence last year.”
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Annual Report 2010
h e r s h a h o s p i t a l i t y t r u s t
Fellow Shareholders:
markets, strengthening operating and market
leverage, and stabilization of our young
In 2010, the country brushed itself off after
portfolio as it consolidates market share.
surviving the most widespread economic
dislocation in living memory. Last year
Our acquisitions program will continue to
certainly marked the beginning of a recovery,
generate
attractive
external
growth
but one that may be slower in its early years
opportunities as we source hotel investments
when compared to past cycles. Despite the
yielding earnings growth that exceeds our
uncertain outlook for the nation at large and
portfolio average. In 2009 and 2010, during
the inconsistency of the broader economic
the depths of the downturn we were one of
recovery, Hersha’s northeastern gateway
the most acquisitive hotel investors in the
market portfolio of high quality, branded
industry. Our decision making and decisive
urban select service hotels began its recovery
action across
the past year
in asset
at a much faster pace. Our portfolio, which is
management, acquisitions and balance sheet
highly leveraged to the recovery, experienced
strategy has earned Hersha the inside track for
an early and steep resurgence last year. The
the upcoming cycle and we are increasingly
urban select service strategy that we helped
encouraged by our outlook.
define years ago, and that we continue to
execute, enabled us to outperform the
remainder of the lodging sector by a wide
Our Hotels Led the Recovery
margin.
Operating fundamentals at our hotels grew
In 2010, Hersha delivered a total return to its
across all metrics in 2010. Revenue per
shareholders of 118% compared to the peer
available room or RevPAR, increased by 13.2%
set median of 47%. As we continue to deliver
year over year. The RevPAR gain consisted of
on our strategy and business travel more fully
an 8% growth in average daily rate or ADR,
recovers, we will realize more of the
and a 330 basis point expansion in occupancy
embedded growth in our portfolio through
to 71%. We specifically focused on driving
improvements in average daily rates in our
occupancy during the downturn which earned
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Annual Report 2010
h e r s h a h o s p i t a l i t y t r u s t
our portfolio the distinction of having industry
peak EBITDA margins from 2008. As ADR
leading occupancy the past two years. With
continues to recover across the cycle, we may
strong occupancy already in place at the
be operating at the best margins in our
beginning of 2010, we were in a strong
history – an attractive outlook on EBITDA
position to regularly test pricing power and
growth at this early point in the recovery.
immediately drive ADR when traction in
pricing re-emerged in the early part of last
year. The heavily rate driven growth resulted
in strong flow-through of incremental revenue
to the bottom
line and solid margin
Continuing to Transition
the Portfolio
performance for the company.
Our market focus served as a great advantage
last year as well. In our portfolio of 77 hotels,
Since ADR
increases were
the
larger
approximately 62% of our room inventory is
component of our earnings growth, while
located in the high demand metropolitan
occupancy played less of a role, the Company
markets of New York City, Boston, Philadelphia
generated favorable earnings growth last year.
and Washington D.C. These markets boast a
We grew our EBITDA margins by 160 basis
wide variety of demand generators that drove
points compared to the peer group median of
strong demand when business travel began to
87 basis points of growth. This resulted in full
recover last year. Historically, these markets
year hotel EBITDA margins of 36.4%
tend to recover early in economic cycles and
compared to the peer median of 24.3%. Our
continue to deliver higher compounded
EBITDA for 2010 compared to a year ago grew
annual earnings growth across an economic
an impressive 18%.
cycle.
Looking
ahead, we
are
particularly
We meaningfully increased our exposure to
encouraged by the fact that in many of our
these markets in 2010, beginning with the
core markets, room rates are still 20% below
purchase of our three Times Square hotels in
the peak rates that we realized in 2008, but
February at historically low pricing. We
we are only two percentage points off of our
purchased a total of 4 hotels in Manhattan
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Hampton Inn, Center City,
Philadelphia, Pennsylvania
“In our portfolio of 77 hotels, approximately 62% of our room
inventory is located in the high demand metropolitan markets
of New York City, Boston, Philadelphia and Washington, D.C.”
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Courtyard by Marriott,
Brookline, Massachusetts
“We continue to pursue urban hotels in high barrier to entry
metropolitan markets in our country’s gateway cities where we can
bring value with unique market knowledge, asset management
expertise and operational synergies through scale.”
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Annual Report 2010
h e r s h a h o s p i t a l i t y t r u s t
last year, all less than 12 months old, for an
a
distinct
and
valuable
operating,
aggregate purchase price of $200 million. In
development, and acquisitions advantage in
Washington, D.C. we purchased a very
the market and our portfolio continues to
strategic asset and added another one in early
benefit from it. Today, we remain focused on
2011 for an aggregate purchase price of
New York, while simultaneously building a
approximately $120 million. Throughout the
similar local market expertise and proprietary
year, we acquired a total of seven hotels and
pipeline in Washington, D.C. and continuing to
one mortgage note all in our core markets,
explore other markets with similar dynamics.
deploying over $330 million in New York City,
Boston, and Washington, D.C. These three
In the coming year, we expect to continue to
markets will continue to grow at a stronger
make selective acquisitions, concentrating in
rate than the broader market and in 2011
markets that we believe will outperform the
these markets will generate over 75% of
very attractive growth rate of our existing
Hersha’s EBITDA. New York, our most
portfolio. We continue to pursue urban hotels
important market, is likely to be the strongest
in high barrier to entry metropolitan markets
performing market in the country and will
in our country’s gateway cities where we can
generate approximately 45% of our EBITDA.
bring value with unique market knowledge,
asset management expertise and operational
Last
year our
consolidated portfolio
synergies through scale.
outperformed our same store portfolio
indicating that the performance of the hotels
We also quickened the pace of divestment of
that we acquired over the past year is
our non-core hotels in 2009 and 2010 with the
outpacing that of the rest of our portfolio.
sale of 5 hotels, which in our view were likely
These results further demonstrate the success
to deliver growth at a rate below our portfolio
in our strategy and support an optimistic
average. We will
continue
to
seek
expectation of portfolio performance across
opportunities for the sale of our non-core
the coming years.
hotels as the demand and market conditions
for acquisitions
in non-urban
locations
Our conviction in New York led us to develop
improves. We believe that the ongoing
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Annual Report 2010
h e r s h a h o s p i t a l i t y t r u s t
recovery and the strengthening of the debt
than 20% of our overall debt matures
markets will create a favorable environment
between now and 2013. The improving
for these sales.
Positioning our Balance Sheet
for Growth
liquidity in the debt markets, improving
fundamentals and our conservative balance
sheet will make refinancing the maturing debt
a manageable task.
At the end of 2010, our total enterprise value
In 2010, we used our market leverage to gain
stood at $2 billion and our total equity
the interest of the equity and debt markets to
capitalization was $1.2 billion. Our financial
generate liquidity to further strengthen our
position today offers us a better advantage
balance sheet and provide us with investment
than at any time in our history. The financial
capital. We raised $440 million in 2010 across
flexibility allows us to move quickly on
three transactions, carefully matching the new
marketed and off-market opportunities in our
capital with strategic acquisitions. This
proprietary pipeline.
enabled us to de-risk the balance sheet and
reduce our Net Debt to Total Enterprise Value
An additional factor in our outperformance in
from 73% to 33%. The additional equity also
2010 and what will prove to be a significant
resulted in a dramatic shift in our Net Debt to
asset as the industry more fully recovers is the
EBITDA ratio reducing it from 9.1 times to
uniquely talented and passionate teams that
6.6 times.
we are privileged to lead. In an early recovery,
management know-how and
technical
In the fall of last year we entered into a $250
expertise makes the difference between taking
million senior revolving credit facility with a
advantage of emerging trends or leaving value
consortium of national money center banks
on the table. The operators that we engage to
that provides the Company with extraordinary
manage our hotels are best in class regional
financial flexibility as we pursue acquisitions
companies that are experts in day to day,
in this market. The facility is at an attractive
multi-unit operations. They have done a
rate and does not mature until 2014. Less
remarkable job through the downturn and
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“Our financial position today offers us a better advantage
than at any time in our history.”
Duane Street Hotel, Tribeca,
New York, New York
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“We completed 2010 very pleased that our strategic
and organically assembled portfolio performed at the
forefront of the industry.”
Hampton Inn,
Washington, D.C.
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Annual Report 2010
h e r s h a h o s p i t a l i t y t r u s t
quickly shifted gears early to take advantage
board of trustees are among the largest
of the recovery in our markets last year.
shareholders of the company and we continue
to add to our ownership positions. We
Our
current asset management and
continue to increase our alignment with
operational strategy is based on taking full
our public shareholders because we are
advantage of the control and responsiveness
encouraged by the company’s investment
of our franchisee managed hotel model as
proposition and believe that it is well
compared to the limited alignment often
positioned to deliver market leading returns.
experienced at brand managed hotels. The
increased responsiveness and limited fixed
We appreciate having you as
fellow
costs in our model allow us to fully realize
shareholders and value the confidence that
market and operating leverage to a degree
you have placed in us. We look forward to
with which most hotel companies cannot
updating you on our progress throughout
compete.
the year.
Jay H. Shah
Chief Executive Officer
Neil H. Shah
Chief Operating Officer
We completed 2010 very pleased that our
strategic and organically assembled portfolio
performed at the forefront of the industry. We
acted decisively during the early recovery to
make changes to our portfolio management
strategy and our balance sheet that will
continue to provide benefits to Hersha across
the next many years. The industry has come
through a trying and volatile time and we
have used this period of dislocation to put
ourselves and our shareholders in better stead
for a promising future.
Collectively, management and members of the
53502 Part 2 4c Text:53502 Part 2 4c Text 4/8/11 5:57 PM Page 12
Hersha Hospitality Properties
(1)
New York Metro Area
Duane Street Hotel, Tribeca
Hotel 373 Fifth Avenue, Midtown
NU Hotel, Brooklyn
Hilton Garden Inn, Tribeca
Hampton Inn, Times Square South
Hampton Inn, Herald Square
Hampton Inn, Chelsea
Hampton Inn, Seaport
Holiday Inn, Wall Street
Holiday Inn Express, Times Square
Holiday Inn Express, Madison Square
Candlewood Suites, Times Square
Sheraton Hotel, JFK International Airport
Hilton Garden Inn, JFK International Airport
Hyatt Summerfield Suites, White Plains
Hampton Inn Brookhaven, Long Island/Farmingville
Holiday Inn Express, Long Island/Hauppauge
Holiday Inn Express, Chester
New Jersey
Courtyard by Marriott, Ewing/Princeton
Hyatt Summerfield Suites, Bridgewater
Hilton Garden Inn, Edison/Raritan Center
Boston Metro Area/Rhode Island
Courtyard by Marriott, Boston/Brookline
Courtyard by Marriott, South Boston
Holiday Inn Express, Cambridge
Holiday Inn Express, South Boston
Residence Inn by Marriott, Framingham
Residence Inn by Marriott, Norwood
Hawthorn Suites, Franklin
Residence Inn by Marriott, North Dartmouth
Comfort Inn, North Dartmouth
Courtyard by Marriott, Warwick, RI
Hampton Inn, Smithfield, RI
Connecticut
Marriott Downtown, Hartford
Hilton Hotel, Hartford
Hilton Garden Inn, Glastonbury
Mystic Marriott Hotel and Spa, Groton
Residence Inn by Marriott, Mystic
SpringHill Suites, Waterford
Residence Inn by Marriott, Southington
Courtyard by Marriott, Norwich
Hampton Inn, West Haven
Residence Inn by Marriott, Danbury
Holiday Inn, Norwich
Philadelphia Metro Area/Delaware
Hampton Inn, Center City Philadelphia
Hyatt Place, King of Prussia/Valley Forge
Holiday Inn Express, King of Prussia/Valley Forge
Courtyard by Marriott, Langhorne/Oxford Valley
Residence Inn by Marriott, Langhorne/Oxford Valley
Holiday Inn Express, Langhorne/Oxford Valley
Holiday Inn Express, Malvern
Fairfield Inn & Suites, Lehigh Valley Airport/Bethlehem
Courtyard by Marriott, Wilmington
Inn at Wilmington, Wilmington
Sheraton, New Castle
Pennsylvania
Hampton Inn & Suites, Hershey
Holiday Inn Express, Hershey
Comfort Inn, West Hanover/Hershey
Residence Inn by Marriott, Carlisle
TownePlace Suites by Marriott, Harrisburg
Holiday Inn Express, Harrisburg
Hampton Inn, Carlisle
Courtyard by Marriott, Scranton
Hampton Inn, Danville
Hampton Inn, Selinsgrove
Washington, D.C. Metro Area
Hampton Inn, Washington, D.C.
Residence Inn by Marriott, Tyson's Corner
Courtyard by Marriott, Alexandria
Residence Inn by Marriott, Greenbelt, MD
Hyatt Summerfield Suites, Gaithersburg, MD
Fairfield Inn, Laurel, MD
Holiday Inn Express, Camp Springs, MD
Virginia/North Carolina
Residence Inn by Marriott, Williamsburg
Springhill Suites, Williamsburg
Hyatt Summerfield Suites, Charlotte, NC
California/Arizona
Hyatt Summerfield Suites, Pleasant Hill/Walnut Creek, CA
Hyatt Summerfield Suites, Pleasanton/Dublin, CA
Hyatt Summerfield Suites, Scottsdale, AZ
(1) HT Properties Listing as of December 31, 2010
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2010 Financial Statements
H E R S H A
HERSHA HOSPITALITY TRUST
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
The Annual Report contains excerpts from our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and
substantially conforms with the version filed with the Securities and Exchange Commission (“SEC”). However, the Form 10-K also
contains additional information. For a free copy of our Form 10-K, please contact:
Investor Relations
Hersha Hospitality Trust
44 Hersha Drive
Harrisburg, PA 17102
Our Form 10-K and other filings with the SEC are also available on our website, www.hersha.com. The most recent certifications by
our chief executive officer and chief financial officer pursuant to the Sarbanes-Oxley Act of 2002 are filed as exhibits to our Form 10-K.
1 HERSHA 2010 ANNUAL REPORT
Item 1.
Business
PART I
All brand names, trademarks and service marks appearing in this report are the property of their respective owners. This report
may contain registered trademarks owned or licensed to companies other than us, including, but not limited to, Candlewood Suites®,
Comfort Inn®, Courtyard® by Marriott®, Fairfield Inn®, Fairfield Inn® by Marriott®, Hampton Inn®, Hawthorne Suites®, Hilton®,
Hilton Garden Inn®, Hilton Hotels®, Holiday Inn®, Holiday Inn Express®, Hyatt Summerfield Suites®, Hyatt Place®, Marriott®,
Marriott Hotels & Resorts®, Residence Inn®, Residence Inn® by Marriott®, Springhill Suites® and Springhill Suites by Marriott®.
None of the owners or licensees of any trademarks contained in this report or any of their respective present and future owners,
subsidiaries, affiliates, officers, directors, agents or employees shall have any liability or responsibility for any financial statements or
other financial information contained in this report.
OVERVIEW
Hersha Hospitality Trust is a self-advised Maryland real estate investment trust that was organized in 1998 and completed its
initial public offering in January of 1999. Our common shares are traded on the New York Stock Exchange under the symbol “HT.” We
invest primarily in institutional grade hotels in central business districts, primary suburban office markets and stable destination and
secondary markets in the Northeastern United States and select markets on the West Coast. Our primary strategy is to continue to acquire
high quality, upscale, mid-scale and extended-stay hotels in metropolitan markets with high barriers to entry in the Northeastern United
States and other markets with similar characteristics. We have operated and intend to continue to operate so as to qualify as a REIT for
federal income tax reporting purposes.
In addition to the direct acquisition of hotels, historically we have made investments in hotels through joint ventures with
strategic partners or through equity contributions, secured mezzanine loans and land leases. Although we may invest in hotels through
secured development loans and land leases, we do not expect to continue to originate any new secured mezzanine loans or enter into any
new land leases as part of our hotel investment strategy.
We seek to identify acquisition candidates located in markets with economic, demographic and supply dynamics favorable to
hotel owners and operators. Through our extensive due diligence process, we select those acquisition targets where we believe selective
capital improvements and intensive management will increase the hotel’s ability to attract key demand segments, enhance hotel
operations and increase long-term value.
As of December 31, 2010, our portfolio consisted of 62 wholly owned limited and full service properties and interests in 15
limited and full service properties owned through joint venture investments. Of the 15 limited and full service properties owned through
our investment in joint ventures, three are consolidated with us for financial reporting purposes. These 77 properties, with a total of
10,262 rooms, are located in Arizona, California, Connecticut, Delaware, District of Columbia, Maryland, Massachusetts, New Jersey,
New York, North Carolina, Pennsylvania, Rhode Island and Virginia and operate under leading brands, such as Candlewood Suites®,
Comfort Inn®, Courtyard® by Marriott®, Fairfield Inn®, Fairfield Inn® by Marriott®, Hampton Inn®, Hawthorne Suites®, Hilton®,
Hilton Garden Inn®, Hilton Hotels®, Holiday Inn®, Holiday Inn Express®, Hyatt Summerfield Suites®, Hyatt Place®, Marriott®,
Marriott Hotels & Resorts®, Residence Inn®, Residence Inn® by Marriott®, Springhill Suites® and Springhill Suites by Marriott®. In
addition, some of our hotels operate as independent boutique hotels.
We are structured as an umbrella partnership REIT, or UPREIT, and we own our hotels and our investments in joint ventures
through our operating partnership, Hersha Hospitality Limited Partnership, for which we serve as general partner. As of December 31,
2010, we owned an approximate 95.8% partnership interest in our operating partnership.
Our wholly-owned hotels are managed by independent, third party qualified management companies, including Hersha
Hospitality Management, L.P. (“HHMLP”), a private management company owned by certain of our affiliated trustees and executive
officers and other unaffiliated third party investors. Third party qualified management companies, including HHMLP, manage the hotels
that we own through joint venture interests. We lease our wholly-owned hotels to 44 New England Management Company (“44 New
England”), our wholly-owned taxable REIT subsidiary (“TRS”). Each of the hotels that we own through a joint venture investment is
leased to another TRS that is owned by the respective joint venture or an entity owned in part by 44 New England.
Our principal executive office is located at 44 Hersha Drive, Harrisburg, Pennsylvania 17102. Our telephone number is (717)
236-4400. Our website address is www.hersha.com. The information found on, or otherwise accessible through, our website is not
incorporated into, and does not form a part of, this report.
2 HERSHA 2010 ANNUAL REPORT
AVAILABLE INFORMATION
We make available free of charge through our website (www.hersha.com) our code of ethics, annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the SEC. The information available on our website is not, and shall not be deemed to be, a part
of this report or incorporated into any other filings we make with the SEC.
INVESTMENT IN HOTEL PROPERTIES
Our operating strategy focuses on increasing hotel performance for our portfolio. The key elements of this strategy are:
· working together with our hotel management companies to increase occupancy levels and revenue per available room, or
"RevPAR", through active property-level management, including intensive marketing efforts to tour groups, corporate and
government extended stay customers and other wholesale customers and expanded yield management programs, which are
calculated to better match room rates to room demand; and
· maximizing our earnings by managing costs and positioning our hotels to capitalize on increased demand in the high
quality, upper-upscale, upscale, mid-scale and extended-stay lodging segment, which we believe can be expected to follow
from improving economic conditions.
As of December 31, 2010, our portfolio included 62 wholly owned limited and full service properties, with a total of 7,686
rooms.
INVESTMENT IN JOINT VENTURES
In addition to the direct acquisition of hotels, we may make investments in hotels through joint ventures with strategic partners.
We have historically identified acquisition candidates located in markets with economic, demographic and supply dynamics favorable to
hotel owners and operators. We are not actively pursuing additional joint venture investments.
As of December 31, 2010, we maintain ownership interests in 15 hotels with a total of 2,576 rooms through joint ventures with
third parties. Of the 15 hotels owned through interests in joint ventures, 3 are consolidated for financial reporting purposes.
DEVELOPMENT LOANS
We take advantage of our relationships with hotel developers, including entities controlled by our officers or affiliated trustees,
to identify development and renovation projects that may be attractive to us. While these developers have borne the risk of construction,
we have historically invested in hotel development projects by providing secured mortgage or mezzanine financing to hotel developers.
In many instances, we maintain a first right of refusal or right of first offer to purchase, at fair market value, the hotel for which we have
provided development loan financing. We are not actively pursuing additional development loan investments.
As of December 31, 2010, we had an investment of $41.7 million in six loans, three loans which are collateralized by operating
hotels and three of which relate to hotel development projects.
ACQUISITIONS
Our primary growth strategy is to selectively acquire high quality branded upper-upscale, upscale, mid-scale and extended-stay
hotels in metropolitan markets with high barriers-to-entry and independent boutique hotels in similar markets. Through our due
diligence process, we select those acquisition targets where we believe selective capital improvements and intensive management will
increase the hotel’s ability to attract key demand segments, enhance hotel operations and increase long-term value. We believe that
current market conditions are creating opportunities to acquire hotels at attractive prices. In executing our disciplined acquisition
program, we will consider acquiring hotels that meet the following additional criteria:
·
nationally-franchised hotels operating under popular brands, such as Marriott Hotels & Resorts, Hilton Hotels, Courtyard by
Marriott, Residence Inn by Marriott, Spring Hill Suites by Marriott, Hilton Garden Inn, Hampton Inn, Sheraton Hotels &
Resorts, DoubleTree, Embassy Suites, Hyatt Summerfield Suites, Hyatt Place, TownePlace Suites and Holiday Inn Express;
3 HERSHA 2010 ANNUAL REPORT
·
·
hotels in locations with significant barriers-to-entry, such as high development costs, limited availability of land and lengthy
entitlement processes;
hotels in our target markets where we can realize operating efficiencies and economies of scale; and
· independent boutique hotels in similar markets
Since our initial public offering in January 1999 and through December 31, 2010, we have acquired, wholly or through joint
ventures, a total of 92 hotels, including 28 hotels acquired from entities controlled by certain of our affiliated trustees and executive
officers. Of the 28 acquisitions from entities controlled by certain of our affiliated trustees and executive officers, 26 were newly
constructed or substantially renovated by these entities prior to our acquisition. Because we do not develop properties, we take advantage
of our relationships with entities that are developing or substantially renovating hotels, including entities controlled by certain of our
affiliated trustees and executive officers, to identify future hotel acquisitions that we believe may be attractive to us. We intend to
continue to acquire hotels from entities controlled by certain of our affiliated trustees and executive officers if approved by a majority of
our independent trustees in accordance with our related party transaction policy.
DISPOSITIONS
We evaluate our hotels on a periodic basis to determine if these hotels continue to satisfy our investment criteria. We may sell
hotels opportunistically based upon management’s forecast and review of the cash flow potential for the hotel and re-deploy the
proceeds into debt reduction or acquisitions of hotels. We utilize several criteria to determine the long-term potential of our hotels.
Hotels are identified for sale based upon management’s forecast of the strength of the hotel’s cash flows and its ability to remain
accretive to our portfolio. Our decision to sell an asset is often predicated upon the size of the hotel, strength of the franchise, property
condition and related costs to renovate the property, strength of market demand generators, projected supply of hotel rooms in the
market, probability of increased valuation and geographic profile of the hotel. All asset sales are comprehensively reviewed by our
Board of Trustees, including our independent trustees. A majority of the independent trustees must approve the terms of all asset sales.
During the time since our initial public offering in 1999 through December 31, 2010, we have sold a total of 23 hotels.
FINANCING
The relative stability of the mid-scale, upscale and upper-upscale segments of the limited service lodging industry allows us to
increase returns to our shareholders through the prudent application of leverage. We may employ a higher amount of leverage at a
specific hotel to achieve a desired return when warranted by that hotel's historical operating performance and may use greater leverage
across our portfolio if and when warranted by prevailing market conditions.
PROPERTY MANAGEMENT
We work closely with our hotel management companies to operate our hotels and increase same hotel performance for our
portfolio. Through our TRS and our investment in joint ventures, we have retained the following management companies to operate our
hotels, as of December 31, 2010:
Wholly Owned
Joint Ventures
Total
Manager
HHMLP
Waterford Hotel Group
LodgeWorks
Jiten Management
Hotels
55
-
-
7
Rooms
6,681
-
1,005
-
Total
62
7,686
Hotels
4
9
-
2
15
Rooms
586
1,708
-
282
Hotels
59
9
7
2
Rooms
7,267
1,708
1,005
282
2,576
77
10,262
Each management agreement provides for a set term and is subject to early termination upon the occurrence of defaults and
certain other events described therein. As required under the REIT qualification rules, all managers, including HHMLP, must qualify as
an “eligible independent contractor” during the term of the management agreements.
4 HERSHA 2010 ANNUAL REPORT
Under the management agreements, the manager generally pays the operating expenses of our hotels. All operating expenses or
other expenses incurred by the manager in performing its authorized duties are reimbursed or borne by our TRS to the extent the
operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. Our managers are
not obligated to advance any of their own funds for operating expenses of a hotel or to incur any liability in connection with operating a
hotel.
For their services, the managers receive a base management fee, and if a hotel meets and exceeds certain thresholds, an
additional incentive management fee. The base management fee for a hotel is due monthly and is generally equal to 3% of the gross
revenues associated with that hotel for the related month.
EMPLOYEES
As of December 31, 2010, we had 28 employees who were principally engaged in managing the affairs of the company
unrelated to property management. Our relations with our employees are satisfactory.
FRANCHISE AGREEMENTS
We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel.
Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs
designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems.
Most of our hotels operate under franchise licenses from national hotel franchisors, including:
Franchisor
Marriott International
Hilton Hotels Corporation
Intercontinental Hotel Group
Hyatt Hotels Corporation
Starwood Hotels
Choice Hotels International
Franchises
Marriott, Residence Inn, Springhill Suites, Courtyard by Marriott, Fairfield Inn, TownePlace Suites
Hilton, Hilton Garden Inn, Hampton Inn, Homewood Suites
Holiday Inn, Holiday Inn Express, Holiday Inn Express & Suites, Candlewood Suites
Hyatt Summerfield Suites, Hawthorn Suites
Sheraton Hotels
Comfort Inn, Comfort Suites, Sleep Inn, Mainstay Suites
We anticipate that most of the hotels in which we invest will be operated pursuant to franchise licenses.
The franchise licenses generally specify certain management, operational, record-keeping, accounting, reporting and marketing
standards and procedures with which the franchisee must comply. The franchise licenses obligate our lessees to comply with the
franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the
types of services and products ancillary to guest room services that may be provided by our lessees, display of signage, and the type,
quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. In general, the franchise
licenses require us to pay the franchisor a fee typically ranging between 6.0% and 9.3% of our hotel revenues.
TAX STATUS
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our
taxable year ended December 31, 1999. As long as we qualify for taxation as a REIT, we generally will not be subject to federal income
tax on the portion of our income that is currently distributed to our shareholders. If we fail to qualify as a REIT in any taxable year and do
not qualify for certain statutory relief provisions, we will be subject to federal income tax (including any applicable alternative minimum
tax) on our taxable income at regular corporate tax rates. Even if we qualify for taxation as a REIT, we will be subject to certain state and
local taxes on our income and property and to federal income and excise taxes on our undistributed income.
We own interests in several TRSs. We may own up to 100% of the stock of a TRS. A TRS is a taxable corporation that may
lease hotels under certain circumstances, provide services to us, and perform activities such as third party management, development,
and other independent business activities. Overall, no more than 25% of the value of our assets may consist of securities of one or more
TRSs. In addition, no more than 25% of our gross income for any year may consist of dividends from one or more TRSs and income
from certain non-real estate related sources.
5 HERSHA 2010 ANNUAL REPORT
A TRS is permitted to lease hotels from us as long as the hotels are operated on behalf of the TRS by a third party manager that
qualifies as an "eligible independent contractor." To qualify for that treatment, the manager must satisfy the following requirements:
1.
2.
3.
4.
such manager is, or is related to a person who is, actively engaged in the trade or business of operating “qualified
lodging facilities” for any person unrelated to us and the TRS;
such manager does not own, directly or indirectly, more than 35% of our shares;
no more than 35% of such manager is owned, directly or indirectly, by one or more persons owning 35% or more of
our shares; and
we do not directly or indirectly derive any income from such manager.
The deductibility of interest paid or accrued by a TRS to us is limited to assure that the TRS is subject to an appropriate level of
corporate taxation. A 100% excise tax is imposed on transactions between a TRS and us or our tenants that are not on an arm’s-length
basis.
FINANCIAL INFORMATION ABOUT SEGMENTS
We are in the business of acquiring equity interests in hotels, and we manage our hotels as individual operating segments that
meet the aggregation criteria and are therefore disclosed as one reportable segment. See “Note 1 Organization and Summary of
Significant Accounting Policies” in Item 8 of this Annual Report on Form 10-K for segment financial information.
6 HERSHA 2010 ANNUAL REPORT
Item 2. Properties
The following table sets forth certain information with respect to the 62 hotels we wholly owned as of December 31, 2010, all of which
are consolidated on the Company’s financial statements:
Location
Year Opened
Number of Rooms
Name
Candlewood Suites
Comfort Inn
Courtyard
Fairfield Inn
Hampton Inn
Hawthorn Suites
Hilton Garden Inn
Holiday Inn
Holiday Inn Express
Times Square, NY
North Dartmouth, MA
Harrisburg, PA
Alexandria, VA
Scranton, PA
Langhorne, PA
Brookline/Boston, MA*
Wilmington, DE
Bethlehem, PA
Laurel, MD
Brookhaven, NY
Chelsea/Manhattan, NY
Hershey, PA
Carlisle, PA
Danville, PA
Selinsgrove, PA
Herald Square, Manhattan, NY
Philadelphia, PA
Seaport, NY
Smithfield, RI
Times Square, NY
West Haven, CT
Washington, DC
Franklin, MA
JFK Airport, NY*
TriBeCa, NY
Edison, NJ*
Glastonbury, CT
Norwich, CT
Wall Street, NY
Hauppauge, NY
Cambridge, MA
Hershey, PA
Malvern, PA
Oxford Valley, PA
Chester, NY
Camp Springs, MD
Times Square, NY
Holiday Inn Express & Suites
Hyatt Place
Independent
Harrisburg, PA
King of Prussia, PA
King of Prussia, PA
Wilmington, DE
Fifth Ave, NY
TriBeCa, NY
Brooklyn, NY
7 HERSHA 2010 ANNUAL REPORT
2009
1986
1998
2006
1996
2002
2003
1999
1997
1999
2002
2003
1999
1997
1998
1996
2005
2001
2006
2008
2009
2009
2005
1999
2005
2009
2003
2003
2006
2010
2001
1997
1997
2004
2004
2006
2008
2009
1997
2004
2010
1999
2007
2008
2008
188
84
81
203
120
118
188
78
103
109
161
144
110
95
72
75
136
250
65
101
184
98
228
100
188
151
132
150
134
113
133
112
85
88
88
80
127
210
77
155
129
71
70
45
93
Name
Residence Inn
Location
Year Opened
Number of Rooms
North Dartmouth, MA
Tysons Corner, VA
Framingham, MA
Greenbelt, MD
Norwood, MA
Langhorne, PA
Carlisle,PA
JFK Airport, NY*
New Castle, DE
White Plains, NY
Bridgewater, NJ
Gaithersburg, MD
Pleasant Hill, CA
Pleasanton, CA
Scottsdale, AZ
Charlotte, NC
Harrisburg, PA
Sheraton Hotel
Summerfield Suites
TownePlace Suites
TOTAL ROOMS
2002
1984
2000
2002
2006
2007
2007
2008
2011
2000
1998
1998
2003
1998
1999
1989
2008
96
96
125
120
96
100
78
150
191
159
128
140
142
128
164
144
107
7,686
*Our interests in these hotels are subject to ground leases which, in most cases, require monthly rental payment as determined
by the applicable ground lease agreement. These ground lease agreements typically have terms of between 75 and 99 years.
The following table sets forth certain information with respect to the 15 hotels we owned through joint ventures with third
parties as of December 31, 2010. Of the 15 properties owned through interests in joint ventures, three are consolidated.
Name
Location
Courtyard
Norwich, CT
South Boston, MA**
Warwick, RI
Ewing/Princeton, NJ
Hartford, CT
Mystic, CT
Hartford, CT
Danbury, CT
Mystic, CT
Southington, CT
Williamsburg, VA
South Boston, MA**
Manhattan, NY
Waterford, CT
Williamsburg, VA
Hilton
Marriott
Residence Inn
Holiday Inn Express
Springhill Suites
TOTAL ROOMS
Year
Opened
Number of
Rooms
HHLP
Ownership
in Asset
HHLP
Preferred
Return
Consolidated/
Unconsolidated
1997
2005
2003
2004
2005
2001
2005
1999
1996
2002
2002
1998
2006
1998
2002
144
164
92
130
393
285
409
78
133
94
108
118
228
80
120
2,576
66.7%
50.0%
66.7%
50.0%
8.5%
N/A
8.5%
11.0%
Unconsolidated
Consolidated
Unconsolidated
Unconsolidated
8.8%
8.5%
Unconsolidated
66.7%
15.0%
66.7%
66.7%
44.7%
75.0%
50.0%
50.0%
66.7%
75.0%
8.5%
8.5%
8.5%
8.5%
8.5%
12.0%
Unconsolidated
Unconsolidated
Unconsolidated
Unconsolidated
Unconsolidated
Consolidated
N/A
N/A
Unconsolidated
Unconsolidated
8.5%
12.0%
Unconsolidated
Consolidated
**The joint ventures interests in these hotels are subject to ground leases which, in most cases, require monthly rental payment
as determined by the applicable ground lease agreements. These ground lease agreements typically have terms of between 75 and 99
years.
8 HERSHA 2010 ANNUAL REPORT
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
MARKET INFORMATION
Our common shares began trading on the New York Stock Exchange on May 5, 2008 under the symbol “HT.” As of March 2,
2011, the last reported closing price per common share on the New York Stock Exchange was $6.44. The following table sets forth the
high and low sales price per common share reported on the New York Stock Exchange as traded and the dividends paid on the common
shares for each of the quarters indicated.
Year Ended December 31, 2010
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year Ended December 31, 2009
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
$
$
$
$
6.69
5.65
5.98
5.41
Low
$
$
$
$
5.05
4.16
4.20
3.14
High
$
$
$
$
3.29
3.43
3.74
3.05
Low
$
$
$
$
2.33
2.16
1.64
1.08
Dividend Per
Common Share
$
$
$
$
0.05
0.05
0.05
0.05
Dividend Per
Common Share
$
$
$
$
0.05
0.05
0.05
0.18
SHAREHOLDER INFORMATION
At December 31, 2010 we had approximately 14,795 holders of record of our common shares. Units of limited partnership
interest in our operating partnership (which are redeemable for common shares on a one for one basis subject to certain limitations) were
held by approximately 41 entities and persons.
9 HERSHA 2010 ANNUAL REPORT
SHARE PERFORMANCE GRAPH
The following graph compares the yearly change in our cumulative total shareholder return on our common shares for the
period beginning December 31, 2005 and ending December 31, 2010, with the yearly changes in the Standard & Poor’s 500 Stock Index
(the S&P 500 Index), the Russell 2000 Index, and the SNL Hotel REIT Index (“Hotel REIT Index”) for the same period, assuming a base
share price of $100.00 for our common shares, the S&P 500 Index, the Russell 2000 Index and the Hotel REIT Index for comparative
purposes. The Hotel REIT Index is comprised of publicly traded REITs which focus on investments in hotel properties. Total
shareholder return equals appreciation in stock price plus dividends paid and assumes that all dividends are reinvested. The performance
graph is not indicative of future investment performance. We do not make or endorse any predictions as to future share price
performance.
Hersha Hospitality Trust
Russell 2000
Hotel REITs Index
S&P 500
$
2005
100.00
100.00
100.00
100.00
$
2006
135.29
118.37
128.62
115.79
$
2007
118.89
116.51
100.10
122.15
2008
2009
$
43.40
77.15
40.04
76.96
$
52.35
98.11
66.32
97.33
$
2010
114.23
124.46
93.27
111.99
Period Ending December 31,
Total Return Performance
150
125
100
75
50
e
u
l
a
V
x
e
d
n
I
25
12/31/2005
12/31/2006
12/31/2007
12/30/2008
12/30/2009
12/30/2010
Hersha
Russell 2000
SNL US REIT Hotel
S&P 500
10 HERSHA 2010 ANNUAL REPORT
Item 6. Selected Financial Data
The following sets forth selected financial and operating data on a historical consolidated basis. The following data should be
read in conjunction with the financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Form 10-K. Where applicable, the operating results of certain real estate assets
which have been sold or otherwise qualify as held for disposition are included in discontinued operations for all periods presented.
HERSHA HOSPITALITY TRUST
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Revenue:
Hotel Operating Revenues
Interest Income From Development Loans
Other Revenues
Total Revenue
Operating Expenses:
Hotel Operating Expenses
Hotel Ground Rent
Real Estate and Personal Property Taxes and Property Insurance
General and Administrative
Stock Based Compensation
Acquisition and Terminated Transaction Costs
Loss from Impairment of Assets
Depreciation and Amortization
Total Operating Expenses
Operating Income
Interest Income
Interest Expense
Other Expense
Loss on Debt Extinguishment
(Loss) Income before Income (Loss) from
Unconsolidated Joint Venture Investments
and Discontinued Operations
(Loss) Income from Unconsolidated Joint Ventures
Gain from Remeasurement of
Investment in Unconsolidated Joint Ventures
Net Income (Loss) from Unconsolidated Joint Venture
(Loss) Income from Continuing Operations
Discontinued Operations:
Gain on Disposition of Hotel Properties
Income from Discontinued Operations
Income from Discontinued Operations
Net (Loss) Income
Loss (Income) Allocated to Noncontrolling Interests
Preferred Distributions
Net (Loss) Income applicable to Common Shareholders
Basic (Loss) Income from Continuing Operations applicable to
Common Shareholders
Diluted (Loss) Income from Continuing Operations applicable to
Common Shareholders (1)
Dividends declared per Common Share
2010
2009
2008
2007
2006
$ 277,708
4,686
381
282,775
$ 212,352
7,411
1,981
221,744
$ 236,247
7,890
3,984
248,121
$ 215,110
6,046
3,518
224,674
$ 117,572
2,487
1,860
121,919
158,717
1,374
19,335
10,263
6,649
4,827
2,433
52,012
255,610
27,165
169
45,868
464
932
124,294
1,166
14,060
5,891
2,143
328
39,111
43,187
230,180
(8,436)
208
45,183
165
-
133,762
1,040
12,559
7,208
1,502
380
21,004
38,989
216,444
31,677
306
43,306
129
1,552
119,559
856
10,902
7,094
852
149
-
31,974
171,386
53,288
686
41,980
83
-
65,700
804
5,516
5,527
293
316
-
16,737
94,893
27,026
1,182
24,183
102
1,485
(19,930)
(1,751)
(53,576)
(7,190)
(13,004)
(517)
11,911
3,476
2,438
1,799
4,008
2,257
(17,673)
-
(7,190)
(60,766)
-
(517)
(13,521)
-
3,476
15,387
-
1,799
4,237
347
124
471
(17,202)
845
(4,800)
1,869
439
2,308
(58,458)
8,597
(4,800)
2,888
204
3,092
(10,429)
1,621
(4,800)
4,248
537
4,785
20,172
(2,325)
(4,800)
784
783
1,567
5,804
(706)
(4,800)
$ (21,157)
$ (54,661)
$ (13,608)
$ 13,047
$ 298
$
(0.16)
$
(1.08)
$ (0.31)
$ 0.20
$ (0.05)
(0.16)
0.20
(1.08)
0.33
(0.31)
0.72
0.20
0.72
(0.05)
0.72
11 HERSHA 2010 ANNUAL REPORT
Balance Sheet Data
Net investment in hotel properties
Assets Held for Sale
Noncontrolling Interests Common Units
Redeemable Noncontrolling Interest
Noncontrolling Interests Consolidated Joint Ventures
Shareholder's equity
Total assets
Total debt
Debt related to Assets Held for Sale
Other Data
Funds from Operations (2)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Weighted average shares outstanding
Basic
Diluted (1)
2010
2009
2008
2007
2006
$
1,245,851
-
19,410
19,894
474
683,434
1,457,277
694,720
-
$
938,954
21,073
27,126
14,733
267
302,197
1,111,044
724,551
20,892
$ 982,082
-
34,781
18,739
1,854
349,963
1,178,405
743,781
-
$ 893,297
-
42,845
-
1,908
330,405
1,067,607
663,008
-
$ 807,784
-
25,933
-
3,092
331,619
968,208
580,542
-
$ 31,373
$ 46,246
$ (314,358)
$ 322,304
$ (15,912)
$ 21,532
$ (8,921)
$ (16,904)
$ 31,441
$ 53,894
$ (114,870)
$ 64,346
$ 49,823
$ 59,300
$ (46,027)
$ (11,262)
$ 25,936
$ 27,217
$ (413,881)
$ 388,200
134,370,172
134,370,172
51,027,742
51,027,742
45,184,127
45,184,127
40,718,724
40,718,724
27,118,264
27,118,264
(1)
(2)
Income allocated to noncontrolling interest in HHLP has been excluded from the numerator and Partnership units have
been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including
these amounts in the numerator and denominator would have no impact..
See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds From
Operations” for an explanation of FFO, why we believe FFO is a meaningful measure of our operating performance and a
reconciliation of FFO to net income calculated in accordance with GAAP.
12 HERSHA 2010 ANNUAL REPORT
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements appearing in this Item 7 are forward-looking statements within the meaning of the federal securities
laws. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. See
“CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS” for additional information regarding our forward-looking
statements.
BACKGROUND
As of December 31, 2010, we owned interests in 77 hotels, many of which are located in clusters around major markets in the
Northeastern Corridor, including 62 wholly-owned hotels and interests in 15 hotels owned through consolidated and unconsolidated
joint ventures. We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December
31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to
a third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of December
31, 2010, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned
TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified
independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS
structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from,
and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.
OVERVIEW
We believe 2010 was a transformative year for the lodging industry generally, lodging fundamentals in the markets on which
we focus, and for our Company in particular. In mid-2008, U.S. lodging demand started to decline as a result of the economic recession,
which led industry RevPAR to decline. Throughout 2009, the decrease in lodging demand accelerated, resulting in one of the largest
RevPAR declines ever in the modern lodging industry. The economic recession generally, and turmoil in the financial markets in
particular, caused credit to significantly tighten, making it more difficult for hotel developers to obtain financing for development
projects or for hotels with limited operating history. Early in 2010, fundamentals in the U.S. lodging industry began showing signs of
improvement with demand for rooms increasing in many major markets, as general economic indicators began to experience
improvement. As a result, the lodging industry experienced increases in occupancy in the early and middle parts of 2010, and with
increasing demand, rates began to rebound in the middle and latter parts of the year, particularly in major urban markets such as New
York, Boston and Washington, D.C. These positive trends continued, strengthened and expanded to other markets during the latter part
of the year, which we expect positions the lodging industry for continued growth in ADR and RevPAR during 2011.
During this same period, we took steps to better position our portfolio and our Company to take advantage of the anticipated
economic recovery. During 2010, we accessed the equity capital markets three times, raising a total of approximately $421.7 million in
net proceeds from sales of common shares. In late 2010, we refinanced our primary credit facility with a syndicate of eleven major
financial institutions, expanding the facility from $135 million to $250 million of total capacity and extending the maturity into late
2013. These improvements to our overall capitalization improved our financial stability and flexibility coming out of the economic
downturn.
We simultaneously repositioned our portfolio to focus more on high barrier to entry and major urban markets -- New York and
Washington D.C. in particular. In the latter part of 2009 and throughout 2010, we acquired nine hotels -- including five in New York
and one in Washington, D.C., bringing our New York City portfolio to 13 hotels comprising a substantial portion of our overall portfolio
performance. Already in 2011, we have committed to acquiring a hotel on Capitol Hill in Washington, D.C. During 2010, we also
began renovations programs at nine properties, accelerating those projects in our core markets in an effort to take advantage of what we
expect to be stronger market conditions and operating fundamentals in the middle to late part of 2011. These efforts to reposition our
portfolio are already showing results. As shown on the tables below under “Summary of Operating Results,” in 2010, we grew
occupancy by 3.3 percentage points, ADR by 7.9% and RevPAR by 13.2% across our consolidated hotels. Increases were similar, but
less substantial, across our joint venture portfolio.
As we enter 2011, we believe the improvements in our equity and debt capitalization and repositioning of our portfolio better
enables us to capitalize on further improvements in lodging fundamentals. During 2011, we expect continued improvements in ADR,
RevPAR and operating margins, led by hotels in our core urban markets of New York, Boston and Washington. We will continue to
seek acquisition opportunities in urban centers, central business districts, primary suburban markets and stable secondary markets. In
addition, we are looking, and will continue to look, for attractive opportunities to dispose of properties in tertiary markets at favorable
prices, potentially redeploying that capital in our focus markets. We do not expect to actively pursue acquisitions made through joint
13 HERSHA 2010 ANNUAL REPORT
ventures; however, we may seek to buyout, or sell our joint venture interest to, select existing joint venture partners. We do not expect to
actively pursue additional development loans or land leases. While property joint ventures, development loans and land leases played an
important role in our growth over the last five years, we do not expect them to play the same role in our near-term future.
Although we are planning for continued stabilization and improvement in consumer and commercial spending and lodging
demand during 2011, the manner in which the economy will recover is not predictable, and certain core economic metrics, including
unemployment, are not rebounding as quickly as many had hoped. In addition, the market for hotel level financing for new hotels is not
recovering as quickly as the economy or broader financial markets. As a result, there can be no assurances that we will be able to grow
hotel revenues, occupancy, ADR or RevPAR at our properties as we hope. Further, we cannot assure that we will not experience
defaults under our development loans. The lack of financing for our borrowers and potential buyers may result in borrower defaults or
prevent borrowers or us from disposing of properties held for sale. Factors that might contribute to less than anticipated performance
include those described under the heading “Item 1A. Risk Factors” and other documents that we may file with the SEC in the future. We
will continue to cautiously monitor recovery in lodging demand and rates, our third party hotel managers, our remaining portfolio of
hotel development loans and our performance generally.
SUMMARY OF OPERATING RESULTS
The following table outlines operating results for the Company’s portfolio of wholly owned hotels and those owned through
joint venture interests that are consolidated in our financial statements for the three years ended December 31, 2010, 2009 and 2008:
CONSOLIDATED HOTELS:
Rooms Available
Rooms Occupied
Occupancy
Average Daily Rate (ADR)
Revenue Per Available Room (RevPAR)
Year Ended
2010
Year Ended
2009
2,747,788
1,941,862
70.67%
136.27
96.30
$
$
2,379,919
1,603,264
67.37%
126.23
85.04
$
$
2010
vs. 2009
% Variance
Year Ended
2008
2009
vs. 2008
% Variance
15.5%
21.1%
3.3%
7.9%
13.2%
2,242,629
1,609,950
71.79%
140.51
100.87
$
$
6.1%
-0.4%
-4.4%
-10.2%
-15.7%
-10.5%
-10.1%
Room Revenues
Hotel Operating Revenues
$
$
264,609,257
277,707,839
$
$
202,386,640
212,352,643
30.7%
30.8%
$
$
226,219,989
236,246,808
The following table outlines operating results for the three years ended December 31, 2010, 2009 and 2008 for hotels we own
through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including
our interest and the interests of our joint venture partners and other noncontrolling interest holders. This table excludes the operations of
the Hilton Garden Inn, Glastonbury, CT and Homewood Suites, Glastonbury, CT. On January 1, 2010, we acquired our joint venture
partner’s membership interest in PRA Glastonbury, LLC, the owner of the Hilton Garden Inn, Glastonbury, CT, and this hotel became
one of our wholly-owned hotels. As a result of this transaction, our joint venture partner acquired our membership interest in PRA
Suites at Glastonbury, LLC, the owner of the Homewood Suites, Glastonbury, CT. In addition, this table excludes the operations of the
Courtyard South Boston, MA. On April 13, 2010, this hotel became one of our consolidated joint venture properties due to our
acquisition of the mortgage note secured by Courtyard South Boston, MA. The acquisition of this mortgage note caused us to be the
primary beneficiary of the joint venture that owns the Courtyard South Boston, MA.
14 HERSHA 2010 ANNUAL REPORT
UNCONSOLIDATED JOINT VENTURES:
Rooms Available
Rooms Occupied
Occupancy
Average Daily Rate (ADR)
Revenue Per Available Room (RevPAR)
Room Revenues
Total Revenues
Year Ended
2010
Year Ended
2009
797,160
537,686
67.45%
136.76
92.24
$
$
797,157
510,739
64.07%
134.61
86.24
$
$
$
$
73,532,283
94,826,036
$
$
68,750,708
90,020,445
2010
vs. 2009
% Variance
0.0%
5.3%
3.4%
1.6%
7.0%
7.0%
5.3%
Year Ended
2008
963,892
677,485
70.29%
146.91
103.26
$
$
$
$
99,530,317
127,874,193
2009
vs. 2008
% Variance
-17.3%
-24.6%
-6.2%
-8.4%
-16.5%
-30.9%
-29.6%
RevPAR for the year ended December 31, 2010 increased 13.2% for our consolidated hotels and increased 7.0% for our
unconsolidated hotels when compared to the same period in 2009. This represents a growth trend in RevPAR experienced during the
year ended December 31, 2010 over the same period in 2009. This growth trend in RevPAR is primarily due to improving economic
conditions in 2010 and the acquisition of hotel properties in 2010 that are accretive to RevPAR.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2010 TO DECEMBER 31, 2009
(dollars in thousands, except per share data)
Revenue
Our total revenues for the year ended December 31, 2010 consisted of hotel operating revenues, interest income from our
development loan program, and other revenues. Hotel operating revenues are recorded for wholly owned hotels that are leased to our
wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating
revenues increased $65,356, or 30.8%, from $212,352 for the year ended December 31, 2009 to $277,708 for the same period in
2010. This increase in hotel operating revenues was primarily attributable to the acquisitions consummated in 2010 and 2009.
We acquired interests in the following six consolidated hotels which contributed the following operating revenues for the year
ended December 31, 2010:
Brand
Location
Acquisition Date
Rooms
Hotel
Operating
Revenues
Hilton Garden Inn
Hampton Inn
Candlewood Suites
Holiday Inn Express
Holiday Inn
Hampton Inn
Glastonbury, CT
Times Square, NY
Times Square, NY
Times Square, NY
Wall Street, NY
Washington, DC
January 1, 2010
February 9, 2010
February 9, 2010
February 9, 2010
May 7, 2010
September 1, 2010
150
184
188
210
113
228
1,073
5,046
11,188
9,215
12,278
4,496
3,923
$ 46,146
Revenues for all hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating
revenues for the year ended December 31, 2010 included revenues for a full year related to two hotels that were purchased during the
year ended December 31, 2009. Hotels acquired during the year ended December 31, 2009 would have a full year of results included in
the year ended December 31, 2010 but not necessarily a full year of results during the same period in 2009. We acquired interests in the
following two consolidated hotels during the year ended December 31, 2009:
15 HERSHA 2010 ANNUAL REPORT
Brand
Location
Acquisition Date
Rooms
2010
Hotel
Operating
Revenues
2009
Hotel
Operating
Revenues
Hilton Garden Inn
Hampton Inn & Suites
TriBeCa, New York, NY
West Haven, CT
November 4, 2009
May 1, 2009 * 151
98
249
$ 11,675
2,746
$ 14,421
$ 6,761
374
$ 7,135
*We acquired a 49% interest in the entity that owns the property on May 1, 2009 and acquired the remaining 51% interest on
June 30, 2009.
In addition, our existing portfolio experienced improvement in ADR and occupancy during the year ended December 31, 2010
when compared to the same period in 2009. Occupancy in our consolidated hotels increased 340 basis points from approximately 67.4%
during the year ended December 31, 2009 to approximately 70.7% for the same period in 2010. ADR improved 7.9%, increasing from
$126.23 for the year ended December 31, 2009 to $136.27 during the same period in 2010. These improvements were due to
improvements in lodging trends in the markets in which we operate.
We have invested in hotel development projects by providing mortgage or mezzanine financing to hotel developers and through
the acquisition of land that is then leased to hotel developers. Interest income is earned on our development loans at rates ranging
between 10.0% and 20.0%. Interest income from development loans receivable was $4,686 for the year ended December 31, 2010
compared to $7,411 for the same period in 2009. The decrease in interest income from development loans receivable was due to a
decrease in the average balance of development loans receivable outstanding in 2010 due primarily to the settlement of $7.0 million in
development loans receivable which was converted into equity in a hotel acquisition. Also contributing to the decrease in interest
income from development loans was the impairment of certain loans in 2009.
As hotel developers are engaged in constructing new hotels or renovating existing hotels the hotel properties are typically not
generating revenue. It is common for the developers to require construction type loans to finance the projects whereby interest incurred
on the loan is not paid currently; rather it is added to the principal borrowed and repaid at maturity. On June 30, 2009, we amended four
development loans, with an aggregate principal balance of $40,000 prior to the amendment, to allow the borrower to elect, quarterly, to
pay accrued interest in-kind by adding the accrued interest to the principal balance of the loan. As a result, $5,653 in accrued interest on
these loans was added to principal since July 1, 2009.
Of the $41,653 in development loans receivable outstanding as of December 31, 2010, $8,000, or 19.2%, is invested in hotels
that are currently operating and generating revenue and $33,653, or 80.8%, is invested in hotel construction projects with significant
progress made toward completion.
Other revenue consists primarily of fees earned for asset management services provided to properties owned by certain of our
unconsolidated joint ventures and land lease revenue. These fees are earned as a percentage of the revenues of the unconsolidated joint
ventures’ hotels. Other revenues decreased from $1,981 for the year ended December 31, 2009 to $381 during the year ended December
31, 2010 primarily due to the exit of our two remaining land leases. Because of the economic challenges facing hotel development
projects, especially those that are in the early phase of development, we decided during the quarter ended September 30, 2009 to exit our
two remaining land leases and dispose of the related land parcels.
Expenses
Total hotel operating expenses increased 27.7% to approximately $158,717 for the year ended December 31, 2010 from
$124,294 for the year ended December 31, 2009. Consistent with the increase in hotel operating revenues, hotel operating expenses
increased primarily due to the acquisitions consummated since the comparable period in 2009, as mentioned above. The acquisitions
also resulted in an increase in depreciation and amortization from $43,187 for the year ended December 31, 2009 to $52,012 for the year
ended December 31, 2010. Similarly, real estate and personal property tax and property insurance increased $5,275, or 37.5%, in the
year ended December 31, 2010 when compared to the same period in 2009 due to numerous New York acquisitions which carry a high
tax rate along with a general overall increase in tax assessments and tax rates as the economy improves.
General and administrative expense increased by approximately $4,372 from $5,891 in 2009 to $10,263 in 2010. Discretionary
incentive compensation related to the 2009 fiscal year was determined subsequent to December 31, 2009. As result, incentive
compensation of $1,256 earned for the year ended December 31, 2009 was recorded in 2010. Incentive compensation
16 HERSHA 2010 ANNUAL REPORT
of $1,720 earned for the year ended December 31, 2010 was accrued in the fourth quarter of 2010. In addition, compensation expense
increased in 2010 due to increases in employee headcount and increases in base compensation.
Non-cash stock based compensation expense increased $4,506 when comparing the year ended December 31, 2010 to the same
period in 2009. In August of 2009, our Compensation Committee established a performance share award program which resulted in
$725 in compensation expense during the year ended December 31, 2010 and $140 in compensation expense during the same period in
2009. In April of 2010, our Compensation Committee adopted an annual long term equity incentive program and a multi-year long term
equity incentive program. Non-cash compensation expense of $3,397 was recorded in 2010 related to these two programs. Please refer
to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our stock based
compensation.
Included in operating expenses for the year ended December 31, 2009 was an impairment charge of $17,703 recorded on two
parcels of land and a hotel. During the year ended December 31, 2010 we determined an additional impairment charge of $2,433 was
incurred on one of these parcels of land and the hotel as conditions in these specific markets worsened. Also during the year ended
December 31, 2009, we determined that two of our development loans were permanently impaired and, accordingly, we recorded an
impairment charge for the remaining principal on these loans in the aggregate amount of $21,408.
Acquisition and terminated transaction costs increased $4,499 from $328 for the year ended December 31, 2009 to $4,827 for
the year ended December 31, 2010 due to acquisitions consummated during period ended December 31, 2010. Of these costs incurred,
$3,269 related to our acquisition of three hotels acquired in the vicinity of Times Square in New York, NY, $21 related to our acquisition
of the Hilton Garden Inn, Glastonbury, CT, $174 related to our acquisition of the Holiday Inn Wall Street in New York, NY, and $1,196
related to our acquisition of the Hampton Inn, Washington, D.C. The remaining costs related to transactions that were terminated during
the year. Two acquisitions were consummated during the same period in 2009. Acquisition costs typically consist of transfer taxes, legal
fees and other costs associated with acquiring a hotel property.
Unconsolidated Joint Venture Investments
Our interest in the income from unconsolidated joint ventures was $2,257 for the year ended December 31, 2010 compared to a
loss of $7,190 for the same period in 2009. Our income from unconsolidated joint ventures for the period ended December 31, 2010 was
due, in part, to a $1,818 gain recognized from the remeasurement of our interest in PRA Glastonbury, LLC the owner of the Hilton
Garden Inn, Glastonbury, CT, upon our acquisition of our joint venture partner’s 52.0% interest in the venture. In addition, we recorded
a $2,190 gain recognized from the remeasurement of our interest in Hiren Boston, LLC, the owner of the Courtyard South Boston, MA.
Included in the loss from unconsolidated joint ventures for the year ended December 31, 2009 was an impairment charge of
$4,541. Please refer to “Note 3 – Investment in Unconsolidated Joint Ventures” of the notes to the consolidated financial statements for
the year ended December 31, 2010 and 2009 for more information about the remeasurement of our interests in PRA Glastonbury, LLC
and Hiren Boston, LLC. RevPAR for our unconsolidated hotel portfolio increased 7.0% during the year ended December 31, 2010 when
compared to the year ended December 31, 2009, which contributed to the increase in income from unconsolidated joint ventures.
Net Income/Loss
Net loss applicable to common shareholders for the year ended December 31, 2010 was $21,157 compared to net loss
applicable to common shareholders of $54,661 for the same period in 2009. This improvement was driven primarily by an increase in
operating income. Operating income for the year ended December 31, 2010 was $27,165 compared to operating loss of $8,436 during
the same period in 2009. We recorded a gain of $1,869 on the disposition of hotel properties during the year ended December 31, 2009,
compared to a $347 gain during the same period in 2010.
Interest expense increased $685 from $45,183 for the year ended December 31, 2009 to $45,868 for the year ended December
31, 2010. Overall, interest expense has remained consistent with our steady debt balance throughout 2010. We incurred $932 of loss on
the extinguishment of $54,684 of mortgage indebtedness and notes payable. Proceeds from equity offerings consummated during the
year were used to extinguish this debt. The loss on the extinguishment of debt related primarily to write-off of remaining unamortized
deferred financing costs at the time of the extinguishment.
17 HERSHA 2010 ANNUAL REPORT
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2009 TO DECEMBER 31, 2008
(dollars in thousands, except per share data)
Revenue
Our total revenues for the year ended December 31, 2009 consisted of hotel operating revenues, interest income from our
development loan program, and other revenue. Hotel operating revenues are recorded for wholly owned hotels that are leased to our
wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating
revenues decreased $23,895, or 10.1%, from $236,247 for the year ended December 31, 2008 to $212,352 for the same period in
2009. This decrease resulted from decreases in both ADR and occupancy. ADR decreased 10.2% from $140.51 for year ended
December 31, 2008 to $126.23 during the same period in 2009. Our occupancy rate decreased 439 basis points from approximately
71.8% during the year ended December 31, 2008 to approximately 67.4% for the same period in 2009.
The decrease in hotel operating revenues was only partially offset by the additional hotel operating revenues attributed to the
following acquisitions consummated during the year ended December 31, 2009:
Brand
Location
Acquisition Date
Rooms
2009
Hotel
Operating
Revenues
Hilton Garden Inn
Hampton Inn & Suites
TriBeCa, New York, NY
West Haven, CT
May 1, 2009 *
November 4, 2009
151
98
$ 6,761
374
249
$ 7,135
*We acquired a 49% interest in the entity that owns the property on May 1, 2009 and acquired the remaining 51% interest on
June 30, 2009.
Revenues for both hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating
revenues for the year ended December 31, 2009 included revenues for a full year related to six hotels that were purchased during the year
ended December 31, 2008. Hotels acquired during the year ended December 31, 2008 would have a full year of results included in the
year ended December 31, 2009 but not necessarily a full year of results during the same period in 2008.
We acquired interests in the following six consolidated hotels during the year ended December 31, 2008:
Brand
Location
Duane Street Hotel (TriBeCa) New York, NY
Harrisburg, PA
TownePlace Suites
JFK Airport, Jamaica, NY
Sheraton Hotel
Camp Springs, MD
Holiday Inn Express
Brooklyn, NY
nu Hotel
Smithfield, RI
Hampton Inn & Suites
Acquisition
Date
1/4/2008
5/8/2008
6/13/2008
6/26/2008
7/7/2008*
8/1/2008
Rooms
45
107
150
127
93
101
2009
Hotel
Operating
Revenue
$ 2,836
2,440
7,869
2,587
4,488
2,033
2008
Hotel
Operating
Revenue
$ 3,688
1,755
3,931
1,313
2,314
848
623
$ 22,253
$ 13,849
* The property was purchased on January 14, 2008 but did not open for business until July 7, 2008.
We have invested in hotel development projects by providing mortgage or mezzanine financing to hotel developers and through
the acquisition of land that is then leased to hotel developers. Interest income is earned on our development loans at rates ranging
between 10.0% and 20.0%. Interest income from development loans receivable was $7,411 for the year ended December 31, 2009
compared to $7,890 for the same period in 2008. The decrease in interest income from development loans receivable was due to a
decrease in the average balance of development loans receivable outstanding in 2009 and cessation of interest accrual on certain loans
that were deemed to be impaired, which resulted in a $98, or 32.0% decrease in interest income.
18 HERSHA 2010 ANNUAL REPORT
On June 30, 2009, we amended four development loans, with an aggregate principal balance of $40,000 prior to the
amendment, to allow the borrower to elect, quarterly, to pay accrued interest in-kind by adding the accrued interest to the principal
balance of the loan. As a result, $4,502 in accrued interest on these loans was added to principal for the year ended December 31, 2009.
We monitor our development loan portfolio for indications of impairment considering the current economic environment, the
borrowers’ access to other sources of financing to complete their hotel development projects, and the borrowers ability to repay amounts
owed to us through the operation or eventual sale of the properties being financed by our loans receivable. Based on our reviews, we
determined that our development loans to Brisam East 52, LLC and Brisam Greenwich, LLC, which were secured by the equity interest
in each entity, were permanently impaired as of December 31, 2009. We ceased accruing interest on these two loans effective July 1,
2009.
During the year ended December 31, 2008, we recorded an impairment charge for one of our development loans to an
unaffiliated developer for the remaining principal of $18,748, which is net of unamortized discount and loan fees in the amount of
$1,252. The loan was deemed to be fully impaired when the developer was unable to obtain additional construction financing to
complete the project and consequently defaulted under his senior mortgage loan. The project, located in Brooklyn, NY, was to include
hotel, residential and retail components, however, the land acquisition financing and our loan were not sufficient to fund the ongoing
construction. A receivable for uncollected interest income of $569, which is net of unrecognized deferred loan fees of $143, was also
recorded as an impairment charge. In connection with the development loan, we also hold an option to acquire an interest in the hotel
upon completion of the development project. This option was valued at $1,687 at its inception and is deemed to be fully impaired. The
total impairment charge recorded during the year ended December 31, 2008 related to this development loan and option was $21,004.
Of the $46,094 in development loans receivable outstanding as of December 31, 2009, $15,000, or 32.5%, is invested in hotels
that are currently operating and generating revenue and $31,094, or 67.5%, is invested in hotel construction projects with significant
progress made toward completion. We have written off and no longer reflect any value for development loans to hotel development
projects that are in the early phase of development where development has been limited to land acquisition and site preparation.
Other revenue consists primarily of fees earned for asset management services provided to properties owned by certain of our
unconsolidated joint ventures. These fees are earned as a percentage of the revenues of the unconsolidated joint ventures’ hotels. Other
revenues decreased from $3,984 for the year ended December 31, 2008 to $1,981 during the year ended December 31, 2009 primarily
due to a decrease in asset management as a result of declining revenues at properties owned by certain of our unconsolidated joint
ventures.
Expenses
Total hotel operating expenses decreased 7.1% to approximately $124,294 for the year ended December 31, 2009 from
$133,762 for the year ended December 31, 2008. As a result of declining hotel operating revenues, our hotel operators implemented cost
reduction and cost containment initiatives to reduce hotel operating expenses. Decreases in our hotel operating expenses resulting from
lower occupancies and our operators cost reduction initiatives were partially offset by increases in hotel operating expenses due to the
acquisitions consummated since January 1, 2008, as mentioned above. The acquisitions also resulted in an increase in depreciation and
amortization from $38,989 for the year ended December 31, 2008 to $43,187 for the year ended December 31, 2009. Similarly, real
estate and personal property tax and property insurance increased $1,501, or 12.0%, in the year ended December 31, 2009 when
compared to the same period in 2008.
General and administrative expense decreased by approximately $1,317 from $7,208 in 2008 to $5,891 in 2009. As of
December 31, 2009, discretionary incentive compensation related to 2009 fiscal year had not been determined and, accordingly, no
expense had been accrued. General and administrative expense for the year ended December 31, 2008 included a charge of $1,253 for
incentive compensation related to the 2008 fiscal year. Non-cash stock based compensation expense increased $641 when comparing
the year ended December 31, 2009 to the same period in 2008 as a result of increased vesting of restricted shares and performance shares
issued and earned during the year ended December 31, 2009.
19 HERSHA 2010 ANNUAL REPORT
Unconsolidated Joint Venture Investments
For the year ended December 31, 2009, we recorded $7,190 in loss from unconsolidated joint ventures compared to $517 in loss
from unconsolidated joint ventures for the same period in 2008.
Included in the loss from unconsolidated joint ventures for the year ended December 31, 2009 was an impairment charge of
$4,541. Through our investment in Hiren Boston, LLC joint venture, we have a 50% interest the Courtyard, South Boston, MA. We
determined that our interest in this hotel was impaired and, as of December 31, 2009, we recorded an impairment loss of approximately
$3,500 which represents our entire investment in the hotel. Through our investment in PRA Suites at Glastonbury, LLC joint venture,
we have a 48% interest in the Homewood Suites, Glastonbury, CT. In 2009, we entered into an agreement to transfer our interest in this
hotel to our joint venture partner as partial consideration for the purchase of our joint venture partner’s 52% interest in PRA Glastonbury,
LLC, the owner of the Hilton Garden Inn, Glastonbury, CT. This transaction closed effective January 1, 2010. We determined that the
carrying value of our interest in the Homewood Suites, Glastonbury, CT exceeded fair value and, as of December 31, 2009, we recorded
an impairment loss of $1,041. As a result of this transaction, as of January 1, 2010 we own a 100% interest in the Hilton Garden Inn,
Glastonbury, CT and have no remaining interest in the Homewood Suites, Glastonbury, CT. The purchase of the Hilton Garden Inn,
Glastonbury, CT in 2010 resulted in a $1,818 gain as a result of applying purchase accounting and the subsequent remeasurement of our
previously held 48% interest was recorded in the first quarter of 2010.
Through our investment in the Mystic Partners, LLC joint venture, we have an 8.8% interest in the Hilton Hotel in Hartford,
CT. In 2008, we determined that our interest in this hotel was impaired. As of December 31, 2008, we recorded an impairment loss of
approximately $1,890 which represents our entire investment in the hotel.
For the year ended December 31, 2009, loss from our investment in unconsolidated joint ventures, excluding the impairment
charges noted above, was $2,649. This compares to income from our investment in unconsolidated joint ventures, excluding the
impairment charges noted above, of $1,373 for the same period in 2008. This decrease was the result of deteriorating revenues in the
hotels owned by our unconsolidated joint ventures. The operating factors impacting the results of our hotels owned by our
unconsolidated joint ventures are consistent with those described above in the discussion of our consolidated hotels, and include
declining ADR, occupancy and RevPAR.
Net Income/Loss
Net loss applicable to common shareholders for year ended December 31, 2009 was $54,661 compared to net loss applicable to
common shareholders of $13,608 for the same period in 2008.
Operating loss for the year ended December 31, 2009 was $8,436 compared to operating income of $31,677 during the same
period in 2008. The $40,113, or 126.6%, decrease in operating income was primarily the result of the impairment charge of $21,408
related to our investment in a development loan and an option to acquire the hotel property upon completion, noted above.
Also contributing to the net loss recorded during the year ended December 31, 2009 was an impairment charge of $17,703
recorded on two parcels of land and a hotel, each of which is classified as held for sale as of December 31, 2009. Due to the economic
challenges facing hotel development projects, especially those that are in the early phase of development, we decided during the quarter
ended September 30, 2009 to exit our two remaining land leases and dispose of the related land parcels. Effective July 1, 2009, we
ceased accruing rents under these leases. We determined that the carrying value of the land exceeded fair value and we recorded an
impairment of $14,545. We also determined that accrued rents under the leases were uncollectible and accrued rents receivable of
$1,579 was expensed during the year ended December 31, 2009. In addition, we committed to a plan to sell one of our hotels and
determined that carrying value of this property exceeded fair value by $1,558 which was recorded as an impairment charge during the
year ended December 31, 2009.
In addition, we recorded a gain of $2,888 on the disposition of hotel properties during the year ended December 31, 2008,
compared to a $1,869 gain during the same period in 2009.
Interest expense increased $1,877 from $43,306 for the year ended December 31, 2008 to $45,183 for the year ended December
31, 2009. The increase in interest expense is the result of mortgages placed on newly acquired properties and increased average balances
on our line of credit.
20 HERSHA 2010 ANNUAL REPORT
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)
Debt and Equity Offerings
The ability to originate or refinance existing loans has become and continues to be very restrictive for all borrowers, even for
those borrowers that have strong balance sheets. While we maintain a portfolio of what we believe to be high quality assets and we
believe our leverage to be at acceptable levels, the market for new debt origination and refinancing of existing debt remains challenging
and visibility on the length of debt terms, the loan to value parameters and loan pricing on new debt originations is limited.
Our organizational documents do not limit the amount of indebtedness that we may incur. In the current economic environment,
the fair market value of certain of our hotel properties may have declined causing some of our indebtedness to exceed the percentage of
an individual hotel property’s fair market value our Board of Trustees intended at the time we acquired the property.
Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit
markets, our degree of leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance
of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market
conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its
investments.
Prior to November 5, 2010, we maintained a revolving credit facility with a syndicate of lenders that had committed up to
$135,000. On November 5, 2010, we entered into a new revolving credit facility, which provides for a revolving line of credit in the
principal amount of up to $250,000. Our previous line of credit, which allowed for borrowings of up to $135,000 was replaced by this
new line, and the new line of credit allows us additional borrowing capacity for future acquisitions and working capital. As of December
31, 2010, we had $46,000 in borrowings under the line of credit and $6,927 in letters of credit outstanding under this facility resulting in
a remaining borrowing capacity under the line of credit of $197,073. The new line of credit expires on November 5, 2013 and includes
an extension of the maturity date until November 5, 2014 at the sole discretion of the lenders. We intend to repay indebtedness incurred
under the new line of credit from time to time, for acquisitions or otherwise, out of cash flow from operations and from the proceeds of
issuances of additional common shares and other securities. For additional information regarding our revolving credit facility, including
important terms, covenants and financial ratios, see “Note 6 – Debt” in our consolidated financial statements included herein.
We will continue to monitor our debt maturities to manage our liquidity needs. However, no assurances can be given that we
will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the
terms of such debt will not vary from the existing terms. As of December 31, 2010, we have $17,861 coming due on or before December
31, 2011. We currently expect that cash requirements for all debt that is not refinanced by our existing lenders will be met through a
combination of cash on hand, refinancing the existing debt with new lenders, draws on our credit facility and issuing public debt or
equity.
During 2010, we completed three public offerings, in which 108,100,000 common shares were sold by us through several
underwriters for net proceeds to us of approximately $421,734 before the payment of offering-related expenses. Immediately upon
closing of each offering, we contributed all of the net proceeds of the offering to HHLP in exchange for additional common units of
limited partnership in HHLP, or Common Units. Aggregate offering-related expenses associated with these three offerings were
approximately $1,293, resulting in net proceeds after expenses of $420,441.
Development Loans Receivable
The current borrowing environment has made it difficult for our development loan borrowers to obtain or renew construction
financing to complete certain hotel development projects for which we have provided development loan financing. As of December 31,
2010, we have $41,653 in development loan principal receivable and $3,013 in accrued interest receivable on these loans.
Each of these loans matures at some time within the next twelve to eighteen months. Most of our development loans have
options to extend the maturity of the loan for periods up to three years from the original maturity date of the loan. Each of these
development loans also provides us with a right of first offer on hotels constructed through the development loan program. We expect
most development loan borrowers to take advantage of these extension options. In addition, we may convert the principal and interest
21 HERSHA 2010 ANNUAL REPORT
due to us on those development loans that are not extended into equity interests in the hotels developed allowing us to acquire new hotel
properties without a significant additional outlay of cash.
In addition, the contractual terms of two development loans allow borrowers the option to add accrued interest to the loan
principal in lieu of making current interest payments. As a result of these amendments, $2,559 of accrued interest was added to loan
principal for year ended December 31, 2010. We do not expect the payments of principal or accrued interest on the development loans
to be a significant source of liquidity over the next twelve to eighteen months.
Acquisitions
On January 1, 2010, we acquired our joint venture partner’s 52% membership interest in PRA Glastonbury, LLC, the owner of
the Hilton Garden Inn, Glastonbury, CT, and this hotel became one of our wholly-owned hotels.
On February 9, 2010, we completed the acquisition of a Hampton Inn, a Holiday Inn Express and a Candlewood Suites located
in the area of Times Square, New York, NY. The total purchase price for the three hotels was $166,089 and consisted of $160,500 in
cash, $290 in franchise fees and 1,451,613 Common Units. In addition, we paid closing costs of $3,228 and acquired approximately $63
in net working capital assets. Cash required for this acquisition was generated primarily from the net proceeds of our recently completed
public offering of common shares and borrowings under our line of credit.
On May 7, 2010, we entered into a contribution agreement with an unrelated third party and closed on the acquisition of 100%
of the membership interests in Maiden Hotel LLC, the owner of the Wall Street Holiday Inn, New York, NY. The aggregate purchase
price paid for the membership interests in Maiden Hotel LLC was approximately $34,876. The purchase price paid included the issuance
of 200,000 Common Units, valued at $957, the settlement of $7,839 of existing mezzanine financing and accrued interest income, $57 in
franchise fees and the payment of approximately $26,023 in cash provided, in part, from borrowings under our existing line of credit.
Upon completion of the acquisition of the membership interests, the hotel owned by Maiden Hotel LLC was unencumbered of debt. In
addition, we paid closing costs of $151 and acquired approximately $511 in net working capital.
On September 1, 2010, we entered into a purchase and sale agreement with an unrelated third party and closed on the
acquisition of Hampton Inn, Washington, DC. The total purchase price for this hotel was $73,096 and consisted of $72,988 in cash and
$108 in franchise fees. In addition, we paid closing costs of $1,188 and acquired approximately $304 in net working capital assets.
On December 28, 2010, we closed on the acquisition of a parcel of land which included a multi-story vacant hotel building with
an unrelated third party in New Castle, DE. The total purchase price for this hotel was $15,301, which was paid in cash. We have begun
the process of converting this hotel building into a Sheraton. The conversion is currently budgeted at $5.5 million and has an estimated
completion date of June 2011.
Purchase agreements related to the Holiday Inn Express, Camp Springs, MD and Hampton Inn and Suites, Smithfield, RI
hotels contained certain earn-out provisions that entitled the seller to a payment based on operating metrics of the hotel properties. As of
December 31, 2010, the earnout period expired for these properties. These properties did not meet the required net operating income
thresholds established in the properties’ purchase agreements. As such, no amounts were paid or are payable to the sellers under these
earn-out provisions.
We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. We
expect that future investments in hotels will depend on and will be financed by, in whole or in part, our existing cash, the proceeds from
additional issuances of common or preferred shares, issuances of Common Units, issuances of preferred units or other securities or
borrowings.
Operating Liquidity and Capital Expenditures
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash
balances and, if necessary, short-term borrowings under our line of credit. We believe that the net cash provided by operations in the
coming year will be adequate to fund the Company’s operating requirements, monthly recurring debt service and the payment of
dividends in accordance with REIT requirements of the federal income tax laws.
22 HERSHA 2010 ANNUAL REPORT
Beginning with our dividend declaration in the second quarter of 2009, the Company reduced its quarterly dividend payment by
approximately 72% in order to preserve cash. As noted above, we issued common shares in public offerings and issued Common Units
in connection with our acquisition of hotel properties. Assuming we continue to make distributions to our common shareholders and
common unitholders at our current rate and assuming no additional common shares or common units are issued, these distributions
would approximate $35,325 over the next twelve months. We cannot guarantee that we will continue to make distributions to our
shareholders at the current rate or at all. While, due to the seasonality of our business, cash provided by operating activities fluctuates
significantly from quarter to quarter, we believe, based on our current estimates, which include the addition of cash provided by hotels
acquired in 2010, that our cash provided by operating activities will be sufficient over the next twelve months to fund the payment of our
dividend at its current level. However, our Board of Trustees continues to evaluate the dividend policy in the context of our overall
liquidity and market conditions and may elect to further reduce or suspend these distributions. Cash provided by operating activities for
the year ended December 31, 2010 was $46,246 and cash used for the payment of distributions and dividends for the year ended
December 31, 2010 was $30,253.
Owning hotels is a capital intensive enterprise. Hotels are expensive to acquire or build and require regular significant capital
expenditures to satisfy guest expectations. However, even with current depressed cash flows, we project that our operating cash flow
and credit facility will be sufficient to satisfy almost all of our liquidity and other capital needs over the next twelve to eighteen months.
We make available to the TRS Lessees of our hotels 4% (6% for full service properties) of gross revenues per quarter, on a
cumulative basis, for periodic replacement or refurbishment of furniture, fixtures and equipment at each of our hotels. We believe that
this reserve is a prudent estimate for future capital expenditure requirements. During 2009, our hotel managers had implemented a
policy of limiting capital expenditures to only those projects that impact safety to our guests or preserve the value of our hotel assets. As
economic conditions have improved, we have begun to fund addition capital expenditures, including the lobby renovation of several of
our hotels. In addition, we completed a renovation converting two of our existing adjoining hotel properties in King of Prussia, PA into
one Hyatt Place during the third quarter of 2010. The total cost to complete this conversion was approximately $6,471, net of $1,200
received from the franchisor upon the completion of the conversion. The renovations were completed and the hotel opened on August
17, 2010. The cash required to complete this project was provided by cash from our equity offerings and operations, as well as
borrowings under credit facility.
We have increased our spending on capital improvements during the year ended December 31, 2010 when compared to the
same period in 2009. During the year ended December 31, 2010 we spent $10,328 on capital expenditures to renovate, improve or
replace assets at our hotels. This compares to $6,138 during the same period in 2009. Our increase in capital expenditures is a result of
complying with brand mandated improvements and initiating projects that we believe will generate a return on investment as we enter a
period of recovery in the lodging sector. We expect further expansion of our capital expenditures in 2011 in an effort to invest in
projects that we believe will generate additional returns as economic conditions improve. We may spend amounts in excess of the
obligated amounts if necessary to comply with the reasonable requirements of any franchise license under which any of our hotels
operate and otherwise to the extent we deem such expenditures to be in our best interests. We are also obligated to fund the cost of certain
capital improvements to our hotels. We will use undistributed cash or borrowings under credit facilities to pay for the cost of capital
improvements and any furniture, fixture and equipment requirements in excess of the set aside referenced above.
CASH FLOW ANALYSIS
(dollars in thousands, except per share data)
Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009
Net cash provided by operating activities for the year ended December 31, 2010, and 2009, was $46,246 and $21,532,
respectively. Primarily as a result of our acquisitions and improving ADR and occupancy at our wholly owned hotel properties, income
before gain on disposition of hotel properties, impairment charges, depreciation and amortization, debt extinguishment and stock based
compensation increased $24,495 during the year ended December 31, 2010 when compared to the same period in 2009.
Net cash used in investing activities for the year ended December 31, 2010 increased $305,437, from $8,921 in the year ended
December 31, 2009 compared to $314,358 for the year ended December 31, 2010. During the year ended December 31, 2010, we used
$280,731 to acquire seven properties. This compares to just $9,315 to acquire two properties during the same period in 2009. We have
also funded $6,471 in construction costs for the conversion of two of our existing adjoined hotels into a Hyatt Place and a $5,500 deposit
for the acquisition of hotel properties. In addition, we invested $13,750 to purchase a mortgage loan secured by the Courtyard by
Marriott, located in South Boston, MA, a hotel which is owned by a joint venture in which we have a 50%
23 HERSHA 2010 ANNUAL REPORT
ownership interest. Offsetting these increases in cash used in investing activities was a decrease of $2,000 in cash used to invest in
development loans receivable for the year ended December 31, 2010 when compared to the same period in 2009.
Net cash provided by financing activities for the year ended December 31, 2010 was $322,304 compared to cash used in
financing activities of $16,904 during the same period in 2009. During the year ended December 31, 2010, we issued 108,100,000
common shares resulting in net proceeds of $420,441. Net repayments under our credit facility were $33,200 during the year ended
December 31, 2010 compared to net repayments of $9,221 during the same period in 2009. Net repayments of our mortgages and notes
payable were $30,274 during the year ended December 31, 2010 compared to net proceeds of $2,923 during the same period in 2009.
Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
Net cash provided by operating activities for the year ended December 31, 2009, and 2008, was $21,532 and $53,894,
respectively. Primarily as a result of declining ADR and occupancy at our wholly owned hotel properties, income before impairment
charges, depreciation and amortization, and debt extinguishment decreased $27,380 during the year ended December 31, 2009 when
compared to the same period in 2008. In addition, the modification of four development loans to allow borrowers the option to add
accrued interest to the loan principal in lieu of making current interest payments resulted in $3,253 in current year development loan
interest income that was added to principal and is not currently a source of operating cash. Cash from operating activities of $3,770 has
also been used to fund increases in our escrow deposits. The increase in our escrow deposits is a result of reduced access to these funds
due to decreases in our capital expenditures.
Net cash used in investing activities for the year ended December 31, 2009 decreased $105,949, from $114,870 in the year
ended December 31, 2008 to $8,921 for the year ended December 31, 2009. During the year ended December 31, 2008, we acquired six
properties for a total purchase price of $115,859, including the assumption of $30,790 in mortgage debt, the issuance of a $500 note
payable, the assumption of $318 of operating liabilities and the issuance of units in our operating partnership valued at $21,624 resulting
in net cash paid for acquisitions of $63,626. During the same period in 2009, we acquired two properties for a total purchase price of
$80,000, including the assumption of $37,524 in mortgage debt, the assumption of $3,043 of operating liabilities, the conversion of
$20,000 in development loans and accrued interest, the conveyance of land and accrued rent receivable with a net value of $10,118 and
cash held back at settlement of $1,200 resulting in net cash paid for acquisitions of $9,315. We used $1,200 of the cash held back at
settlement to facilitate the conveyance of land to the seller of the property during the year ended December 31, 2009. We decreased our
capital expenditures from $19,226 during the year ended December 31, 2008 to $6,138 during the same period in 2009. This decrease
was the result of our initiatives to defer capital expenditures where appropriate, reducing capital expenditures on a year over year
basis. In addition, cash used to invest in development loans receivable, net of repayments, was $41,784 for the year ended December 31,
2008 compared to $1,500 for the same period in 2009. In addition, the sale of hotel properties during the year ended December 31, 2009
provided $8,524 in cash proceeds compared to $6,456 provided during 2008. Net cash distributions from unconsolidated joint ventures
decreased $2,509 from net distributions received of $2,017 during 2008 to net contributions made of $492 in 2009, primarily as a result
of declining operating results in the hotels owned by our unconsolidated joint ventures.
Net cash used in financing activities for the year ended December 31, 2009 was $16,904 compared to cash provided by
financing activities of $64,346 for the year ended December 31, 2008. During year ended December 31, 2008, we issued 6,600,000
common shares resulting in net proceeds of $61,845. During the year ended December 31, 2009, we issued 8,442,300 common shares
resulting in net proceeds of $21,339. The Company reduced its quarterly common dividend rate by 72% from $0.18 per share to $0.05
per share beginning with the dividend and distribution payment in July of 2009. Total dividends and distributions decreased $11,249
during the year ended December 31, 2009 when compared to the same period in 2008 due to the decrease in the rate of dividends and
distributions, partially offset by an increase in dividend due to an increased number of shares outstanding. Net proceeds from mortgages
and notes payable were $1,735 during the year ended December 31, 2008 compared to net proceeds of $2,923 for the same period in
2009. Net repayments of our credit facility were $9,221 during the year ended December 31, 2009 compared to net proceeds of $44,721
during the same period in 2008. The decrease in borrowings from our credit facility is a result of a decrease in acquisition activity
requiring short term borrowings and an effort to lower debt levels.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
24 HERSHA 2010 ANNUAL REPORT
FUNDS FROM OPERATIONS
(in thousands, except share data)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a
non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Partnership units in
accordance with the April 2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper. The White Paper defines
FFO as net income (loss) (computed in accordance with GAAP) 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. Our interpretation of the NAREIT definition is that minority interest in
net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO
computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT
definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shares,
includes depreciation and amortization expenses, gains or losses on property sales, minority interest and preferred dividends. In
computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an
alternative to net income as an indication of Hersha’s performance or to cash flow as a measure of liquidity or ability to make
distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the
assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a
performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we
believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The
display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating
performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Partnership units
because our Partnership units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO
applicable to all common shares and Partnership units.
The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for
the same periods:
December 31, 2010
Twelve Months Ended
December 31, 2009
December 31, 2008
Net (loss) income applicable to common shares
(Loss) income allocated to noncontrolling interest
Loss (income) from unconsolidated joint ventures
Gain on sale of assets
Depreciation and amortization
Depreciation and amortization from discontinued operations
FFO related to the noncontrolling interest in consolidated joint ventures (1)
Funds from consolidated hotel operations
applicable to common shares and Partnership units
(Loss) income from unconsolidated joint ventures
Less:
Gain from remeasurement of
investment in unconsolidated joint ventures
Add:
Depreciation and amortization of purchase price
in excess of historical cost (2)
Interest in depreciation and amortization
of unconsolidated joint venture (3)
Funds from unconsolidated joint ventures operations
applicable to common shares and Partnership units
Funds from Operations
applicable to common shares and Partnership units
Weighted Average Common Shares and Units Outstanding
Basic
Diluted
(1)
$
(21,157)
(845)
(2,257)
(347)
52,012
87
(307)
27,186
2,257
$
(54,661)
(8,597)
7,190
(1,869)
43,187
1,098
$
(13,608)
(1,621)
517
(2,888)
38,989
2,429
(98)
(13,750)
(7,190)
(4,008)
-
2,033
3,905
4,187
2,137
2,891
(2,162)
$
31,373
$
(15,912)
$
31,441
134,370,172
146,656,308
51,027,742
59,752,467
45,184,127
53,218,864
(240)
23,578
(517)
-
2,093
6,287
7,863
Adjustment made to deduct FFO related to the noncontrolling interest in our consolidated joint ventures; represents the
25 HERSHA 2010 ANNUAL REPORT
(2)
(3)
portion of net income and depreciation allocated to our joint venture partners.
Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint
venture at the time of our investment.
Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint
ventures.
Comparison of the year ended December 31, 2010 to December 31, 2009
FFO was $31,373 for the year ended December 31, 2010, which was an increase of $47,285 or 297.2% over FFO in the
comparable period in 2009, which was a deficit of $15,912. FFO for the year ended December 31, 2009 was negatively impacted by
impairment charges of $39,111 incurred during the twelve months ended December 31, 2009 compared to $2,433 incurred during the
same period in 2010. The increase in FFO was also a result of the acquisitions consummated in 2010 and 2009 and a strengthening
economy.
Comparison of the year ended December 31, 2009 to December 31, 2008
FFO was a deficit of $15,912 for the year ended December 31, 2009, which was a decrease of $47,353 or 150.6%, over FFO in
the comparable period in 2008, which was $31,441. FFO for year ended December 31, 2009 was negatively impacted by impairment
charges of $39,111 incurred during the twelve months ended December 31, 2009 compared to $21,004 incurred during the same period
in 2008. Other than these impairment charges, the decrease in FFO was primarily a result of worsening economic conditions which has
caused occupancies and average daily rates to decline at our hotel properties. The decrease in revenues has only been partially offset by
decreases in operating expenses resulting from declines in occupancy and our hotel operators cost reduction initiatives. FFO was also
negatively impacted by increases in our interest expense during the year ended December 31, 2009.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, estimates are evaluated by us, including those related to carrying value of investments in hotel properties.
Our estimates are based upon historical experience and on various other assumptions we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue Recognition
Approximately 95% of our revenues are derived from hotel room revenues and revenue from other hotel operating departments.
We directly recognize revenue and expense for all consolidated hotels as hotel operating revenue and hotel operating expense when
earned and incurred. These revenues are recorded net of any sales or occupancy taxes collected from our guests. All revenues are
recorded on an accrual basis, as earned. We participate in frequent guest programs sponsored by the brand owners of our hotels and we
expense the charges associated with those programs, as incurred.
Revenue for interest on development loan financing is recorded in the period earned based on the interest rate of the loan and
outstanding balance during the period. Development loans receivable and accrued interest on the development loans receivable are
evaluated to determine if outstanding balances are collectible. Interest is recorded only if it is determined the outstanding loan balance
and accrued interest balance are collectible.
Other revenues consist primarily of fees earned for asset management services provided to hotels we own through
unconsolidated joint ventures. Fees are earned as a percentage of hotel revenue and are recorded in the period earned.
Investment in Hotel Properties
Investments in hotel properties are recorded at cost. Improvements and replacements are capitalized when they extend the
26 HERSHA 2010 ANNUAL REPORT
useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line
method over the estimated useful life of up to 40 years for buildings and improvements, two to seven years for furniture, fixtures and
equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the
amount of depreciation to record on an annual basis with respect to our investments in hotel properties. These assessments have a direct
impact on our net income because if we were to shorten the expected useful lives of our investments in hotel properties we would
depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Most identifiable assets, liabilities, noncontrolling interests, and goodwill related to hotel properties acquired in a business
combination are recorded at full fair value. Estimating techniques and assumptions used in determining fair values involve significant
estimates and judgments. These estimates and judgments have a direct impact on the carrying value of our assets and liabilities which
can directly impact the amount of depreciation expense recorded on an annual basis and could have an impact on our assessment of
potential impairment of our investment in hotel properties.
The operations related to properties that have been sold or properties that are intended to be sold are presented as discontinued
operations in the statement of operations for all periods presented, and properties intended to be sold are designated as “held for sale” on
the balance sheet.
Based on the occurrence of certain events or changes in circumstances, we review the recoverability of the property’s carrying
value. Such events or changes in circumstances include the following:
·
·
·
·
·
·
a significant decrease in the market price of a long-lived asset;
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including
an adverse action or assessment by a regulator;
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a
long-lived asset;
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast
that demonstrates continuing losses associated with the use of a long-lived asset; and
a current expectation that, it is more likely than not that, a long-lived asset will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life.
We review our portfolio on an on-going basis to evaluate the existence of any of the aforementioned events or changes in
circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the
future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These
estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as
well as the effects of hotel demand, competition and other factors. If impairment exists due to the inability to recover the carrying value
of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are
required to make subjective assessments as to whether there are impairments in the values of our investments in hotel properties.
As of December 31, 2010, based on our analysis, we have determined that the future cash flow of each of the properties in our
portfolio is sufficient to recover its carrying value.
Investment in Joint Ventures
Properties owned in joint ventures are consolidated if the determination is made that we are the primary beneficiary in a
variable interest entity (VIE) or we maintain control of the asset through our voting interest or other rights in the operation of the entity.
To determine if we are the primary beneficiary of a VIE, we evaluate whether we have a controlling financial interest in that VIE through
means other than voting rights. Our examination of each joint venture consists of reviewing the sufficiency of equity at risk, controlling
financial interests, voting rights, and the obligation to absorb expected losses and expected gains, including residual returns. Control can
also be demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the
partnerships without the consent of the limited partners and the inability of the limited partners to replace the general partner. This
evaluation requires significant judgment.
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or
our voting interest in a voting interest entity, the equity method of accounting is used. Under this method, the investment, originally
recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliates as they occur rather than as dividends or other
distributions are received, limited to the extent of our investment in, advances to and commitments for the investee. Pursuant to our joint
venture agreements, allocations of profits and losses of some of our investments in unconsolidated joint ventures may be allocated
27 HERSHA 2010 ANNUAL REPORT
disproportionately as compared to nominal ownership percentages due to specified preferred return rate thresholds.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if
circumstances exist indicating impairment to the carrying value of the investment that is other than temporary. When an impairment
indicator is present, we will estimate the fair value of the investment. Our estimate of fair value takes into consideration factors such as
expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. This
determination requires significant estimates by management, including the expected cash flows to be generated by the assets owned and
operated by the joint venture. Subsequent changes in estimates could impact the determination of whether impairment exists. To the
extent impairment has occurred, the loss will be measured as the excess of the carrying amount over the fair value of our investment in
the unconsolidated joint venture.
As of December 31, 2010, based on our analysis, we have determined that the fair value of each of our investments in
unconsolidated joint ventures exceeds the carrying value of our investment in each joint venture.
Development Loans Receivable
The Company accounts for the credit risk associated with its development loans receivable by monitoring the portfolio for
indications of impairment. Our methodology consists of the following:
·
Identifying loans for individual review. In general, these consist of development loans that are not performing in
accordance with the contractual terms of the loan.
· Assessing whether the loans identified for review are impaired. That is, whether it is probable that all amounts will not be
collected according to the contractual terms of the loan agreement. We determine the amount of impairment by calculating
the estimated fair value, discounted cash flows or the value of the underlying collateral.
Any charge to earnings necessary based on our review is recorded on our income statement as an impairment of a development
loan receivable. Our assessment of impairment is based on information known at the time of the review. Changes in factors underlying
the assessment could have a material impact on the amount of impairment to be charged against earnings. Such changes could impact
future results.
Based on our reviews, we determined that it is probable that all amounts will be collected according to the contractual terms of
each of our development loan agreements.
Accounting for Derivative Financial Investments and Hedging Activities
We use derivatives to hedge, fix and cap interest rate risk and we account for our derivative and hedging activities by recording
all derivative instruments at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate
exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We
formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and
strategy for undertaking each hedge transaction. Cash flow hedges that are considered highly effective are accounted for by recording the
fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other
comprehensive income within shareholders’ equity. Amounts are reclassified from other comprehensive income to the income
statements in the period or periods the hedged forecasted transaction affects earnings.
Under cash flow hedges, derivative gains and losses not considered highly effective in hedging the change in expected cash
flows of the hedged item are recognized immediately in the income statement. For hedge transactions that do not qualify for the short-cut
method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the
cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether
they are expected to be highly effective in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
Consolidation of Variable Interest Entities
On January 1, 2010, the Company adopted a pronouncement that amends existing US GAAP as follows: (a) to require an
enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest
in a variable interest entity and to identify the primary beneficiary of a variable interest entity, (b) to require ongoing reassessment of
whether an enterprise is the primary beneficiary of a variable interest entity, rather than only when specific events occur, (c) to eliminate
28 HERSHA 2010 ANNUAL REPORT
the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, (d) to amend certain
guidance for determining whether an entity is a variable interest entity, (e) to add an additional reconsideration event when changes in
facts and circumstances pertinent to a variable interest entity occur, (f) to eliminate the exception for troubled debt restructuring
regarding variable interest entity reconsideration, and (g) to require advanced disclosures that are intended to provide users of financial
statements with more transparent information about an enterprise’s involvement in a variable interest entity. Upon adoption, the
Company re-evaluated each of its investments and contractual relationships to determine whether they met the guidelines of
consolidation, in light of the amendments described above. Based on the evaluation performed, we have concluded that there is no
change from our initial assessment with regard to these investments and contractual relationships.
RELATED PARTY TRANSACTIONS
We have entered into a number of transactions and arrangements that involve related parties. For a description of the
transactions and arrangements, please see Note 7, “Commitments and Contingencies and Related Party Transactions,” to the
consolidated financial statements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our contractual obligations and commitments to make future payments under contracts, such
as debt and lease agreements, as of December 31, 2010:
29 HERSHA 2010 ANNUAL REPORT
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk (in thousands, except per share data)
Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of December 31, 2010, we are
exposed to interest rate risk with respect to variable rate borrowings under our revolving line of credit and certain variable rate mortgages
and notes payable. As of December 31, 2010, we had total variable rate debt outstanding of $137,409. At December 31, 2010, our
variable rate debt outstanding had a weighted average interest rate of 3.92%. The effect of a 100 basis point increase or decrease in the
interest rate on our variable rate debt outstanding as of December 31, 2010 would be an increase or decrease in our interest expense for
the year ended December 31, 2010 of $1,064.
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates for a portion of our
borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such
arrangements. We have also entered into derivative financial instruments such as interest rate swaps or caps, and in the future may enter
into treasury options or locks, to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on
a portion of our variable rate debt. Currently, we have two interest rate caps related to debt on the Hotel 373, New York, NY and our two
subordinated notes payable. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
As of December 31, 2010, approximately 80.2% of our outstanding mortgages and notes payable are subject to fixed rates,
including variable rate debt that is effectively fixed through our use of an interest rate swap, while approximately 19.8% of our
outstanding mortgages payable are subject to floating rates.
Changes in market interest rates on our fixed-rate debt impact the fair value of the debt, but such changes have no impact on
interest expense incurred. If interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value
of our debt to decrease. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates
from their December 31, 2010 levels, with all other variables held constant. A 100 basis point increase in market interest rates would
cause the fair value of our fixed-rate debt outstanding at December 31, 2010 to be approximately $487,571 and a 100 basis point
decrease in market interest rates would cause the fair value of our fixed-rate debt outstanding at December 31, 2010 to be approximately
$541,061.
We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate
fluctuations. For debt obligations outstanding as of December 31, 2010, including liabilities related to assets held for sale, the following
table presents expected principal repayments and related weighted average interest rates by expected maturity dates (in thousands):
Mortgages & Notes Payable
2011
2012
2013
2014
2015
Thereafter
Total
Fixed Rate Debt
Weighted Average Interest Rate
$7,938
6.04%
$33,694
6.14%
$32,444
6.13%
$42,550
6.10%
$88,640
6.01%
$353,028
6.01%
$558,294
6.07%
Floating Rate Debt
Weighted Average Interest Rate
39,861
3.26%
$47,799
-
3.26%
$33,694
-
3.26%
$32,444
-
3.26%
$42,550
-
3.26%
$88,640
51,548
3.26%
$404,576
91,409
3.26%
$649,703
Credit Facility
Weighted Average Interest Rate
-
-
TOTAL
$47,799
$33,694
46,000
4.25%
$78,444
-
-
-
$42,550
$88,640
$404,576
$46,000
4.25%
$695,703
The table incorporates only those exposures that existed as of December 31, 2010, and does not consider exposure or positions
that could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the
exposures that arise during the future period, prevailing interest rates, and our hedging strategies at that time.
30 HERSHA 2010 ANNUAL REPORT
The following table illustrates expected principal repayments and certain adjustments to reflect:
·
·
·
the Company’s exercise of each of the extension options within its discretion or upon lender approval;
the lender’s extension of the maturity of the revolving line of credit extension options; and
the refinance of mortgage debt on the hotel properties.
Principal repayments due as of December 31,
2010, as noted above
$
47,799
$
33,694
$
78,444
$
42,550
$
88,640
$
404,576
$
695,703
2011
2012
2013
2014
2015
Thereafter
Total
Adustments (1)
Extension Options
Hotel 373 - 5th Avenue, New York, NY (2)
Hampton Inn - West Haven, CT (3)
Residence Inn - Carlisle (4)
Line of Credit Facility (5)
Refinance
NU Hotel Brooklyn - New York, NY (6)
(22,000)
-
-
-
-
22,000
(7,552)
-
-
-
-
(6,732)
(46,000)
-
-
-
46,000
(18,000)
18,000
-
-
7,552
-
-
-
-
-
6,732
-
-
-
-
-
-
Pro Forma Principal Repayments (7)
$
25,799
$
30,142
$
43,712
$
88,550
$
96,192
$
411,308
$
695,703
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Adjustments reflect principal balances as of December 31, 2010. Adjustments do not include amortization of principal
scheduled to occur subsequent to December 31, 2010 through maturity date or extended maturity date if options are
exercised.
Represents mortgage debt on the Hotel 373, 5th Avenue, New York, NY which contains a one-year extension option, which
can be exercised at our discretion, effectively extending the maturity from May of 2011 to May of 2012.
Represents the mortgage debt on the Hampton Inn, West Haven, CT, which contains a three-year extension option, which
is subject to the lender’s approval in its discretion, which, if granted, effectively extends the maturity from November of
2012 to November of 2015.
Represents mortgage debt on Residence Inn, Carlisle, PA, which contains a three-year extension option, which is subject to
the lenders’ approval in its discretion, which, if granted, effectively extends the maturity from January of 2013 to January
of 2016.
Represents the revolving line of credit agreement, which contains a one-year extension option, which is subject to the
lender’s approval in its discretion, which, if granted, effectively extends the maturity date from September of 2013 to
September of 2014.
Represents the mortgage debt on the Nu Hotel, Brooklyn, NY, which contains a one-year extension option, which can be
exercised at out discretion, effectively extending the maturity date from January 2012 to January 2013.
Reflects principal balances as of December 31, 2010 unless otherwise noted. Figures do not include amortization of
principal scheduled to occur subsequent to December 31, 2010 through maturity date or extended maturity date if options
are exercised.
31 HERSHA 2010 ANNUAL REPORT
Item 8. Financial Statements and Supplementary Data
Hersha Hospitality Trust
Page
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Equity and Comprehensive Income for the years ended December 31,
2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation for the year ended December 31, 2010
33
34
35
37
39
40
81
32 HERSHA 2010 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Stockholders of
Hersha Hospitality Trust:
We have audited the accompanying consolidated balance sheets of Hersha Hospitality Trust and subsidiaries as of December 31, 2010
and 2009, and the related consolidated statements of operations, equity and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we have also
audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of Hersha Hospitality Trust’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Hersha Hospitality Trust and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hersha
Hospitality Trust and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 3, 2011, expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 3, 2011
33 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 AND 2009
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]
Assets:
Investment in Hotel Properties, net of Accumulated Depreciation
Investment in Unconsolidated Joint Ventures
Development Loans Receivable
Cash and Cash Equivalents
Escrow Deposits
Hotel Accounts Receivable, net of allowance for doubtful accounts of $31 and $34
Deferred Financing Costs, net of Accumulated Amortization of $5,852 and $4,262
Due from Related Parties
Intangible Assets, net of Accumulated Amortization of $1,084 and $794
Other Assets
Assets Held for Sale
December 31, 2010
December 31, 2009
$
1,245,851
35,561
41,653
65,596
17,384
9,611
10,204
5,069
7,934
18,414
-
$
938,954
39,182
46,094
11,404
16,174
7,103
8,696
2,394
7,542
12,428
21,073
Total Assets
$
1,457,277
$
1,111,044
Liabilities and Equity:
Line of Credit
Mortgages and Notes Payable, net of unamortized discount of $983 and $49
Accounts Payable, Accrued Expenses and Other Liabilities
Dividends and Distributions Payable
Due to Related Parties
Liabilities Related to Assets Held for Sale
$
46,000
648,720
28,601
9,805
939
-
$
79,200
645,351
16,216
4,293
769
20,892
Total Liabilities
734,065
766,721
Redeemable Noncontrolling Interests - Common Units (Note 1)
$
19,894
$
14,733
Equity:
Shareholders' Equity:
Preferred Shares - 8% Series A, $.01 Par Value, 29,000,000 shares authorized,
2,400,000 Shares Issued and Outstanding (Aggregate Liquidation
Preference $60,000) at December 31, 2010 and 2009
Common Shares - Class A, $.01 Par Value, 300,000,000 and 150,000,000
Shares Authorized at December 31, 2010 and 2009,
169,205,638 and 57,682,917 Shares Issued and Outstanding
at December 31, 2010 and 2009, respectively
Common Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized,
None Issued and Outstanding
Accumulated Other Comprehensive Loss
Additional Paid-in Capital
Distributions in Excess of Net Income
Total Shareholders' Equity
Noncontrolling Interests (Note 1):
Noncontrolling Interests - Common Units
Noncontrolling Interests - Consolidated Joint Ventures
Total Noncontrolling Interests
Total Equity
Total Liabilities and Equity
24
1,692
-
(338)
918,215
(236,159)
683,434
19,410
474
19,884
703,318
24
577
-
(160)
487,481
(185,725)
302,197
27,126
267
27,393
329,590
$
1,457,277
$
1,111,044
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
34 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
Revenue:
Hotel Operating Revenues
Interest Income from Development Loans
Other Revenues
Total Revenues
Operating Expenses:
Hotel Operating Expenses
Hotel Ground Rent
Real Estate and Personal Property
Taxes and Property Insurance
General and Administrative
Stock Based Compensation
Acquisition and Terminated Transaction Costs
Loss from Impairment of Assets
Depreciation and Amortization
Total Operating Expenses
Operating Income (Loss)
Interest Income
Interest Expense
Other Expense
Loss on Debt Extinguishment
Loss before Income (Loss) from
Unconsolidated Joint Venture Investments
and Discontinued Operations
Loss from Unconsolidated Joint Ventures
Gain from Remeasurement of
Investment in Unconsolidated Joint Venture
Income (Loss) from Unconsolidated Joint Venture Investments
2010
2009
2008
$
277,708
4,686
381
282,775
158,717
1,374
19,335
10,263
6,649
4,827
2,433
52,012
255,610
27,165
169
45,868
464
932
(19,930)
(1,751)
4,008
2,257
$
212,352
7,411
1,981
221,744
$
124,294
1,166
14,060
5,891
2,143
328
39,111
43,187
230,180
(8,436)
208
45,183
165
-
236,247
7,890
3,984
248,121
133,762
1,040
12,559
7,208
1,502
380
21,004
38,989
216,444
31,677
306
43,306
129
1,552
(53,576)
(13,004)
(7,190)
-
(7,190)
(517)
-
(517)
Loss from Continuing Operations
(17,673)
(60,766)
(13,521)
Discontinued Operations (Note 12):
Gain on Disposition of Hotel Properties
Income from Discontinued Operations
Income from Discontinued Operations
Net Loss
Loss Allocated to Noncontrolling Interests
Preferred Distributions
Net Loss applicable to
Common Shareholders
347
124
471
(17,202)
845
(4,800)
1,869
439
2,308
(58,458)
8,597
(4,800)
2,888
204
3,092
(10,429)
1,621
(4,800)
$
(21,157)
$
(54,661)
$
(13,608)
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
35 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
Earnings Per Share:
BASIC
(Loss) from Continuing Operations
applicable to Common Shareholders
Income from Discontinued Operations
applicable to Common Shareholders
Net (Loss)
applicable to Common Shareholders
DILUTED
(Loss) from Continuing Operations
applicable to Common Shareholders
Income from Discontinued Operations
applicable to Common Shareholders
Net (Loss)
applicable to Common Shareholders
2010
2009
2008
$ (0.16)
$
(1.12)
$
(0.37)
$ -
0.04
0.06
$
(0.16)
$
(1.08)
$
(0.31)
$ (0.16) *
$
(1.12)
*
$
(0.37)
*
$ - *
0.04
*
0.06
*
$
(0.16)
*
$
(1.08)
*
$
(0.31)
*
Weighted Average Common Shares Outstanding:
Basic
Diluted
134,370,172
134,370,172
*
51,027,742
51,027,742
*
45,184,127
45,184,127
*
*
Income allocated to noncontrolling interest in Hersha Hospitality Limited Partnership has been excluded from the numerator and
units of limited partnership interest in Hersha Hospitality Limited Partnership have been omitted from the denominator for the
purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator
would have no impact. Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership
outstanding for the year ended December 31, 2010, 2009 and 2008 were 8,628,492, 8,724,725 and 8,034,737, respectively.
Unvested stock awards, contingently issuable share awards and options to acquire our common shares have been omitted from the
denominator for the purpose of computing diluted earnings per share for the year ended December 31, 2010, since the effect of
including these awards in the denominator would be anti-dilutive to loss from continuing operations applicable to common
shareholders. For the year ended December 31, 2010, there were 396,328 anti-dilutive unvested stock awards outstanding,
934,097 anti-dilutive contingently issuable share awards outstanding, and 2,327,219 anti-dilutive options to acquire our common
shares outstanding. As a result of the application of the treasury stock method, there were no potentially dilutive securities to be
considered for inclusion in the denominator for purpose of computing diluted earnings per share for years ended December 31,
2009 and 2008.
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
36 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
[IN THOUSANDS, EXCEPT PER SHARE AMOUNTS]
Class A
Common Shares
Class B
Common Shares
Series A
Preferred Shares
Shareholders' Equity
Balance at December 31, 2007
Common Stock Issuance
Issuance Costs
Unit Conversion
Common Units Issued for Acquisitions
Reallocation of Noncontrolling Interest
Reclassification of Noncontrolling Interests
Dividends declared:
Common Stock ($0.72 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted Share Award Grants
Restricted Share Award Amortization
Share Grants to Trustees
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2008
Common Stock Issuance
Issuance Costs
Unit Conversion
Dividends and Distributions declared:
Distribution to Noncontrolling Interest in
Consolidated Joint Ventures
Common Stock ($0.33 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted and Performance
Share Award Grants
Restricted Share Award Amortization
Share Grants to Trustees
Disposition of Consolidated Joint Venture
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2009
Common Stock Issuance
Issuance Costs
Unit Conversion
Common Units Issued for Acquisitions
Reallocation of Noncontrolling Interest
Dividends and Distributions declared:
Distribution to Noncontrolling Interest in
Consolidated Joint Ventures
Common Stock ($0.20 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted and Performance
Share Award Grants
Restricted Share Award Amortization
Share Grants to Trustees
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2010
Shares
41,203,612
6,600,000
-
175,843
-
-
-
-
-
5,092
281,675
-
10,000
-
-
Dollars
$
412
66
2
3
-
-
-
-
-
-
-
-
-
-
-
48,276,222
8,442,300
$
483
84
-
44,490
-
-
-
9,943
862,462
-
47,500
-
-
-
-
-
-
-
-
-
-
-
-
-
9
1
57,682,917
108,100,000
-
2,934,511
$
577
1,081
-
29
-
-
-
-
-
2,655
437,555
-
48,000
-
-
-
-
-
-
-
-
-
-
-
4
1
Shares
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Dollars
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Shares
2,400,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,400,000
-
-
-
-
-
-
-
-
-
-
-
-
-
2,400,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,966
-
-
-
31
(3)
1,411
91
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25
(9)
2,039
141
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12
(4)
5,072
263
-
-
Additional
Paid-In
Capital
$
397,127
62,007
(228)
1,370
-
Other
Comprehensive
Income
$
(23)
-
-
-
-
24
Dollars
$
-
-
-
-
Distributions
in Excess
of Net
Earnings
$
(67,135)
-
-
-
-
-
-
330,405
Total Shareholders'
Equity
$
62,073
(228)
1,372
-
1,966
-
(33,464)
(4,800)
-
(33,464)
(4,800)
31
-
-
-
-
1,411
91
-
-
-
-
-
-
-
-
24
$
-
-
-
$
463,772
22,423
(1,165)
255
$
(109)
-
-
-
$
(114,207)
-
-
-
(86)
-
-
(8,808)
(86)
(8,808)
(8,894)
$
349,963
22,507
(1,165)
255
24
$
-
-
-
-
-
$
487,481
420,653
(1,293)
12,405
-
(6,374)
$
(160)
-
-
-
-
-
$
(185,725)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(16,857)
(4,800)
-
-
(16,857)
(4,800)
25
-
-
-
-
-
2,039
142
-
(51)
-
-
(49,861)
(51)
(49,861)
(49,912)
$
302,197
421,734
(1,293)
12,434
-
(6,374)
-
-
-
-
-
-
-
-
(29,277)
(4,800)
-
-
(29,277)
(4,800)
12
-
-
-
-
5,072
264
(178)
-
-
(16,357)
(178)
(16,357)
(16,535)
$
683,434
169,205,638
$
1,692
-
$
-
2,400,000
$
24
$
918,215
$
(338)
$
(236,159)
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
37 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (continued)
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
[IN THOUSANDS, EXCEPT PER SHARE AMOUNTS]
Noncontrolling Interests
Redeemable Noncontrolling
Interests
Common Units
Common Units
Total Equity
375,158
$
62,073
(228)
-
21,624
1,283
Shares
-
-
-
-
-
-
(20,670)
3,064,252
Balance at December 31, 2007
Common Stock Issuance
Issuance Costs
Unit Conversion
Common Units Issued for Acquisitions
Reallocation of Noncontrolling Interest
330,405
Total Shareholders'
Equity
$
62,073
(228)
1,372
-
Shares
6,424,915
-
-
(175,843)
2,497,228
Dollars
$
42,845
-
-
(1,372)
21,624
1,966
-
(683)
Reclassification of Noncontrolling Interests
-
(3,064,252)
(20,670)
Dividends declared:
Common Stock ($0.72 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
(33,464)
(4,800)
31
Restricted Share Award Grants
Restricted Share Award Amortization
Share Grants to Trustees
-
1,411
91
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2008
Common Stock Issuance
Issuance Costs
Unit Conversion
Dividends and Distributions declared:
Distribution to Noncontrolling Interest in
Consolidated Joint Ventures
Common Stock ($0.33 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted and Performance
Share Award Grants
Restricted Share Award Amortization
Share Grants to Trustees
Disposition of Consolidated Joint Venture
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2009
Common Stock Issuance
Issuance Costs
Unit Conversion
Common Units Issued for Acquisitions
Reallocation of Noncontrolling Interest
Dividends and Distributions declared:
Distribution to Noncontrolling Interest in
Consolidated Joint Ventures
Common Stock ($0.20 per share)
Preferred Stock ($2.00 per share)
Dividend Reinvestment Plan
Stock Based Compensation
Restricted and Performance
Share Award Grants
Restricted Share Award Amortization
Share Grants to Trustees
Comprehensive Income (Loss):
Other Comprehensive Loss
Net Loss
Total Comprehensive Loss
Balance at December 31, 2010
(86)
(8,808)
(8,894)
$
349,963
22,507
(1,165)
255
-
(16,857)
(4,800)
25
-
2,039
142
-
(51)
(49,861)
(49,912)
302,197
$
421,734
(1,293)
12,434
-
(6,374)
-
(29,277)
(4,800)
12
-
5,072
264
(178)
(16,357)
(16,535)
683,434
$
-
-
-
-
-
-
-
-
-
5,682,048
-
-
(44,490)
-
-
-
-
-
-
-
-
-
-
-
5,637,558
-
-
(2,884,511)
1,651,613
-
-
-
-
-
-
-
-
-
-
-
4,404,660
(5,492)
-
-
-
-
-
$
-
(1,471)
(1,471)
34,781
-
-
(255)
-
(1,871)
-
-
-
-
-
-
$
-
(5,529)
(5,529)
27,126
-
-
(12,203)
6,256
-
-
(1,090)
-
-
-
-
-
Consolidated
Joint Ventures
1,908
$
-
-
-
-
Total
Noncontrolling
Interests
$
44,753
-
-
(1,372)
21,624
-
-
-
-
-
-
-
-
(683)
(20,670)
(5,492)
-
-
-
-
-
$
-
(54)
(54)
1,854
-
-
-
$
-
(1,525)
(1,525)
36,635
-
-
(255)
(38,956)
(4,800)
31
-
1,411
91
$
(86)
(10,333)
(10,419)
386,598
22,507
(1,165)
-
(124)
-
-
-
-
-
-
(1,391)
(124)
(1,871)
-
-
-
-
-
(1,391)
(124)
(18,728)
(4,800)
25
-
2,039
142
(1,391)
$
-
(72)
(72)
267
-
-
-
-
-
$
-
(5,601)
(5,601)
27,393
-
-
(12,203)
6,256
-
$
(51)
(55,462)
(55,513)
329,590
421,734
(1,293)
231
6,256
(6,374)
-
-
-
-
-
-
-
-
(1,090)
-
-
-
-
-
-
(30,367)
(4,800)
12
-
5,072
264
-
(679)
(679)
19,410
$
-
207
207
474
$
-
(472)
(472)
19,884
$
(178)
(16,829)
(17,007)
703,318
$
Dollars
-
$
-
-
-
-
(1,283)
20,670
(552)
-
-
-
-
-
$
-
(96)
(96)
18,739
-
-
-
-
(1,010)
-
-
-
-
-
-
$
-
(2,996)
(2,996)
14,733
-
-
(230)
-
6,374
-
(610)
-
-
-
-
-
-
(373)
(373)
19,894
$
-
-
-
-
-
-
-
-
-
3,064,252
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,064,252
-
-
(50,000)
-
-
-
-
-
-
-
-
-
-
-
-
3,014,252
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
38 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS]
Operating activities:
Net loss
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Gain on disposition of hotel properties
Impairment of assets
Acquisition costs
Depreciation
Amortization
Debt extinguishment
Development loan interest added to principal
Equity in (income) loss of unconsolidated joint ventures
Distributions from unconsolidated joint ventures
Loss (gain) recognized on change in fair value of derivative instrument
Stock based compensation expense
Change in assets and liabilities:
(Increase) decrease in:
Hotel accounts receivable
Escrows
Other assets
Due from related party
Increase (decrease) in:
Due to related party
Accounts payable and accrued expenses
Net cash provided by operating activities
Investing activities:
Purchase of hotel property assets
Deposits on hotel acquisitions
Capital expenditures
Cash paid for hotel development project
Proceeds from disposition of hotel properties
Distributions from unconsolidated joint venture
Advances and capital contributions to unconsolidated joint ventures
Investment in development loans receivable
Repayment of development loans receivable
Repayment of notes receivable
Cash paid for franchise fee intangible
Net cash used in investing activities
Financing activities:
Proceeds (repayments of) from borrowings under line of credit, net
Principal repayment of mortgages and notes payable
Proceeds from mortgages and notes payable
Cash paid for deferred financing costs
Proceeds from issuance of common stock, net
Acquisition of interest rate cap
Distributions to partners in consolidated joint ventures
Dividends paid on common shares
Dividends paid on preferred shares
Distributions paid on common partnership units
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of year
2010
2009
2008
$
(17,202)
$
(58,458)
$
(10,429)
(347)
2,410
4,676
51,823
2,975
725
(2,559)
(2,257)
-
12
6,649
(1,694)
(1,210)
(273)
(2,514)
(131)
5,163
46,246
(280,731)
(5,500)
(10,328)
(6,471)
2,863
100
(14,291)
-
-
-
-
(314,358)
(33,200)
(61,779)
31,505
(4,016)
420,441
(394)
-
(23,688)
(4,800)
(1,765)
322,304
54,192
11,404
(1,869)
39,111
-
44,002
2,285
-
(3,253)
7,190
400
(172)
2,143
(312)
(3,770)
(3,727)
2,159
(634)
(3,563)
21,532
(9,315)
-
(6,138)
-
8,524
261
(753)
(2,000)
500
-
-
(8,921)
(9,221)
(39,232)
42,155
(362)
21,342
-
(124)
(22,640)
(4,800)
(4,022)
(16,904)
(4,293)
15,697
(2,888)
21,004
-
41,219
1,958
1,587
-
517
3,036
71
1,502
420
1,302
(1,132)
(3,251)
(1,115)
93
53,894
(63,626)
-
(19,226)
-
6,456
2,113
(96)
(64,200)
22,416
1,350
(57)
(114,870)
44,721
(57,421)
59,156
(1,244)
61,845
-
-
(32,169)
(4,800)
(5,742)
64,346
3,370
12,327
Cash and cash equivalents - end of year
$
65,596
$
11,404
$
15,697
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
39 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hersha Hospitality Trust (“we” or the “Company”) was formed in May 1998 as a self-administered, Maryland real estate investment
trust. We have elected to be taxed and expect to continue to elect to be taxed as a real estate investment trust, or REIT, for federal
income tax purposes.
The Company owns a controlling general partnership interest in Hersha Hospitality Limited Partnership (“HHLP” or the “Partnership”),
which owns a 99% limited partnership interest in various subsidiary partnerships. Hersha Hospitality, LLC (“HHLLC”), a Virginia
limited liability company, owns a 1% general partnership interest in the subsidiary partnerships and the Partnership is the sole member of
HHLLC.
The Partnership owns a taxable REIT subsidiary (“TRS”), 44 New England Management Company (“44 New England” or “TRS
Lessee”), to lease certain of the Company’s hotels.
Hersha’s common shares of beneficial interest trade on the New York Stock Exchange (“the NYSE”) under the ticker symbol "HT" and
its 8.0% Series A preferred shares of beneficial interest trade on the NYSE under the ticker symbol "HT PR A."
As of December 31, 2010, the Company, through the Partnership and subsidiary partnerships, wholly owned sixty-two limited and full
service hotels. All of the wholly owned hotel facilities are leased to the Company’s TRS, 44 New England.
In addition to the wholly owned hotel properties, as of December 31, 2010, the Company owned joint venture interests in another fifteen
properties. The properties owned by the joint ventures are leased to a TRS owned by the joint venture or to an entity owned by the joint
venture partners and 44 New England. The following table lists the properties owned by these joint ventures:
Joint Venture
Ownership
Property
Location
Lessee/Sublessee
Unconsolidated Joint Ventures
Inn America Hospitality at Ewing, LLC
Mystic Partners, LLC
SB Partners, LLC
Metro 29th Street Associates, LLC.
Consolidated Joint Ventures
Hiren Boston, LLC
LTD Associates One, LLC
LTD Associates Two, LLC
50.0%
66.7%
8.8%
66.7%
66.7%
66.7%
66.7%
44.7%
66.7%
15.0%
50.0%
50.0%
50.0%
75.0%
75.0%
Courtyard
Marriott
Hilton
Courtyard
Courtyard
Residence Inn
Residence Inn
Residence Inn
Springhill Suites
Marriott
Holiday Inn Express
Holiday Inn Express
Ewing/Princeton, NJ
Mystic, CT
Hartford, CT
Norwich, CT
Warwick, RI
Danbury, CT
Mystic, CT
Southington, CT
Waterford, CT
Hartford, CT
South Boston, MA
New York, NY
Hersha Inn America TRS Inc.
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
Mystic Partners Leaseco, LLC
South Bay Sandeep, LLC
Metro 29th Sublessee, LLC
Courtyard
Springhill Suites
Residence Inn
South Boston, MA
Williamsburg, VA
Williamsburg, VA
South Bay Boston, LLC
HT LTD Williamsburg One LLC
HT LTD Williamsburg Two LLC
Mystic Partners, LLC owns an interest in nine hotel properties. Our interest in Mystic Partners, LLC is relative to our interest in each of
the nine properties owned by the joint venture as defined in the joint venture’s governing documents. Each of the nine properties owned
by Mystic Partners, LLC is leased to a separate entity that is consolidated in Mystic Partners Leaseco, LLC which is owned by 44 New
England and our joint venture partner in Mystic Partners, LLC.
The properties are managed by eligible independent management companies, including Hersha Hospitality Management, LP
40 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(“HHMLP”). HHMLP is owned in part by three of the Company’s executive officers, two of its affiliated trustees and other third party
investors.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned TRS
Lessee. All significant inter-company amounts have been eliminated.
Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company as
general partner of the Partnership. Properties owned in joint ventures are also consolidated if the determination is made that we are the
primary beneficiary in a variable interest entity (VIE) or we maintain control of the asset through our voting interest in the entity. Control
can be demonstrated when the general partner has the power to impact the economic performance of the partnership, which includes the
ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent
of the limited partners and the inability of the limited partners to replace the general partner. Control can be demonstrated by the limited
partners if the limited partners have the right to dissolve or liquidate the partnership or otherwise remove the general partner without
cause or have rights to participate in the significant decisions made in the ordinary course of the partnership’s business.
We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines of consolidation. Our
examination consists of reviewing the sufficiency of equity at risk, controlling financial interests, voting rights, and the obligation to
absorb expected losses and expected gains, including residual returns. Based on our examination, the following entities were determined
to be VIE’s: Mystic Partners, LLC; Mystic Partners Leaseco, LLC; South Bay Boston, LLC; HT LTD Williamsburg One LLC; HT LTD
Williamsburg Two LLC; Metro 29th Sublessee, LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II. Mystic Partners, LLC is a
VIE entity, however because we are not the primary beneficiary it is not consolidated by the Company. Our maximum exposure to losses
due to our investment in Mystic Partners, LLC is limited to our investment in the joint venture which is $25,935 as of December 31,
2010. Also, Mystic Partners Leaseco, LLC; South Bay Boston, LLC; HT LTD Williamsburg One LLC; HT LTD Williamsburg Two
LLC, and Metro 29th Sublessee, LLC lease hotel properties from our joint venture interests and are VIEs. These entities are consolidated
by the lessors, the primary beneficiaries of each entity. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs but HHLP is not
the primary beneficiary in these entities. The accounts of Hersha Statutory Trust I and Hersha Statutory Trust II are not consolidated with
and into HHLP.
We have consolidated the operations of LTD Associates One, LLC; and LTD Associates Two, LLC joint ventures because each entity is
a voting interest entity and the Company owns a majority voting interest in the venture. In addition, we have consolidated the operations
of the Hiren Boston, LLC joint venture beginning on April 13, 2010, due to debt restructuring event which caused Hiren Boston, LLC to
become a VIE. Since HHLP is considered the primary beneficiary of this VIE, we have consolidated this joint venture.
We allocate resources and assess operating performance based on individual hotels and consider each one of our hotels to be an
operating segment. All of our individual operating segments meet the aggregation criteria. All of our other real estate investment
activities are immaterial and meet the aggregation criteria, and thus, we report one segment: investment in hotel properties.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (US GAAP)
requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
41 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Although we believe the assumptions and estimates we made are reasonable and appropriate, as discussed in the applicable sections
throughout these Consolidated Financial Statements, different assumptions and estimates could materially impact our reported results.
The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions and changes in
market conditions could impact our future operating results.
Investment in Hotel Properties
The Company allocates the purchase price of hotel properties acquired based on the fair value of the acquired real estate, furniture,
fixtures and equipment, and intangible assets and the fair value of liabilities assumed, including debt. The Company’s investments in
hotel properties are carried at cost and are depreciated using the straight-line method over the following estimated useful lives:
Building and Improvements
Furniture, Fixtures and Equipment
7 to 40 Years
2 to 7 Years
The Company periodically reviews the carrying value of each hotel to determine if circumstances indicate impairment to the carrying
value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of
impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific
hotel. Based on the properties undiscounted future cash flows, the Company will determine if the investment in such hotel is
recoverable. If impairment is indicated, an adjustment will be made to reduce the carrying value of the hotel to reflect the hotel at fair
value.
We consider a hotel to be held for sale when management and our independent trustees commit to a plan to sell the property, the property
is available for sale, management engages in an active program to locate a buyer for the property and it is probable the sale will be
completed within a year of the initiation of the plan to sell.
Investment in Unconsolidated Joint Ventures
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or our voting
interest in a voting interest entity, the equity method of accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize our share of net earnings or losses of the affiliates as they occur rather than as dividends or other
distributions are received, limited to the extent of our investment in, advances to and commitments for the investee. Pursuant to our joint
venture agreements, allocations of profits and losses of some of our investments in unconsolidated joint ventures may be allocated
disproportionately as compared to the ownership percentages due to specified preferred return rate thresholds.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if circumstances
indicate impairment to the carrying value of the investment that is other than temporary. When an impairment indicator is present, we
will estimate the fair value of the investment. Our estimate of fair value takes into consideration factors such as expected future
operating income, trends and prospects, as well as the effects of demand, competition and other factors. This determination requires
significant estimates by management, including the expected cash flows to be generated by the assets owned and operated by the joint
venture. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount over the fair value of our
investment in the unconsolidated joint venture.
Development Loans Receivable
The Company provides secured first-mortgage and mezzanine financing to hotel developers. Development loans receivable are recorded
at cost and are reviewed for potential impairment on an on-going basis. The Company’s development loans receivable are each secured
by various hotel or hotel development properties or partnership interests in hotel or hotel development properties. We have determined
that development loans receivable do not constitute a financial interest in a VIE and do not consolidate the operating
42 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
results of the borrower in our consolidated financial statements. Our evaluation consists of reviewing the sufficiency of the borrower’s
equity at risk, controlling financial interests in the borrower, voting rights of the borrower, and the borrower’s obligation to absorb
expected losses and expected gains, including residual returns. The analysis utilized by the Company in evaluating the development
loans receivable involves considerable management judgment and assumptions.
A development loan receivable is considered impaired when it becomes probable, based on current information, that the Company will
be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by
comparing the recorded amount of the loan to the present value of the expected cash flows or the fair value of the collateral. If a loan was
deemed to be impaired, the Company would record a charge to income for any shortfall.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand and in banks plus short-term investments with an initial maturity of three months or
less when purchased.
Escrow Deposits
Escrow deposits include reserves for debt service, real estate taxes, and insurance and reserves for furniture, fixtures, and equipment
replacements, as required by certain mortgage debt agreement restrictions and provisions.
Hotel Accounts Receivable
Hotel accounts receivable consists primarily of meeting and banquet room rental and hotel guest receivables. The Company generally
does not require collateral. Ongoing credit evaluations are performed and an allowance for potential losses from uncollectible accounts
is provided against the portion of accounts receivable that is estimated to be uncollectible.
Deferred Costs
Deferred loan costs are recorded at cost and amortized over the terms of the related indebtedness using the effective interest method.
Due from/to Related Parties
Due from/to Related Parties represents current receivables and payables resulting from transactions related to hotel management and
project management with affiliated entities. Due from related parties results primarily from advances of shared costs incurred and
interest receivable on development loans made to related parties. Due to affiliates results primarily from hotel management and project
management fees incurred. Both due to and due from related parties are generally settled within a period not to exceed one year.
Intangible Assets
Intangible assets consist of leasehold intangibles for above-market and below-market value of in-place leases and deferred franchise
fees. The leasehold intangibles are amortized over the remaining lease term. Deferred franchise fees are amortized using the
straight-line method over the life of the franchise agreement.
Noncontrolling Interest
Noncontrolling interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income
(loss) is allocated to noncontrolling interest in accordance with the weighted average percentage ownership of the Partnership during
43 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted
average percentage ownership of the Partnership during the period. Our ownership interest in the Partnership as of December 31,2010,
2009 and 2008 was 95.8%, 86.9%, and 84.5%, respectively.
Effective January 1, 2009, we adopted a new accounting standard which defines a noncontrolling interest as the portion of equity in a
subsidiary not attributable, directly or indirectly, to a parent. Under this standard, such noncontrolling interests are reported on the
consolidated balance sheets within equity, but separately from the shareholders’ equity. Revenues, expenses and net income or loss
attributable to both the Company and noncontrolling interests are reported on the consolidated statements of operations.
In accordance with US GAAP, we classify securities that are redeemable for cash or other assets at the option of the holder, or not solely
within the control of the issuer, outside of permanent equity in the consolidated balance sheet. The Company makes this determination
based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling
interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company considers the guidance in
US GAAP to evaluate whether the Company controls the actions or events necessary to issue the maximum number of common shares
that could be required to be delivered at the time of settlement of the contract.
We classify the noncontrolling interests of our consolidated joint ventures within equity on our consolidated balance sheets. These
noncontrolling interests totaled $474 as of December 31, 2010 and $267 as of December 31, 2009. In addition, certain common units of
limited partnership interests in HHLP (“Nonredeemable Common Units”) are reclassified from the mezzanine section of our
consolidated balance sheets to equity. These noncontrolling interests of Nonredeemable Common Units totaled $19,410 as of December
31, 2010 and $27,126 as of December 31, 2009. As of December 31, 2010, there were 4,404,660 Nonredeemable Common Units
outstanding with a fair market value of $29,071, based on the price per share of our common shares on the NYSE on such date. These
units are only redeemable by the unit holders for common shares on a one-for-one basis or, at our option, cash.
Certain common units of limited partnership interests in HHLP (“Redeemable Common Units”) have been pledged as collateral in
connection with a pledge and security agreement entered into by the Company and the holders of the Redeemable Common Units. The
redemption feature contained in the pledge and security agreement where the Redeemable Common Units serve as collateral contains a
provision that could result in a net cash settlement outside of the control of the Company. As a result, the Redeemable Common Units
will continue to be classified in the mezzanine section of the consolidated balance sheets as they do not meet the requirements for equity
classification under US GAAP. The carrying value of the Redeemable Common Units equals the greater of carrying value based on the
accumulation of historical cost or the redemption value. As of December 31, 2010, there were 3,014,252 Redeemable Common Units
outstanding with a redemption value equal to the fair value of the Redeemable Common Units, or $19,894. The redemption value of the
Redeemable Common Units is based on the price per share of our common shares on the NYSE on such date. As of December 31, 2010,
the Redeemable Common Units were valued on the consolidated balance sheets at redemption value since the Redeemable Common
Units redemption value was greater than historical cost of $13,521. As of December 31, 2009, the Redeemable Common Units were
valued on the consolidated balance sheets at carrying value based on historical cost of $14,733 since historical cost exceeded the
Redeemable Common Units redemption value of $9,622.
We also maintain noncontrolling interests for the equity interest owned by third parties in LTD Associates One, LLC and LTD
Associates Two, LLC. Third parties own a 25% interest in each of LTD Associates One, LLC and LTD Associates Two, LLC. In
addition, we maintain noncontrolling interest for the equity interest owned by third parties in Hiren Boston, LLC. A third party owns a
50% interest in Hiren Boston, LLC. We allocate the income (loss) of these joint ventures to the noncontrolling interest in consolidated
joint ventures based upon the ownership of the entities, preferences in distributions of cash available and the terms of each venture
agreement.
44 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net income or loss attributed to Nonredeemable Common Units and Redeemable Common Units (collectively, “Common Units”), as
well as the net income or loss related to the noncontrolling interests of our consolidated joint ventures, is included in net income or loss
in the consolidated statements of operations. Net income or loss attributed to the Common Units and the noncontrolling interests of our
consolidated joint ventures is excluded from net income or loss applicable to common shareholders in the consolidated statements of
operations.
Shareholders’ Equity
On January 21, 2010, we completed a public offering in which 51,750,000 common shares, including 6,750,000 common shares subject
to an overallotment option exercised by the underwriters, were sold by us through several underwriters for net proceeds to us of
approximately $148,955 before the payment of offering-related expenses. Immediately upon closing the offering, we contributed all of
the net proceeds of the offering to HHLP in exchange for additional common units of limited partnership in HHLP.
On March 24, 2010, we completed a public offering in which 27,600,000 common shares, including 3,600,000 common shares subject to
an overallotment option exercised by the underwriters, were sold by us through several underwriters for net proceeds to us of
approximately $112,762 before the payment of offering-related expenses. Immediately upon closing the offering, we contributed all of
the net proceeds of the offering to the Partnership in exchange for additional common units of limited partnership in HHLP.
On October 22, 2010, we completed a public offering in which 28,750,000 common shares, including 3,750,000 common shares subject
to an overallotment option exercised by the underwriters, were sold by us through several underwriters for net proceeds to us of
approximately $160,017 before the payment of offering-related expenses. Immediately upon closing the offering, we contributed all of
the net proceeds of the offering to HHLP in exchange for additional common units of limited partnership in HHLP. HHLP used the net
proceeds of this offering to reduce some of the indebtedness outstanding under our revolving line of credit facility and secured debt on
several of our existing assets and intends to use the remainder for general corporate purposes, including repayment of debt and and future
acquisitions.
Aggregate offering-related expenses associated with these three public offerings were approximately $1,293, resulting in net proceeds
after expenses of $420,441.
On August 4, 2009, we entered into a purchase agreement with Real Estate Investment Group L.P. (“REIG”), pursuant to which we sold
5,700,000 Class A common shares of beneficial interest at a price of $2.50 per share to REIG for gross proceeds of $14,250. REIG is a
Bermuda limited partnership, whose general partner and majority limited partner wholly-owned by IRSA Inversiones y
Representaciones Sociedad Anуnima, a stock corporation organized under the laws of the Republic of Argentina (“IRSA”). We also
granted REIG the option to buy up to an additional 5,700,000 common shares at a price of $3.00 per share, which is exercisable through
August 4, 2014. If at any time after August 4, 2011 the closing price for our common shares on the NYSE exceeds $5.00 for 20
consecutive trading days, we may call in and cancel the option in exchange for issuance of common shares to REIG with an aggregate
value equal to the volume weighted average price per common share for the 20 trading days prior to the exercise of the option, less the
$3.00 option price, multiplied by the number of common shares remaining under the option.
On June 12, 2009, we entered into a sales agreement with a broker-dealer acting as a sales agent, under which it may offer and sell up to
15,000,000 Class A common shares of beneficial interest. Sales of shares under this agreement, if any, may be made by any method
permitted by law deemed to be an “at the market offering” and in privately negotiated transactions. The sales agent is to use its
commercially reasonable efforts consistent with its normal trading and sales practice to sell the shares as directed by the Company. The
sales agent is entitled to compensation equal to 2.75% of the gross sales price per share for any shares sold under the agreement. Under
the sales agreement, during the year ended December 31, 2009, we sold 2,742,300 shares with net proceeds of $8,258.
45 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On May 16, 2008, we completed a public offering of 6,000,000 common shares at $9.90 per share. On May 20, 2008, the underwriters
exercised a portion of their over-allotment option with respect to that offering, and we issued an additional 600,000 common shares at
$9.90 per share. Proceeds to us, net of underwriting discounts and commissions and expenses, were approximately
$61,845. Immediately upon closing the offering, we contributed all of the net proceeds of the offering to the Partnership in exchange for
additional Partnership interests. The net offering proceeds were used to repay indebtedness.
Stock Based Compensation
We measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of
the award. The compensation cost is amortized on a straight line basis over the period during which an employee is required to provide
service in exchange for the award. The compensation cost related to performance awards that are contingent upon market based criteria
being met is recorded at the fair value of the award on the date of the grant and amortized over the performance period.
Derivatives and Hedging
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate
movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps
as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts
in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate
caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to increases in variable interest rates.
Revenue Recognition
We recognize revenue and expense for all consolidated hotels as hotel operating revenue and hotel operating expense when earned
and incurred. These revenues are recorded net of any sales or occupancy taxes collected from our guests. We participate in frequent guest
programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred.
Interest income on development loan financing is recorded in the period earned based on the interest rate of the loan and outstanding
balance during the period. Development loans receivable and accrued interest on the development loans receivable are evaluated to
determine if outstanding balances are collectible. Interest is recorded only if it is determined the outstanding loan
balance and accrued interest balance are collectible.
Other revenues consist primarily of fees earned for asset management services provided to hotels we own through unconsolidated joint
ventures. Fees are earned as a percentage of hotel revenue and are recorded in the period earned to the extent of the noncontrolling
interest ownership.
Income Taxes
The Company qualifies as a REIT under applicable provisions of the Internal Revenue Code, as amended, and intends to continue to
qualify as a REIT. In general, under such provisions, a trust which has made the required election and, in the taxable year, meets certain
requirements and distributes to its shareholders at least 90% of its REIT taxable income will not be subject to Federal income tax to the
extent of the income which it distributes. Earnings and profits, which determine the taxability of dividends to shareholders, differ from
net income reported for financial reporting purposes due primarily to differences in depreciation of hotel properties for Federal income
tax purposes.
46 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability method. Under this method,
deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS
Lessee and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be
in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely
than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors.
Although the TRS Lessee is expected to operate at a profit for Federal income tax purposes in future periods, the utilization of the
deferred tax asset is not determinable. Therefore, any deferred tax assets have been reserved as we have not concluded that it is more
likely than not that these deferred tax assets will be realizable.
Reclassification
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Costs
In July 2010, the FASB issued a new accounting standard that expands existing disclosures about the credit quality of financial
receivables and the related allowance for credit losses. The expanded disclosure requirements, which are effective for ending balances
as of December 31, 2010, are applicable to our Development Loans Receivable, and have been included in Note 4. Disclosures
regarding activity that occurs during the reporting period will be effective beginning January 1, 2011.
47 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties consists of the following at December 31, 2010 and 2009:
Land
Buildings and Improvements
Furniture, Fixtures and Equipment
Construction in Progress
December 31, 2010
December 31, 2009
$
233,869
1,057,344
150,723
15,301
1,457,237
$
161,449
814,461
122,174
-
1,098,084
Less Accumulated Depreciation
(211,386)
(159,130)
Total Investment in Hotel Properties
$
1,245,851
$
938,954
Depreciation expense was $51,823, $44,002 and $41,219 for the years ended December 31, 2010, 2009, and 2008, respectively.
Acquisitions
During the year ended December 31, 2010 we acquired the following wholly owned hotel properties:
Acquisition
Date
Land
Buildings and
Improvements
Furniture
Fixtures and
Equipment
Franchise
Fees, Loan
Costs, and
Leasehold
Intangible
Construction
in Progress
Total
Purchase
Price
Fair Value of
Assumed Debt
1/1/2010
$ 1,898
$ 12,981
$ 2,223
$ 27
$ -
$ 17,129
$ 11,937
2/9/2010
10,691
41,637
3,939
89
-
56,356
-
2/9/2010
11,075
43,113
4,078
105
-
58,371
-
2/9/2010
10,281
36,687
4,298
96
-
51,362
-
5/7/2010
12,152
21,100
1,567
57
-
34,876
-
9/1/2010
9,335
58,048
5,605
108
-
73,096
-
12/28/2010
-
-
-
-
15,301
15,301
-
$ 55,432
$ 213,566
$ 21,710
$ 482
$ 15,301
$ 306,491
$ 11,937
Hotel
Hilton Garden Inn,
Glastonbury, CT
Hampton Inn,
Times Square, NY
Holiday Inn Express,
Times Square, NY
Candlewood Suites,
Times Square, NY
Holiday Inn,
Wall Street, NY
Hampton Inn,
Washington, DC
Sheraton,
New Castle, DE
Total
On January 1, 2010, we acquired our joint venture partner’s 52.0% membership interest in PRA Glastonbury, LLC, the owner of the
Hilton Garden Inn, Glastonbury, CT, and as a result, this hotel became one of our wholly-owned properties. We assumed $13,141 in
mortgage debt with the acquisition of this property bearing interest at 5.98% which was determined on the date of acquisition to be below
market rates. We recorded a discount of $1,204 related to the assumption of this debt which will be amortized through the date of the
debt’s maturity in April 2016. Amortization of the discount is recorded as interest expense on our consolidated statement of
operations. See “Note 3 – Investment in Unconsolidated Joint Ventures” for further discussion of this transaction.
On February 9, 2010, we acquired a Hampton Inn, a Holiday Inn Express and a Candlewood Suites in the area of Times Square, New
York, NY. The sellers of the three hotels were related to each other, but not the Company. The total purchase price for the three
48 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (continued)
hotels was $166,089 and consisted of $160,790 in cash and 1,451,613 Common Units, valued at $5,299. In addition, we paid closing
costs of $3,228 and acquired approximately $63 in net working capital assets.
On May 7, 2010, we entered into a contribution agreement with an unrelated third party and closed on the acquisition of 100% of the
membership interests in Maiden Hotel LLC, the owner of the Wall Street Holiday Inn, New York, NY. The aggregate purchase price
paid for the membership interests in Maiden Hotel LLC was approximately $34,876. The purchase price paid included the issuance of
200,000 Common Units, valued at $957, the settlement of $7,839 of existing mezzanine financing and accrued interest income, and the
payment of approximately $26,080 in cash provided, in part, from borrowings under our existing line of credit. The property was
purchased unencumbered of debt. In addition, we paid closing costs of $151 and acquired approximately $511 in net working capital.
On September 1, 2010, we entered into a purchase and sale agreement with an unrelated third party and closed on the acquisition of the
Hampton Inn, Washington, DC. The total purchase price for this hotel was $73,096, which was paid in cash provided by borrowings
under our revolving line of credit. In addition, we paid closing costs of $1,188 and acquired approximately $304 in net working capital
assets.
On December 28, 2010, we closed on the acquisition of a parcel of land which includes a multi-story vacant hotel building with an
unrelated third party in New Castle, DE. The total purchase price for this hotel was $15,301, which was paid in cash. We have begun
the process of converting this hotel building into a branded hotel. The conversion has an estimated completion date of June 2011.
As shown in the table below, included in the consolidated statements of operations for the year ended December 31, 2010 are total
revenues of $46,147 and total net income of $7,518 for the hotels we acquired a 100% interest in since January 1, 2010. These amounts
represent the results of operations for such hotels since the date of acquisition of our 100% interest in such hotels.
Hotel
Hilton Garden Inn, (cid:31)Glastonbury, CT
Hampton Inn, Holiday Inn Express, Candlewood Suites, Times Square, NY(cid:31)
Holiday Inn, Wall Street, NY
Hampton Inn, Washington, DC
Total
Revenue
5,046
$
32,681
4,496
3,924
46,147
$
Twelve Months Ended,
December 31, 2010
Net
(Loss) Income
$
(142)
7,025
962
(327)
7,518
$
During the year ended December 31, 2009 we acquired the following wholly owned hotel properties:
Acquisition
Date
Land
Buildings and
Improvements
Furniture
Fixtures and
Equipment
Franchise
Fees, Loan
Costs, and
Leasehold
Intangible
Construction
in Progress
Total
Purchase
Price
Fair Value of
Assumed Debt
6/30/2009
$ 21,077
$ 42,955
$ 2,668
$ 300
$ -
$ 67,000
$ 29,824
11/4/2009
1,053
$ 22,130
10,751
$ 53,706
1,196
$ 3,864
-
-
$ 300
$ -
13,000
$ 80,000
7,700
$ 37,524
Hotel
Hilton Garden Inn,
TriBeCa, New York, NY
Hampton Inn,
West Haven, CT
Total
49 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (continued)
On May 1, 2009, we acquired, from an unaffiliated seller, a 49% membership interest in York Street, LLC, the owner of the Hilton
Garden Inn, TriBeCa, New York, NY. In connection with the acquisition of our 49% interest in York Street, LLC, we also entered into
an option agreement to acquire the seller’s remaining 51% interest in York Street, LLC. On June 30, 2009, we exercised the option and
acquired the remaining 51% interest in York Street, LLC making the Hilton Garden Inn, TriBeCa, New York, NY, wholly
owned. Consideration given as of the purchase date to acquire our 100% interest in York Street, LLC included:
Cash paid to seller
Amounts payable to seller
Settlement of development loans receivable and
accrued interest income on development loans
Land and mortgage transferred to seller
Assumption of York Street, LLC mortgage loan payable
Net hotel working capital liabilities assumed
$ 4,794
1,387 (1)
19,555 (2)
10,118 (3)
29,824 (4)
1,322
Total consideration given
$ 67,000
(1) “Cash payable to the seller” of $1,387 was held back at settlement pending the seller’s completion of certain capital
expenditures and the delivery on the Company’s obligation to transfer land to the seller.
(2) “Settlement of development loans receivable and accrued interest income on development loans” consists of principal and
accrued interest receivable reductions with respect to development loans made to York Street, LLC and Maiden Hotel, LLC, an
entity controlled by the seller. See “Note 4 – Development Loans Receivable and Land Leases” for more information related to
the development loans made to York Street, LLC and Maiden Hotel, LLC.
(3) “Land and mortgage transferred to seller” consisted of our investment in real property at 440 West 41st Street, New York, NY,
and related land lease revenue receivable. This parcel was acquired on July 28, 2006 and leased to Metro Forty First Street,
LLC, an entity controlled by the seller. In connection with our acquisition of the membership interests in York Street, LLC, we
transferred this property to Metro Forty First Street, LLC, and that entity assumed our obligations under the $12,100 mortgage
loan encumbering the property.
(4) The mortgage loan assumed in connection with the acquisition of York Street, LLC, which is secured by the Hilton Garden Inn,
TriBeCa, New York, NY, was refinanced on August 7, 2009 with a $29,824 first mortgage loan which matures in July 2012 and
bears interest at the Wall Street Journal variable prime rate plus 2.0% subject to an interest rate floor of 8.75%.
We recorded an intangible asset for the lease of restaurant space located in the Hilton Garden Inn, TriBeCa, New York, NY that was in
place at the time of acquisition. The lease is with an unrelated third party and has 15 years remaining until expiration with one five year
extension option. We earn fixed rent under this lease at a minimum of $300 per annum for the first five years of the lease and a minimum
of $336 and $376 per annum for the second and third five-year periods of the lease, respectively.
On November 4, 2009, we entered into a contribution agreement and closed on the acquisition of 100% of the membership interests in
44 West Haven Hospitality, LLC, the owner of the Hampton Inn and Suites, West Haven, CT. The aggregate purchase price paid for
the membership interests in 44 West Haven Hospitality, LLC was approximately $13,000, including the assumption of $7,700 of
existing mortgage debt secured by a first lien on the Hampton Inn and Suites, West Haven, CT, the release of $2,000 of existing
mezzanine financing provided by us to 44 West Haven Hospitality, LLC, the cancellation of approximately $200 in accrued interest
related to the existing mezzanine financing and approximately $3,100 of cash. The assumed mortgage debt bears interest at a fixed
rate of 6.0% and matures in November 2012, with a three year extension subject to approval by the lenders. In addition, we paid the
lenders a modification fee of $39. Certain of our officers and affiliated trustees had direct or indirect interests in 44 West Haven
Hospitality, LLC. As a related party transaction, the transaction was approved by all of our independent trustees. HHMLP will
continue to manage the Hampton Inn and Suites, West Haven, CT.
50 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (continued)
Pro Forma Results (Unaudited)
The following condensed pro forma financial data is presented as if all acquisitions had been completed on January 1, 2009. Properties
acquired without any operating history are excluded from the condensed pro forma operating results. The condensed pro forma
information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions
had been consummated on January 1, 2009 at the beginning of the year presented, nor does it purport to represent the results of
operations for future periods.
Pro Forma Total Revenues
Pro Forma (Loss) income from Continuing Operations
Income (Loss) from Discontinued Operations
Pro Forma Net (Loss) income
Loss (Income) allocated to Noncontrolling Interest
Preferred Distributions
Pro Forma Net (Loss) income applicable to Common Shareholders
Pro Forma (Loss) income
applicable to Common Shareholders per Common Share
Basic
Diluted
Weighted Average Common Shares Outstanding
Basic
Diluted
For the Year Ended December
2010
294,049
$
2009
$
260,145
$
$
(13,698)
471
(13,227)
605
(4,800)
(17,422)
(53,548)
2,308
(51,240)
7,543
(4,800)
(48,497)
$
$
$
$
(0.16)
(0.16)
$
$
(0.95)
(0.95)
134,370,172
134,370,172
51,027,742
51,027,742
Renovation
On April 2, 2010, we commenced renovations to convert two of our existing adjoining hotel properties in King of Prussia, PA into a
Hyatt Place. The hotels previously operated as a Mainstay Suites and a Sleep Inn and were closed at the time renovations
commenced. As such, we ceased recording depreciation expense on the two existing properties and we capitalized the cost of
construction, including interest, during the period of time the hotel was under renovation. On August 17, 2010, the renovations were
completed and the hotel opened. We capitalized approximately $6,471 in renovation costs, which are included in Investment in Hotel
Properties on the consolidated balance sheet.
Earn-out Provisions
Purchase agreements related to the Holiday Inn Express, Camp Springs, MD and Hampton Inn and Suites, Smithfield, RI hotels
contained certain earn-out provisions that entitled the seller to a payment based on operating metrics of the hotel properties. As of
December 31, 2010, the earnout period expired for these properties. These properties did not meet the required net operating income
thresholds established in the properties’ purchase agreements. As such, no amounts were paid or are payable to the sellers under these
earn-out provisions.
51 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of December 31, 2010 and December 31, 2009 our investment in unconsolidated joint ventures consisted of the following:
Joint Venture
Hotel Properties
Percent
Owned
Preferred
Return
December 31,
2010
December 31,
2009
PRA Glastonbury, LLC
Inn American Hospitality
at Ewing, LLC
Hiren Boston, LLC*
SB Partners, LLC
Mystic Partners, LLC
PRA Suites at
Glastonbury, LLC**
Metro 29th Street
Associates, LLC
Hilton Garden Inn,
Glastonbury, CT
Courtyard by Marriott,
Ewing, NJ
Courtyard by Marriott,
Boston, MA
Holiday Inn Express,
Boston, MA
48.0%
50.0%
50.0%
50.0%
11.0%
cumulative
11.0%
cumulative
N/A
N/A
$ -
$ 561
28
459
-
-
1,852
1,934
Hilton and Marriott branded
hotels in CT and RI
8.8%-66.7%
Homewood Suites,
Glastonbury, CT
Holiday Inn Express,
New York, NY
8.5%
non-cumulative
10.0%
non-cumulative
25,935
27,043
-
1,754
48.0%
50.0%
N/A
7,746
7,431
$ 35,561
$ 39,182
*During the year ended December 31, 2009, we determined that our investment in the Courtyard by Marriott, Boston, MA was
impaired. As a result, the Company recorded an impairment charge of $3,500 which is included in loss from unconsolidated joint
venture investments on the Company’s consolidated statements of operations. This charge reduced our investment in the Courtyard
by Marriott, Boston, MA to $0.
**During the year ended December 31, 2009, we determined that our investment in the Homewood Suites, Glastonbury, was
impaired. As result, the Company recorded an impairment charge of $1,041 which is included in loss from unconsolidated joint
venture investments on the Company’s consolidated statements of operations. This charged reduced our investment in the Homewood
Suites, Glastonbury, to $1,754.
On January 1, 2010, we acquired our joint venture partner’s 52.0% membership interest in PRA Glastonbury, LLC, the owner of the
Hilton Garden Inn, Glastonbury, CT, and this hotel became one of our wholly-owned hotels. The consideration provided to our joint
venture partner in exchange for its 52.0% membership interest consisted of:
·
·
·
·
cash of $253;
our 48% minority membership interest in PRA Suites at Glastonbury, LLC, the owner of the Homewood Suites,
Glastonbury, CT;
settlement of a note receivable and accrued interest made to our former joint venture partner with a principal balance of
$1,267 and accrued interest receivable of $141; and
our assumption of the outstanding mortgage debt secured by the Hilton Garden Inn, Glastonbury, CT which had an
outstanding principal balance of $13,141 as of December 31, 2009, bears interest at a fixed rate of 5.98% per annum and
has an anticipated maturity date of April 1, 2016.
As a result of this transaction, our joint venture partner acquired our 48.0% minority membership interest in PRA Suites at
Glastonbury, LLC, the entity owning the Homewood Suites, Glastonbury, CT, and assumed the outstanding mortgage debt secured by
52 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
the Homewood Suites, Glastonbury, CT.
Due to the increase in our ownership interest in PRA Glastonbury, LLC, the value of our existing 48.0% interest was remeasured
resulting in a $1,818 gain which was recorded upon our acquisition of the remaining interests in the Hilton Garden Inn, Glastonbury, CT.
Hiren Boston, LLC, a joint venture that owns the 164-room Courtyard by Marriott located in South Boston, MA, had been pursuing
discussions with its lender to refinance a $16,200 mortgage loan secured by the hotel property, which had originally matured in
September 2009. On April 13, 2010, we purchased this mortgage loan from the lender, which had an unamortized principal balance of
$15,628, for a purchase price of $13,750, and amended the terms of the note. As amended, this $13,750 mortgage loan now requires the
joint venture to make monthly interest payments beginning on May 1, 2010, bears interest at a fixed rate of 10% per annum and matures
on April 13, 2012. As a result of the purchase of this mortgage loan, we have determined that we are the primary beneficiary of Hiren
Boston, LLC. As of April 13, 2010, we no longer accounted for our investment in Hiren Boston, LLC under the equity method of
accounting and began accounting for Hiren Boston, LLC as a consolidated subsidiary. Hiren Boston, LLC’s results of operations are
included in our consolidated statement of operations for the period from April 13, 2010 through December 31, 2010 and its balance sheet
is included in our consolidated balance sheet as of December 31, 2010. Our interest in Hiren Boston, LLC was remeasured, and as a
result, we recorded a gain of approximately $2,190.
During the year ended December 31, 2008, we determined that our investment in the Hartford Hilton, part of the Mystic Partners joint
venture portfolio, was impaired. As a result, the Company recorded an impairment charge of $1,890 which is included in loss from
unconsolidated joint venture investments on the Company’s consolidated statements of operations. This charge reduced our investment
in the Hartford Hilton to $0.
Income or loss from our unconsolidated joint ventures is allocated to us and our joint venture partners consistent with the allocation of
cash distributions in accordance with the joint venture agreements. Any difference between the carrying amount of these investments
and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets. Income
(loss) recognized during the years ended December 31, 2010, 2009, and 2008 for our Investments in Unconsolidated Joint Ventures is as
follows:
PRA Glastonbury, LLC
Inn American Hospitality at Ewing, LLC
Hiren Boston, LLC
SB Partners, LLC
Mystic Partners, LLC
PRA Suites at Glastonbury, LLC
Metro 29th Street Associates, LLC
Gain from Remeasurement of Investement in Unconsolidated Joint Venture
Less: Impairment of Investment in Unconsolidated Joint Venture
Twelve Months Ended December 31,
2009
2008
2010
$
-
(331)
-
(83)
(1,650)
-
313
(1,751)
4,008
-
$
(77)
(127)
(460)
(156)
(1,686)
(6)
(137)
(2,649)
-
(4,541)
$
94
20
(189)
80
(345)
(8)
1,721
1,373
-
(1,890)
Income (Loss) from Unconsolidated Joint Venture Investments
$
2,257
$
(7,190)
$
(517)
The Mystic Partners, LLC joint venture agreement provides for an 8.5% non-cumulative preferred return based on our contributed equity
interest in the venture. Cash distributions will be made from cash available for distribution, first, to us to provide an 8.5% annual
non-compounded return on our unreturned capital contributions and then to our joint venture partner to provide an 8.5% annual
non-compounded return of their unreturned contributions. Any remaining cash available for distribution will be distributed to us 10.5%
with respect to the net cash flow from the Hartford Marriott, 7.0% with respect to the Hartford Hilton and 56.7%, with respect to the
remaining seven properties. Mystic Partners, LLC allocates income to us and our joint venture partner consistent with the
53 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
allocation of cash distributions in accordance with the joint venture agreements.
Each of the Mystic Partners, LLC hotel properties, except the Hartford Hilton, is under an Asset Management Agreement with 44 New
England to provide asset management services. Fees for these services are paid monthly to 44 New England and recognized as income in
the amount of 1% of operating revenues, except for the Hartford Marriott which is 0.25% of operating revenues.
The Company and our joint venture partner in Mystic Partners, LLC jointly and severally guarantee the performance of the terms of a
loan to Adriaen’s Landing Hotel, LLC, owner of the Hartford Marriott, in the amount of $50,000, and 315 Trumbull Street Associates,
LLC, owner of the Hartford Hilton, in the amount of $27,000, if at any time during the term of the note and during such time as the net
worth of Mystic Partners falls below the amount of the guarantee. We have determined that the probability of incurring loss under this
guarantee is remote and the value attributed to the guarantee is de minimis.
The following tables set forth the total assets, liabilities, equity and components of net income, including the Company’s share, related to
the unconsolidated joint ventures discussed above as of December 31, 2010 and December 31, 2009 and for the years ended December
31, 2010, 2009, and 2008.
Balance Sheets
Assets
Investment in hotel properties, net
Other Assets
Total Assets
Liabilities and Equity
Mortgages and notes payable
Other liabilities
Equity:
Hersha Hospitality Trust
Joint Venture Partner(s)
Total Equity
December 31,
2010
December 31,
2009
$
$
$
$
144,675
27,970
172,645
196,842
28,473
225,315
$
156,976
37,797
$
218,116
18,219
38,394
(60,522)
(22,128)
44,178
(55,198)
(11,020)
Total Liabilities and Equity
$
172,645
$
225,315
Statements of Operations
Room Revenue
Other Revenue
Operating Expenses
Interest Expense
Loss on Impairment of Building and Equipment
Lease Expense
Property Taxes and Insurance
Federal and State Income Taxes
General and Administrative
Loss Allocated to Noncontrolling Interests
Depreciation and Amortization
2010
$
Twelve Months Ended December 31,
2009
$
2008
$
74,817
21,298
(63,113)
(11,817)
-
(5,363)
(6,827)
-
(7,025)
478
(10,345)
81,718
22,427
(68,389)
(16,326)
(7)
(5,647)
(6,596)
-
(7,332)
705
(14,423)
99,530
28,344
(82,327)
(13,442)
(9,171)
(5,538)
(6,459)
121
(7,835)
-
(16,171)
Net loss
$
(7,897)
$
(13,870)
$
(12,948)
54 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
The following table is a reconciliation of the Company’s share in the unconsolidated joint ventures’ equity to the Company’s investment
in the unconsolidated joint ventures as presented on the Company’s balance sheets as of December 31, 2010 and 2009:
Company's share of equity recorded on the joint ventures' financial statements
Adjustment to reconcile the Company's share of equity recorded on the
joint ventures' financial statements to our investment in
unconsoldiated joint ventures(1)
Investment in Unconsolidated Joint Ventures
December 31,
2010
$
38,394
December 31,
2009
$
44,178
$
(2,833)
35,561
$
(4,996)
39,182
(1) Adjustment to reconcile the Company's share of equity recorded on the joint ventures' financial statements to our investment in
unconsolidated joint ventures consists of the following:
- cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements;
- our basis in the investment in joint ventures not recorded on the joint ventures' financial statements; and
- accumulated amortization of our equity in joint ventures that reflects our portion of the excess of the fair value of
joint ventures' assets on the date of our investment over the carrying value of the assets recorded on the joint ventures
financial statements. This excess investment is amortized over the life of the properties, and the amortization is
included in Income (Loss) from Unconsolidated Joint Venture Investments on our consolidated statement of
operations.
55 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 4 - DEVELOPMENT LOANS RECEIVABLE
Development Loans
Historically, we provided first mortgage and mezzanine loans to hotel developers, including entities in which our executive officers and
affiliated trustees own an interest that enabled such entities to construct hotels and conduct related improvements on specific hotel
projects at interest rates ranging from 10% to 20%. These loans were initially originated as part of our acquisition strategy. During the
year ended December 31, 2010, no such loans were originated by us. Interest income from development loans was $4,686, $7,411 and
$7,890 for the years ended December 31, 2010, 2009, and 2008, respectively. Accrued interest on our development loans receivable
was $3,013 as of December 31, 2010 and $2,451 as of December 31, 2009. Accrued interest on our development loans receivable as of
December 31, 2010 does not include cumulative interest income of $5,653 which has been accrued and paid in kind by adding it to the
principal balance of certain loans as indicated in the table below.
As of December 31, 2010 and 2009, our development loans receivable consisted of the following:
Hotel Property
Borrower
Operational Hotels
Holiday Inn - New York, NY
Renaissance by Marriott - Woodbridge, NJ
Element Hotel - Ewing, NJ
Hilton Garden Inn - Dover, DE
Maiden Hotel, LLC
Hersha Woodbridge Associates, LLC
American Properties @ Scotch Road, LLC
44 Aasha Hospitality Associates, LLC
Construction Hotels
Hyatt 48Lex - New York, NY
44 Lexington Holding, LLC
Hyatt Union Square - New York, NY
Risingsam Union Square, LLC
Hampton Inn - New York, NY
SC Waterview, LLC
Principal
Outstanding
December 31,
2010
Principal
Outstanding
December 31,
2009
Interest
Rate
Maturity Date (1)
-
5,000
2,000
1,000
$ 7,000
5,000
2,000
1,000
(2)
(2)
12,939
12,714
8,000
11,591
11,503
8,000
20%
11%
11%
10%
11%
10%
10%
N/A
April 1, 2011 *
August 6, 2011 *
November 1, 2011 *
December 31, 2011 *
December 31, 2011
December 31, 2011
Total Development Loans Receivable
$
41,653
$
46,094
* Indicates borrower is a related party
(1) Represents current maturity date in effect. Agreements for our development loans receivable typically allow for two one-year
extensions which can be exercised by the borrower if the loan is not in default. As these loans typically finance hotel
development projects, it is common for the borrower to exercise their options to extend the loans, in whole or in part, until the
project has been completed and the project provides cash flow to the developer or is refinanced by the developer.
(2) We amended the following development loans to allow the borrower to elect, quarterly, to pay accrued interest in-kind by adding
the accrued interest to the principal balance of the loan as of December 31, 2010 and 2009:
Interest Income
Year Ended December 31,
Borrower
2010
2009
Cumulative
Interest Income
Paid In Kind
Risingsam Union Square, LLC
44 Lexington Holding, LLC
$
1,211
1,348
$
1,069
1,178
$
2,714
2,939
Total
$
2,559
$
2,247
$
5,653
56 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 4 - DEVELOPMENT LOANS RECEIVABLE (continued)
Advances and repayments on our development loans receivable consisted of the following for the years ended December 31, 2010, 2009,
and 2008:
2010
2009
2008
Balance at January 1,
New advances
Interest added to principal
Repayments
Principal exchanged for interest in hotel properties
Amortization of discount
Impairments, net of discount
Balance at December 31,
Impairment of Development Loans
$
$
$
46,094
-
2,559
-
(7,000)
-
-
41,653
81,500
2,000
4,502
(500)
(20,000)
-
(21,408)
46,094
58,183
64,200
-
(22,416)
-
281
(18,748)
81,500
$
$
$
We monitor our portfolio of development loans on an on-going basis to determine collectability of the loan principal and accrued
interest. We determined that our development loans to Brisam East 52, LLC and Brisam Greenwich, LLC, which were secured by the
equity interest in each entity, were permanently impaired. We ceased accruing interest on the loans effective July 1, 2009. As of
December 31, 2009, we determined that the fair value of each loan receivable is $0 and have incurred an impairment charge for the
remaining principal on these loans in the aggregate amount of $21,408, which includes $1,408 of interest income that had been added to
the principal balance of the loan.
In 2008, we determined that the developer of the Hilton Garden Inn/Homewood Suites – Brooklyn, NY had failed to make payments to
the senior lender on the property’s first mortgage. After discussions with the developer and the senior lender, we determined that the
fair value of the loan receivable and discount was $0 as of December 31, 2008. As a result, we incurred an impairment charge for the
remaining principal of $18,748, which is net of unamortized discount in the amount of $1,252. A receivable for uncollected interest
income of $569, which is net of unrecognized deferred loan fees of $143, was also recorded as an impairment charge.
57 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 — OTHER ASSETS
Other Assets consisted of the following at December 31, 2010 and 2009:
December 31, 2010
December 31, 2009
Transaction Costs
Investment in Statutory Trusts
Notes Receivable
Deposits on Hotel Acquisitions
Prepaid Expenses
Interest Receivable from Development Loans to Non-Related Parties
Deposit on Property Improvement Plans
Hotel Purchase Option
Other
$
$
340
1,548
-
5,500
6,986
1,767
167
933
1,173
18,414
292
1,548
1,412
20
4,468
1,573
167
933
2,015
12,428
$
$
Transaction Costs - Transaction costs include legal fees and other third party transaction costs incurred relative to entering into debt
facilities and issuances of equity securities which are recorded in other assets prior to the closing of the respective transactions.
Investment in Statutory Trusts - We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II.
Our investment is accounted for under the equity method.
Notes Receivable – Notes receivable as of December 31, 2009 included a loan, and related accrued interest, made to one of our
unconsolidated joint venture partners. The $1,267 note accrued interest at 11% and matured on December 31, 2009. The principal and
accrued interest receivable under this note was settled in connection with our acquisition of the remaining interest in PRA Glastonbury,
LLC as noted in “Note 3 – Investment in Unconsolidated Joint Ventures.”
Deposits on Hotel Acquisitions - Deposits paid in connection with the acquisition of hotels, including accrued interest, are recorded in
other assets. As of December 31, 2010 and 2009, we had $5,500 and $20, respectively, in non-interest bearing deposits related to the
acquisition of hotel properties.
Prepaid Expenses - Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in
the next twelve months.
Interest Receivable from Development Loans to Non-Related Parties– Interest receivable from development loans to non-related parties
represents interest income receivable from loans extended to non-related parties that are used to enable such entities to construct hotels
and conduct related improvements on specific hotel projects. This excludes interest receivable from development loans extended to
related parties in the amounts of $1,246 and $878 as of December 31, 2010 and 2009, respectively, which is included in due from related
parties on the consolidated balance sheets.
Deposits on Property Improvement Plans – Deposits on property improvement plans consists of amounts advanced to HHMLP that are
to be used to fund capital expenditures as part of our property improvement programs at certain properties.
Hotel Purchase Option – We have an option to acquire a 50% interest in the entity that owns the Holiday Inn Express – Manhattan. This
option is exercisable after February 1, 2012 or upon termination of Metro 29th Street’s lease of the hotel and expires at the end of the
lease term.
58 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 - DEBT
Mortgages and Notes Payable
We had total mortgages payable at December 31, 2010 and 2009, of $596,949 and $614,401, respectively. These balances consisted of
mortgages with fixed and variable interest rates, which ranged from 2.26% to 8.25% as of December 31, 2010. Aggregate interest
expense incurred under the mortgage loans payable totaled $37,600, $35,878, and $34,855 during 2010, 2009, and 2008,
respectively. The mortgages are secured by first deeds of trust on various hotel properties with a combined net book value of $1,179,052
and $892,825 as of December 31, 2010, and 2009, respectively. Our mortgage indebtedness contains various financial and non-financial
covenants customarily found in secured, non-recourse financing arrangements. Our mortgage loans payable typically require that
specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under
the loan agreements relating to such properties. If the specified criteria are not satisfied, the lender may be able to escrow cash flow
generated by the property securing the applicable mortgage loan. We have determined that certain debt service coverage ratio covenants
contained in the loan agreements securing fifteen of our hotel properties were not met as of December 31, 2010 due to recent economic
conditions. These covenants do not constitute an event of default for these loans. As of December 31, 2010 we were in compliance with
all events of default covenants under the applicable loan agreements. As of December 31, 2010, the maturities for the outstanding
mortgage loans ranged from May 2011 to September 2023.
Subordinated Notes Payable
We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture
agreements which will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, beginning on July 30, 2010 in
accordance with the provisions of the indenture agreement. Effective July 30, 2010, the $25,774 notes issued to Hersha Statutory Trust
I and Hersha Statutory Trust II bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets two business days prior to
each quarterly payment. For the period October 30, 2010, to January 29, 2011, we incur interest expense at a variable rate of
3.29%. Prior to this, the $25,774 note issued to Hersha Statutory Trust I incurred interest at a fixed rate of 7.34% per annum through
July 30, 2010, and the $25,774 note issued to Hersha Statutory Trust II incurred interest at a fixed rate of 7.173% per annum through July
30, 2010. On April 19, 2010, we purchased an interest rate cap that effectively limits interest payments when LIBOR exceeds 2.00% on
our two subordinated notes payable. See “Note 8 - Fair Value Measurements and Derivative Instruments” for more information.
Interest expense in the amount of $2,934, $3,766, $3,729 was recorded for the years ended 2010, 2009, and 2008, respectively.
Other Notes Payable
HHLP has entered into a management agreement with an unaffiliated hotel manager that has extended a $498 interest-free loan to HHLP
for working capital contributions that are due at either the termination or expiration of the management agreement. A discount was
recorded on the note payable which reduced the principal balances recorded in the mortgages and notes payable. The discount is being
amortized over the remaining life of the loan and is recorded as interest expense. On December 31, 2010, we terminated the
management agreement with Lodgeworks, L.P. (“Lodgeworks”), for the management services they provided for the two Hyatt
Summerfield Suites located in White Plains, NY, and Gaithersburg, MD. In connection with this termination, we repaid $149 as a
partial repayment of the interest free loan due to Lodgeworks as a result of our acquisition of the Summerfield Suites portfolio. The
remaining balance of the note payable, net of unamortized discount, was $223 as of December 31, 2010 and $294 as of December 31,
2009.
59 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – DEBT (continued)
Aggregate annual principal payments for the Company’s mortgages and notes payable for the five years following December 31, 2010
and thereafter are as follows:
Year Ending December 31,
Amount
2011
2012
2013
2014
2015
Thereafter
Net Unamortized Discount
47,799
33,694
32,444
42,550
88,640
404,576
(983)
648,720
$
Revolving Line of Credit
On October 14, 2008, we entered into a Revolving Credit Loan and Security Agreement with T.D. Bank, NA and various other lenders,
which provided for a revolving line of credit in the principal amount of up to $175,000, including a sub-limit of $25,000 for irrevocable
stand-by letters of credit. The bank group had committed $135,000, and the credit agreement was structured to allow for an increase of
an additional $40,000 under the line of credit, provided that additional collateral was supplied and additional lenders joined the bank
group.
On December 11, 2009, we amended the credit agreement to modify certain financial covenants, resulting in changes to the annual
interest rate incurred on prime rate and LIBOR rate loans borrowed under the line of credit. Hersha paid the lenders a fee of $338 in
connection with the amendment the credit agreement. As amended, the credit agreement included certain financial covenants and
required that we maintain (1) a minimum tangible net worth of $300,000; (2) maximum accounts and other receivables from affiliates of
$125,000; (3) annual distributions not to exceed 95% of adjusted funds from operations; (4) maximum variable rate indebtedness to total
debt of 30%; and (5) certain financial ratios.
On November 5, 2010, we entered into a Revolving Credit Loan and Security Agreement with T.D. Bank, NA and various other
lenders. The credit agreement provides for a revolving line of credit in the principal amount of up to $250,000, including a sub-limit of
$25,000 for irrevocable stand-by letters of credit and a $10,000 sub-limit for the swing line loans. On November 5, 2010, our previous
line of credit was terminated and replaced by the new line of credit and as a result all amounts outstanding under our previous credit
facility were repaid with borrowings from our new credit facility. Additional borrowings under the line of credit provided by T.D. Bank,
NA may be used for working capital and general corporate purposes and for the future purchase of additional hotels. The line of credit
expires on November 1, 2013, and, provided no event of default has occurred and remains uncured, we may request that T.D. Bank, NA
and the other lenders renew the line of credit for an additional one-year period.
60 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – DEBT (continued)
The line of credit is collateralized by a first lien-security interest in all existing and future unencumbered assets of HHLP, a collateral
assignment of all hotel management contracts of the management companies in the event of default, and title-insured, first-lien
mortgages on the following hotel properties:
- Hampton Inn, Danville, PA
- Hampton Inn, Philadelphia, PA
- Hampton Inn, Carlisle, PA
- Hampton Inn, Selinsgrove, PA
- Holiday Inn, Norwich, CT
- Towneplace Suites, Harrisburg, PA
- Holiday Inn Express and Suites, Harrisburg, PA
- Residence Inn, Langhorne, PA
- Residence Inn, Norwood, MA
- Sheraton Hotel, JFK Airport, New York, NY
- Holiday Inn Express, Times Square, NY
- Hampton Inn, Washington, DC
- Hyatt Place, King of Prussia, PA
At our option, the interest rate on loans provided under the line of credit will be either (i) the Wall Street Journal variable prime rate plus
an applicable margin ranging between 150 and 175 basis points per annum or (ii) LIBOR plus an applicable margin ranging between 350
and 375 basis points per year, subject to a floor of 4.25%.
The credit agreement providing for the line of credit includes certain financial covenants and requires that we maintain: (1) a minimum
tangible net worth of $500,000, which is subject to increases under certain circumstances; (2) maximum accounts and other receivables
from affiliates of $125,000; (3) annual distributions not to exceed 95% of adjusted funds from operations; (4) maximum variable rate
indebtedness to total debt of 30%; and (5) certain financial ratios, including the following:
- a fixed charge coverage ratio of not less than 1.25 to 1.00 which will increase to 1.35 to 1.00 as of September 30, 2011, and
1.45 to 1.00 as of September 30, 2012; and
- a total funded liabilities to gross asset value ratio of not more than 0.65 to 1.00
The Company is in compliance with each of the covenants listed above as of December 31, 2010.
The outstanding principal balance under the line of credit was $46,000 at December 31, 2010 and $79,200 at December 31, 2009. The
Company recorded interest expense of $2,737, $3,235, and $3,094 related to the line of credit borrowings, for the years ended December
31, 2010, 2009, and 2008, respectively. The weighted average interest rate on our Line of Credit during the years ended December 31,
2010, 2009, and 2008 was 4.29%, 3.25%, and 5.07%, respectively.
As of December 31, 2010 we had $6,927 in irrevocable letters of credit issued and our remaining borrowing capacity under the Line of
Credit was $197,073.
Fair Value of Debt
The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by
discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt
obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of December
31, 2010, the carrying value and estimated fair value of the Company’s debt was $694,720 and $658,487, respectively. As of December
31, 2009, the carrying value and estimated fair value of the Company’s debt was $745,443 and $688,662 respectively.
61 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – DEBT (continued)
Capitalized Interest
We utilize mortgage debt and our revolving line of credit to finance on-going capital improvement projects at our properties. Interest
incurred on mortgages and the revolving line of credit that relates to our capital improvement projects is capitalized through the date
when the assets are placed in service. For the years ended December 31, 2010, 2009, and 2008, we capitalized $46, $10 and $544,
respectively, of interest expense related to these projects.
Deferred Costs
Costs associated with entering into mortgages and notes payable and our revolving line of credit are deferred and amortized over the life
of the debt instruments. Amortization of deferred costs is recorded in interest expense. As of December 31, 2010, deferred costs were
$10,204, net of accumulated amortization of $5,852. As of December 31, 2009, deferred costs were $8,696, net of accumulated
amortization of $4,262. Amortization of deferred costs for the years ended December 31, 2010, 2009, and 2008 was $2,381, $2,059 and
$2,030, respectively.
Debt Extinguishment and Principal Paydowns
During 2008, we repaid one mortgage and settled on the defeasance of loans associated with four of our properties. In addition, we
replaced our previous line of credit with Commerce Bank and various other lenders with a new credit facility with T.D. Bank, NA and
various other lenders. As a result of these extinguishments, we expensed $1,552 in unamortized deferred costs and defeasance
premiums, which are included in the Loss on Debt Extinguishment caption on the consolidated statements of operations for the year
ended December 31, 2008.
During 2010, we repaid seven mortgages and two notes payable. In addition, we replaced our previous line of credit with a new credit
facility with T.D. Bank, NA and various other lenders. As a result of these extinguishments, we expensed $932 in unamortized deferred
costs and fees, which are included in the Loss on Debt Extinguishment caption on the consolidated statements of operations for the year
ended December 31, 2010.
62 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Management Agreements
Our wholly-owned TRS, 44 New England, engages eligible independent contractors in accordance with the requirements for
qualification as a REIT under the Federal income tax laws, including HHMLP, as the property managers for hotels it leases from us
pursuant to management agreements. HHMLP is owned, in part, by certain executives and affiliated trustees of the Company. Our
management agreements with HHMLP provide for five-year terms and are subject to early termination upon the occurrence of defaults
and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible
independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays
the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties
are reimbursed or borne by our TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable
approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur
any liability in connection with operating a hotel. Management agreements with other unaffiliated hotel management companies have
similar terms.
For its services, HHMLP receives a base management fee, and if a hotel exceeds certain thresholds, an incentive management fee. The
base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related
month. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal
year and is based upon the financial performance of the hotels. For the years ended December 31, 2010, 2009 and 2008, base
management fees incurred totaled $7,099, $5,485 and $6,136, respectively and are recorded as Hotel Operating Expenses. For the years
ended December 31, 2010, 2009 and 2008, incentive management fees of $0, $0, and $363, respectively, were recorded as Hotel
Operating Expenses.
On December 3, 2010, we terminated the management agreement held with Marriott International Inc. for the management services they
provided for the Courtyard by Marriott, Alexandria, VA. In connection with this termination, we paid $250 in termination fees. Effective
December 4, 2010, this hotel is now managed by HHMLP. Also, on December 31, 2010, we terminated the management agreement
held with Lodgeworks, L.P. for the management services they provided for the Hyatt Summerfield Suites, White Plains, NY and Hyatt
Summerfield Suites, Gaithersburg, MD. In connection with this termination, we repaid $149 as a partial repayment of the interest free
loan due to Lodgeworks, L.P. as a result of our acquisition of the Hyatt Summerfield Suites portfolio. See “Note 6 – Debt” for more
information.
Franchise Agreements
Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements
have 10 to 20 year terms but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the
agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such
payments are based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as
incurred. Franchise fee expense for the years ended December 31, 2010, 2009, and 2008 was $18,560, $14,019 and $17,041
respectively. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
Accounting and Information Technology Fees
Each of the wholly owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and
information technology fee. Monthly fees for accounting services are $2 per property and monthly information technology fees are
$0.5 per property. In addition, each of the wholly owned hotels not managed by HHMLP, but for which the accounting is provided by
HHMLP incurs a monthly accounting fee of $3. For the years ended December 31, 2010, 2009 and 2008, the Company incurred
63 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (continued)
accounting fees of $1,537, $1,459 and $1,426, respectively. For the years ended December 31, 2010, 2009 and 2008, the Company
incurred information technology fees of $347, $325 and $316, respectively. Accounting fees and information technology fees are
included in General and Administrative expenses.
Capital Expenditure Fees
HHMLP charges a 5% fee on all capital expenditures and pending renovation projects at the properties as compensation for procurement
services related to capital expenditures and for project management of renovation projects. For the years ended December 31, 2010,
2009 and 2008, we incurred fees of $257, $158, and $271, respectively, which were capitalized with the cost of fixed asset additions.
Acquisitions from Affiliates
We have entered into an option agreement with each of our officers and affiliated trustees such that we obtain a right of first refusal to
purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market value. This right of
first refusal would apply to each party until one year after such party ceases to be an officer or trustee of our Company. Our Acquisition
Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the
purchase of hotels from related parties are approved by the Acquisition Committee.
Hotel Supplies
For the years ended December 31, 2010, 2009, and 2008, we incurred charges for hotel supplies of $156, $73, and $41, respectively. For
the years ended December 31, 2010, 2009 and 2008, we incurred charges for capital expenditure purchases of $6,755, $824, and $1,547
respectively. These purchases were made from Hersha Purchasing and Design, a hotel supply company owned, in part, by certain
executives and affiliated trustees of the Company. Hotel supplies are expenses included in hotel operating expenses on our consolidated
statements of operations, and capital expenditure purchases are included in investment in hotel properties on our consolidated balance
sheets. Approximately $22 and $32 is included in accounts payable at December 31, 2010 and 2009, respectively.
Due From Related Parties
The due from related parties balance as of December 31, 2010 and 2009 was approximately $5,069 and $2,394 respectively. The
balances primarily consisted of accrued interest due on our development loans, and the remaining due from related party balances are
receivables owed from our unconsolidated joint ventures.
Due to Related Parties
The due to related parties balance as of December 31, 2010 and 2009 was approximately $939 and $769, respectively. The balances
consisted of amounts payable to HHMLP for administrative, management, and benefit related fees.
Hotel Ground Rent
For the years ended December 31, 2010, 2009, and 2008, we incurred $1,374, $1,166, and $1,040, respectively, of rent expense related
to these ground leases.
64 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (continued)
Future minimum lease payments (without reflecting future applicable Consumer Price Index increases) under these agreements are as
follows:
Year Ending December 31,
Amount
2011
2012
2013
2014
2015
Thereafter
$
1,226
1,266
1,271
1,276
1,276
97,296
103,611
$
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than
routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which
are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our
liquidity, results of operations or business or financial condition.
65 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements
Our determination of fair value measurements are based on the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair value measurements, we utilize a fair value hierarchy that
distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to
access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are
observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are
observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on
an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the
entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.
As of December 31, 2010, the Company’s derivative instruments represented the only financial instruments measured at fair
value. Currently, the Company uses derivative instruments, such as interest rate swaps and caps, to manage its interest rate risk. The
valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the
expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity,
and uses observable market-based inputs.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s
nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy,
the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to
evaluate the likelihood of default by us and the counterparties. However, as of December 31, 2010 we have assessed the significance of
the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit
valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative
valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Derivative Instruments
We maintain an interest rate cap that effectively fixes interest payments when LIBOR exceeds 5.75% on our debt financing related to
Hotel 373, New York, NY. The notional amount of the interest rate cap is $22,000 and equals the principal of the variable interest rate
debt being hedged. This interest rate cap matured on May 9, 2010 and was replaced by a new interest rate cap with identical terms that
matures on May 9, 2011.
On April 19, 2010, we purchased an interest rate cap for $379 that effectively limits variable rate interest payments on the subordinated
notes payable to Hersha Statutory Trust I and Hersha Statutory Trust II when LIBOR exceeds 2.00%. The notional amount of the interest
rate cap is $51,548 and equals the principal of the variable interest rate debt being hedged. The effective date of the interest rate cap is
July 30, 2010, which correlates with the end of the fixed interest rate period on the notes payable.
66 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (continued)
We maintain an interest rate swap agreement that effectively fixes the interest rate on a variable rate mortgage on the nu Hotel, Brooklyn,
NY, which bears interest at one month U.S. dollar LIBOR plus 2.0%. Under the terms of the interest rate swap, we pay fixed rate interest
of 1.1925% on the $18,000 notional amount and we receive floating rate interest equal to the one month U.S. dollar LIBOR, effectively
fixing our interest on the mortgage debt at a rate of 3.1925%. This interest rate swap agreement matured on January 10, 2011, and we
did not replace it with another agreement.
We maintained an interest rate swap agreement that effectively fixes the interest rate on a variable rate mortgage, bearing interest at one
month U.S. dollar LIBOR plus 3.0%, originated upon the refinance of the debt associated with the Hilton Garden Inn, Edison,
NJ. Under the terms of this interest rate swap, we pay fixed rate interest of 1.37% and we receive floating rate interest equal to the one
month U.S. dollar LIBOR, effectively fixing our interest at a rate of 4.37%. The notional amount amortized in tandem with the
amortization of the underlying hedged debt. This interest rate swap agreement was terminated upon the repayment of the principal
balance of the underlying hedged debt in October 2010. As a result of this termination, we repaid the fair value of the interest rate swap
of $21.
We maintained an interest rate swap agreement that fixes the interest rate on a $40,000 portion of our floating revolving credit facility
with Commerce Bank, which bears interest at one month U.S. dollar LIBOR plus 2.5%. Under the terms of this interest rate swap, we
pay fixed rate interest of 2.6275% on the $40,000 notional amount and we receive floating rate interest equal to the one month U.S.
dollar LIBOR, effectively fixing our interest on this portion of the line of credit at a rate of 5.1275%. This interest rate swap agreement
matured on February 1, 2009, and we did not replace it with another agreement.
We maintained an interest rate swap that fixed our interest rate on a variable rate mortgage on the Sheraton Four Points, Revere,
MA. Under the terms of this interest rate swap, we paid fixed rate interest of 4.73% of the notional amount and we received floating rate
interest equal to the one month U.S. dollar LIBOR. Prior to January 1, 2008, the hedge relationship was deemed to be effective and the
change in fair value related to the effective portion of the interest rate swap was recorded in Accumulated Other Comprehensive Income
on the Balance Sheet. Subsequent to January 1, 2008, the hedge relationship was no longer deemed to be effective. This swap matured
on July 23, 2009. The change in fair value of the interest rate swap for the twelve months ended December 31, 2009 resulted in a gain of
$172 and was recorded in income (loss) from discontinued operations.
At December 31, 2010 and December 31, 2009, the fair value of the interest rate swaps and cap were:
Date of Transaction
Hedged Debt
Type
Maturity Date
May 9, 2010
December 31, 2008
January 9, 2009
April 19, 2010
Variable Rate Mortgage - Hotel 373, New York, NY
Variable Rate Mortgage - Hilton Garden Inn, Edison, NJ
Variable Rate Mortgage - Nu Hotel, Brooklyn, NY
Subordinated Notes Payable
Cap
Swap
Swap
Cap
May 9, 2011
January 1, 2011
January 10, 2011
July 30, 2012
Estimated Fair Value
December 31, 2010
-
$
-
$
(4)
50
46
December 31, 2009
-
$
(53)
(103)
-
(156)
$
The fair value of the derivative instrument is included in Accounts Payable, Accrued Expenses and Other Liabilities at December 31,
2010 and December 31, 2009.
The change in fair value of derivative instruments designated as cash flow hedges was a gain of $178, a loss of $51, and a loss of $86 for
the years ended December 31, 2010, 2009, and 2008, respectively. These unrealized gains and losses were reflected on our Balance
Sheet in Accumulated Other Comprehensive Income. Hedge ineffectiveness of $0, $1, and $1 on cash flow hedges was recognized in
interest expense for the years ended December 31, 2010, 2009, and 2008, respectively.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest
payments are made on the Company’s variable-rate debt. The change in net unrealized gains/losses on cash flow hedges reflects a
reclassification of $252 of net unrealized gains/losses from accumulated other comprehensive income as an increase to interest expense
during 2009. During 2010, the Company estimates that an additional $128 will be reclassified as an increase to interest expense.
67 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 - SHARE-BASED PAYMENTS
In May 2008, the Company established the Hersha Hospitality Trust 2008 Equity Incentive Plan (the “2008 Plan”) for the purpose of
attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the Company. Prior
to the 2008 Plan, the Company made awards pursuant to the 2004 Equity Incentive Plan (the “2004 Plan”). Upon approval of the 2008
Plan by the Company’s shareholders on May 22, 2008, the Company terminated the 2004 Plan. Termination of the 2004 Plan did not
have any effect on equity awards and grants previously made under that plan.
Executives
2010 Long-Term Equity Incentive
On May 7, 2010, the Compensation Committee adopted an annual long-term equity incentive plan for the executive officers, pursuant to
which the executive officers are eligible to earn equity awards in the form of stock awards or performance shares. The equity awards for
2010 will be made pursuant to the 2008 Plan or any other equity incentive plan approved by the Company’s shareholders. Half of the
award will be made, subject to the sole discretion of the Committee, if the executive officer is employed by the Company on the date
awards are determined, and the remainder of the award will be based on absolute and relative RevPar growth, with 25% of the award
based on RevPAR growth in 2010 on an absolute basis and 25% of the award based on RevPAR growth in 2010 relative to a group of
peer companies. The number of shares to be issued will be determined by dividing the dollar value of the award by the 20-day volume
weighted average closing price of the Company’s common shares on the New York Stock Exchange as of December 31 for the
applicable performance year. The Company accounts for these grants as performance awards for which the Company assesses the
probability of achievement of the grant at the end of each period. As of December 31, 2010, the Company concluded that it was
probable that the grants under this plan would be achieved, and, as such, the Company recognized stock based compensation expense of
$1,314 for the year ended December 31, 2010, for the equity awards potentially issuable pursuant to the 2010 long-term equity incentive
program.
Multi-Year Long-Term Equity Incentive
On May 7, 2010, the Compensation Committee also adopted a multi-year long-term equity incentive plan. This plan has a three-year
performance period, which commenced on January 1, 2010 and will end on December 31, 2012. The awards to be granted are based
upon the Company’s achievement of a certain level of (1) absolute total shareholder return (75% of the award), and (2) relative total
shareholder return as compared to the Company’s peer group (25% of the award). The number of equity awards to be issued under this
program is determined by dividing the dollar value of the award by the 20-day volume weighted average closing price of the Company’s
common shares on the New York Stock Exchange as of December 31, 2009. If shares are issued under this program, half will vest
immediately on December 31, 2012 while the other half will vest on December 31, 2013 if the executive remains employed by the
Company. The Company accounts for these grants as market based awards where the Company estimates unearned compensation at the
grant date fair value which is amortized into compensation cost over the vesting period. The fair value of these market based awards is
estimated using a simulation or Monte Carlo method. For the purpose of the simulation, on the grant date we made the following
assumptions:
·
·
·
volatility of our shares within a range of 53% to 71% over three year performance period which is calculated based on the
volatility of our stock price over the last three years and an implied volatility;
volatility of our peer group’s shares within a range of 15% to 117% over three year performance period which is calculated
based on the volatility of our peers’ stock prices over the last three years and an implied volatility; and
risk-free interest rates ranging from 0.13% to 1.34%, which reflects the yield on zero-coupon risk free instruments ranging from
3 months to 3 years maturity.
Stock based compensation expense of $2,084 was recorded for the year ended December 31, 2010, for the multi-year long-term equity
incentive program. Unearned compensation related to the multi-year program as of December 31, 2010 was $9,575.
68 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 - SHARE-BASED PAYMENTS (continued)
Performance Share Awards
On August 5, 2009, the Company’s Compensation Committee awarded an aggregate of 354,250 performance shares pursuant to the
2008 Plan to our executive officers. Performance shares are not considered to be outstanding at the time of grant, but are earned based
on the Company’s common shares maintaining a closing price in excess of defined thresholds over a defined period of time and then
settled in an equivalent number of common shares. As of December 31, 2010, the performance shares have been earned in full and a
total of 354,250 commons shares have been issued upon settlement of the performance shares. On March 22, 2010, an aggregate of
81,250 common shares were issued upon settlement of an equivalent number of earned performance shares. On May 18, 2010, an
aggregate of 78,000 common shares were issued upon settlement of an equivalent number of earned performance shares. On September
13, 2010, the Compensation Committee determined that the remaining performance shares had been earned and the Company issued an
aggregate of 86,666 common shares upon settlement of an equivalent number of earned performance shares. The Company accounts for
these grants as market based awards where the Company estimates the unearned compensation at grant date fair value which is
amortized into compensation cost over the vesting of the performance share awards. Stock based compensation expense of $725 and
$140 was incurred during the years ended December 31, 2010 and 2009, respectively. Unearned compensation related to the awards as
of December 31, 2010 was $0.
Restricted Share Awards
Stock based compensation expense related to the restricted share awards, consisting of restricted common shares issued to executives of
the Company, of $2,263, $1,899, and $1,411 was incurred during the years ended December 31, 2010, 2009, and 2008, respectively.
Unearned compensation related to the restricted share awards as of December 31, 2010 and 2009 was $2,960 and $4,334,
respectively. The following table is a summary of all unvested share awards issued to executives under the 2004 and 2008 Plans:
Shares Vested
Unearned Compensation
Original Issuance
Date
June 1, 2006
June 1, 2007
June 2, 2008
September 30, 2008
June 1, 2009
September 25, 2009
March 25, 2010
June 1, 2010
Total
Shares
Issued
89,500
214,582
278,059
3,616
744,128
10,000
6,000
185,639
1,531,524
Share Price
on date of
grant
$
$
$
$
$
$
$
$
9.40
12.32
8.97
7.44
2.80
3.06
5.02
4.63
Vesting
Period
4 years
4 years
4 years
1-4 years
4 years
1 year
2 years
0-3 years
Vesting
Schedule
25%/year
25%/year
25%/year
25-100%/year
25%/year
100%/year
50%/year
25-100%/year
December 31, 2010
89,500
160,933
139,028
2,308
186,241
10,000
-
46,115
634,125
December 31, 2009
67,125
107,291
69,515
654
-
-
-
-
244,585
December 31, 2010
$
-
275
883
9
1,258
-
20
515
2,960
$
December 31, 2009
$
87
935
1,506
6
1,780
20
-
-
4,334
$
69 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 - SHARE-BASED PAYMENTS (continued)
Trustees
Compensation expense related to stock awards issued to the Board of Trustees of $263, $104, and $91 was incurred during the years
ended December 31, 2010, 2009, and 2008, respectively and is recorded in stock based compensation on the statement of operations. All
shares issued to the Board of Trustees are immediately vested. The following table is a summary of all of the grants issued to trustees
during the years ended 2010, 2009, and 2008:
Date of Award Issuance
January 2, 2008
June 2, 2008
January 2, 2009
June 1, 2009
December 31, 2009
June 1, 2010
December 31, 2010
Shares Issued
4,000
6,000
12,500
17,000
18,000
27,000
21,000
Share Price on
date of grant
9.33
8.97
2.96
2.80
3.14
4.63
6.60
70 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 10 - EARNINGS PER SHARE
The following table is a reconciliation of the income or loss (numerator) and the weighted average shares (denominator) used in the
calculation of basic and diluted earnings per common share. The computation of basic and diluted earnings per share is presented below:
Numerator:
BASIC AND DILUTED*
(Loss) from
Continuing Operations
Loss from Continuing Operations
allocated to Noncontrolling Interests
Distributions to 8.0% Series A
Preferred Shareholders
Dividends Paid on Unvested Restricted Shares
(Loss) from Continuing Operations
applicable to Common Shareholders
Discontinued Operations
Income from Discontinued Operations
(Income) from Discontinued Operations
allocated to Noncontrolling Interests
Income from Discontinued Operations
applicable to Common Shareholders
Net (Loss)
applicable to Common Shareholders
Denominator:
Weighted average number of
common shares - basic
Effect of dilutive securities:
Restricted Stock Awards
Contingently Issued Shares
Option to acquire common shares
Partnership Units
Weighted average number of
common shares - diluted
December 31, 2010
Year Ended
December 31, 2009
December 31, 2008
$ (17,673)
$ (60,766)
$ (13,521)
873
8,884
2,036
(4,800)
(189)
(4,800)
(255)
(4,800)
(329)
(21,789)
(56,937)
(16,614)
471
2,308
3,092
(28)
(287)
(415)
443
2,021
2,677
$ (21,346)
$ (54,916)
$ (13,937)
134,370,172
51,027,742
45,184,127
-
-
-
- *
-
-
-
- *
** -
** -
** -
- *
134,370,172
51,027,742
45,184,127
* Income (Loss) allocated to noncontrolling interest in Hersha Hospitality Limited Partnership has been excluded from the numerator,
and units of limited partnership interest in Hersha Hospitality Limited Partnership have been omitted from the denominator, for the
purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would
have no impact. Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the
year ended December 31, 2010, 2009 and 2008 were 8,628,492, 8,724,725 and 8,034,737, respectively.
** Unvested stock awards, contingently issuable share awards and options to acquire our common shares have been omitted from the
denominator for the purpose of computing diluted earnings per share for the year ended December 31, 2010, since the effect of including
these awards in the denominator would be anti-dilutive to loss from continuing operations applicable to common shareholders. For the
year ended December 31, 2010, there were 396,328 anti-dilutive unvested stock awards outstanding, 934,097 anti-dilutive contingently
issuable share awards outstanding, and 2,327,219 anti-dilutive options to acquire our common shares outstanding. As a result of the
application of the treasury stock method, there were no potentially dilutive securities to be considered for inclusion in the denominator
for purpose of computing diluted earnings per share for years ended December 31, 2009 and 2008.
71 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 10 - EARNINGS PER SHARE (continued)
Earnings Per Share:
BASIC
(Loss) from Continuing Operations
applicable to Common Shareholders
Income from Discontinued Operations
applicable to Common Shareholders
Net (Loss)
applicable to Common Shareholders
DILUTED*
(Loss) from Continuing Operations
applicable to Common Shareholders
Income from Discontinued Operations
applicable to Common Shareholders
Net (Loss)
applicable to Common Shareholders
December 31, 2010
Year Ended
December 31, 2009
December 31, 2008
$ (0.16)
$ (1.12)
$ (0.37)
-
0.04
0.06
$ (0.16)
$ (1.08)
$ (0.31)
$ (0.16)
$ (1.12)
$ (0.37)
-
0.04
0.06
$ (0.16)
$ (1.08)
$ (0.31)
* Income (Loss) allocated to noncontrolling interest in Hersha Hospitality Limited Partnership has been excluded from the numerator,
and units of limited partnership interest in Hersha Hospitality Limited Partnership have been omitted from the denominator, for the
purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would
have no impact. Weighted average units of limited partnership interest in Hersha Hospitality Limited Partnership outstanding for the
year ended December 31, 2010, 2009 and 2008 were 8,628,492, 8,724,725 and 8,034,737, respectively.
72 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 11 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING ACTIVITIES
Interest paid in 2010, 2009 and 2008 totaled $43,756, $42,471 and $41,797, respectively. The following non-cash investing and
financing activities occurred during 2010, 2009 and 2008:
73 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 12 - DISCONTINUED OPERATIONS
The operating results of certain real estate assets which have been sold or otherwise qualify as held for disposition are included in
discontinued operations in the statements of operations for all periods presented.
The following real estate assets were sold between the period of January 1, 2008 and December 31, 2010. Our Board of Trustees
authorized management of the Company to sell each of these assets prior to the final disposition. Based on their disposal date, the
operating results for these hotels were reclassified to discontinued operations for the years ended December 31, 2010, 2009 and 2008:
Hotel
Acquisition
Date
Disposition
Date
Consideration
Gain on
Disposition
Holiday Inn, New Cumberland, PA
MainStay Suites, Frederick, MD
Comfort Inn, Frederick, MD
Sheraton Four Points, Revere, MD
Hilton Garden Inn, Gettysburg, PA
Holiday Inn Express, New Columbia, PA
January 1999
January 2002
May 2004
March 2004
July 2004
December 1997
October 2008
July 2009
July 2009
July 2009
July 2009
July 2010
$
6,456
5,125
5,125
2,500
7,750
3,000
$
2,888
748
748
165
208
347
***
*
*
**
*
*
Total
$
29,956
$
5,104
* Property was sold to an unrelated buyer
** Interest in the joint venture was sold to our joint venture partner
***Leased hotel to an unrelated party which had a purchase provision by the lessee in the lease agreement
Assets Held for Sale
The following real estate assets were held for sale as of December 31, 2009. Our Board of Trustees authorized management of the
Company to sell each of these assets in the third quarter of 2009. Based on changing market conditions and the inability to find a
suitable buyer, these assets were no longer considered held for sale as of December 31, 2010. As such, the operating results of these
assets are included in continuing operations in the consolidated statements of operations for the years ended December 31, 2010, 2009
and 2008. Assets held for sale and liabilities related to assets held for sale consisted of the following as of December 31, 2009:
Land
Buildings and Improvements
Furniture, Fixtures and Equipment
Intangible Assets
December 31, 2009
$
18,389
2,912
531
50
21,882
Less Accumulated Depreciation & Amortization
(809)
Assets Held for Sale
$
21,073
Liabilities Related to Assets Held for Sale
$
20,892
74 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 12 - DISCONTINUED OPERATIONS (continued)
Impairment of Assets Previously Held for Sale
We determined that the carrying value of the following properties exceeded fair value and as such we recorded an impairment charge as
noted below during the years ended December 31, 2010 and 2009. The fair value of these properties was determined using Level 3
inputs, which are typically unobservable and are based on our own assumptions, as there is little, if any, related market activity.
Asset
Comfort Inn, North Dartmouth, MA
39th Street and 8th Avenue, New York, NY
Nevins Street, Brooklyn, NY
Asset Type
Hotel Property
Land Parcel
Land Parcel
For the Year Ended December 31,
2010
2009
Impairment Charge
$
944
16
1,473
$
1,577
4,702
9,843
We allocate to income or loss from discontinued operations interest expense debt that is to be assumed or that is required to be repaid as
a result of the disposal transaction. We allocated $0, $1,121 and $2,425 of interest expense to discontinued operations for the years
ended December 31, 2010, 2009, and 2008, respectively.
The following table sets forth the components of discontinued operations for the years ended December 31, 2010, 2009 and 2008:
Revenue:
Hotel Operating Revenues
Hotel Lease Revenues
Other Revenue
Total Revenues
Expenses:
Hotel Operating Expenses
Real Estate and Personal Property Taxes and Property Insurance
Depreciation and Amortization
General and Administrative
Other Expense
Interest Expense
Loss on Debt Extinguishment
Total Expenses
2010
2009
2008
$
822
-
-
822
$
8,100
-
1,086
9,186
$
14,525
628
2,125
17,278
580
32
87
3
(4)
-
-
698
6,341
649
1,098
(462)
-
1,121
-
8,747
11,210
968
2,429
7
-
2,425
35
17,074
Income from Discontinued Operations
$
124
$
439
$
204
75 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 13 - SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN PARTNERSHIP
Common Shares
The Company’s common shares are duly authorized, fully paid and non-assessable. Common shareholders are entitled to receive
dividends if and when authorized and declared by the Board of Trustees of the Company out of assets legally available and to share
ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation, dissolution or
winding up after payment of, or adequate provision for, all known debts and liabilities of the Company.
Preferred Shares
The Declaration of Trust authorizes our Board of Trustees to classify any unissued preferred shares and to reclassify any previously
classified but unissued preferred shares of any series from time to time in one or more series, as authorized by the Board of Trustees.
Prior to issuance of shares of each series, the Board of Trustees is required by Maryland REIT Law and our Declaration of Trust to set for
each such series, subject to the provisions of our Declaration of Trust regarding the restriction on transfer of shares of beneficial interest,
the terms, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series. Thus, our Board of Trustees could authorize the issuance of
additional preferred shares with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a
change in control in us that might involve a premium price for holders of common shares or otherwise be in their best interest.
Common Units
Units of interest in our limited partnership, or Common Units are issued in connection with the acquisition of wholly owned hotels and
joint venture interests in hotel properties. The total number of Common Units outstanding as of December 31, 2010, 2009 and 2008 was
7,418,912, 8,701,810 and 8,746,300 respectively. These units can be converted to common shares which are issuable to the limited
partners upon exercise of their redemption rights. The number of shares issuable upon exercise of the redemption rights will be adjusted
upon the occurrence of stock splits, mergers, consolidation or similar pro rata share transactions, that otherwise would have the effect of
diluting the ownership interest of the limited partners or our shareholders. During 2010, 2009 and 2008, 2,934,511, 44,490 and 175,843
common units were converted to Class A Common Shares, respectively.
76 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 14 - INCOME TAXES
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with its
taxable year ended December 31, 1999. To qualify as a REIT, the Company must meet a number of organizational and operational
requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income to its shareholders. It is the
Company’s current intention to adhere to these requirements and maintain the Company’s qualification for taxation as a REIT. As a
REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that is currently
distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income
taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four
subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local
taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.
Taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
44 New England is subject to income taxes at the applicable federal, state and local tax rates. On June 23, 2009, we sold our interest in
Revere Hotel Group(“Revere”), a 55% owned taxable REIT subsidiary. Prior to this sale, Revere was subject to income taxes at the
applicable federal, state and local tax rates.
In 2010, 2009 and 2008, 44 New England generated net operating losses of $4,726, $6,555, and $2,554, respectively. In 2008, Revere
generated net operating income of $5. There was no income tax expense (benefit) recognized by 44 New England or Revere for 2010,
2009 and 2008.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax income as a result of the following differences:
Computed "Expected" federal tax expense (benefit) of TRS, at 35%
State income taxes, net of federal income tax effect
Changes in valuation allowance
$
(1,875)
(304)
2,179
$
(1,061)
(421)
1,482
$
(1,251)
(181)
1,432
Total income tax expense
$
-
$
-
$
-
For the year ended December 31,
2010
2008
2009
The components of consolidated TRS’s deferred tax assets as of December 31, 2010 and 2009 were as follows:
Deferred tax assets:
Net operating loss carryforward
Depreciation
Net deferred tax assets
Valuation allowance
Deferred tax assets
As of December 31,
2010
2009
$
5,755
(66)
5,689
(5,689)
$
-
$
3,558
(48)
3,510
(3,510)
$
-
Upon the sale of our interest in Revere in 2009, we relinquished deferred tax assets related to Revere’s net operating loss carry forwards
of $1,128 and a valuation allowance in the same amount.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of
77 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 14 - INCOME TAXES (continued)
the deferred tax assets will not be realized. Based on the level of historical taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management believes it is more likely than not that 44 New England will not
realize the benefits of these deferred tax assets at December 31, 2010.
Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from net income reported for
financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to compute
depreciation. The following table sets forth certain per share information regarding the Company’s common and preferred share
distributions for the years ended December 31, 2010, 2009 and 2008:
Preferred Shares - 8% Series A
Ordinary income
Return of Capital
Capital Gain Distribution
Common Shares - Class A
Ordinary income
Return of Capital
Capital Gain Distribution
2010
2009
2008
0.00%
100.00%
0.00%
0.00%
100.00%
0.00%
0.00%
100.00%
0.00%
0.00%
100.00%
0.00%
86.46%
0.00%
13.54%
44.61%
48.40%
6.99%
78 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 15 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Total Revenues
Total Expenses
Income (Loss) from Unconsolidated Joint Ventures
(Loss) Income from Continuing Operations
Year Ended December 31, 2010
First
Quarter
$
50,857
67,935
778
(16,300)
Second
Quarter
Third
Quarter
Fourth
Quarter
$
76,234
72,706
2,059
5,587
$
81,129
79,685
(243)
1,201
$
74,724
82,548
(337)
(8,161)
(Loss) Income from Discontinued Operations (including Gain on Disposition of Hotel Properties)
Net (Loss) Income
(37)
(16,337)
120
5,707
401
1,602
(13)
(8,174)
(Loss) Income Allocated to Noncontrolling Interests in Continuing Operations
Preferred Distributions
Net (Loss) Income applicable to Common Shareholders
Basic and diluted earnings per share:
(Loss) Income from continuing operations applicable to common shareholders
Discontinued Operations
Net (Loss) Income applicable to Common Shareholders
Weighted Average Common Shares Outstanding
Basic
Diluted
Total Revenues
Total Expenses
(Loss) Income from Unconsolidated Joint Ventures
(Loss) Income from Continuing Operations
(1,715)
1,200
(15,822)
$
1,151
1,200
3,356
$
263
1,200
139
$
(544)
1,200
(8,830)
$
$
$
(0.16)
-
(0.16)
$ 0.02
-
0.02
$
-
$
-
$
-
$
$
(0.05)
-
(0.05)
99,311,523
99,311,523
137,200,796
140,351,846
138,636,206
142,066,649
161,600,788
161,600,788
Year Ended December 31, 2009
First
Quarter
$
45,799
54,836
(1,329)
(10,366)
Second
Quarter
$
60,771
59,297
(395)
1,079
Third
Quarter
$
61,834
101,353
(606)
(40,125)
Fourth
Quarter
$
53,548
60,042
(4,860)
(11,354)
(Loss) Income from Discontinued Operations (including Gain on Disposition of Hotel Properties)
Net (Loss) Income
(317)
(10,683)
405
1,484
2,190
(37,935)
30
(11,324)
(Loss) Income Allocated to Noncontrolling Interests in Continuing Operations
Preferred Distributions
Net (Loss) Income applicable to Common Shareholders
Basic and diluted earnings per share:
(Loss) Income from continuing operations applicable to common shareholders
Discontinued Operations
Net Loss (Income) applicable to Common Shareholders
Weighted Average Common Shares Outstanding
Basic
Diluted
(2,053)
1,200
(9,830)
$
451
1,200
(167)
$
(5,560)
1,200
(33,575)
$
(1,435)
1,200
(11,089)
$
$
$
(0.21)
-
(0.21)
-
$
-
$
-
$
$
$
$
(0.39)
(0.26)
(0.65)
(0.20)
-
(0.20)
47,786,503
47,786,503
47,964,818
47,964,818
51,878,482
51,878,482
56,488,607
56,488,607
79 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 16 – SUBSEQUENT EVENTS
The following events occurred subsequent to December 31, 2010:
Acquisition
On January 20, 2011, the Company entered into a purchase and sale agreement to acquire the Capitol Hill Suites, Washington, DC for
approximately $47,500. The closing of this acquisition is expected to occur by the end of the first quarter 2011.
80 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2010 (continued)
[IN THOUSANDS]
Initial Costs
Costs Capitalized
Subsequent to
Acquisition
Gross Amounts at which
Carrried at Close of
Period
Description
Encumbrances
Land
Improvements
Land
Buildings &
Buildings &
Improvements
Land
Buildings &
Improvements
Total
Accumulated
Depreciation
Buildings &
Improvements
*
Net Book
Value
Land
Buildings &
Improvements
Date of
Acquisition
$
-
$
300
$
3,109
$
200
$
2,394
$
500
$
5,503
$
6,003
$
(1,819)
$
4,184
06/01/97
Hampton Inn,
Carlisle, PA
Holiday Inn Exp,
Hershey, PA
Comfort Inn,
Harrisburg, PA
Hampton Inn,
Selinsgrove, PA
Hampton Inn,
Danville, PA
Holiday Inn Exp & Suites,
Harrisburg, PA
Hampton Inn,
Hershey, PA
Hilton Garden Inn,
Edison, NJ
Residence Inn,
Framingham, MA
Hampton Inn,
New York, NY
Residence Inn,
Greenbelt, MD
Courtyard
South Boston, MA
Fairfield Inn,
Laurel, MD
Holiday Inn Exp,
Langhorne, PA
Holiday Inn Exp,
Malvern, PA
Holiday Inn Exp,
King of Prussia, PA
Courtyard Inn,
Wilmington, DE
McIntosh Inn,
Wilmington, DE
Residence Inn,
Williamsburg, VA
Springhill Suites,
Williamsburg, VA
Courtyard Inn,
Brookline, MA
Courtyard Inn,
Scranton, PA
Courtyard Inn,
Langhorne, PA
Fairfield Inn,
Bethlehem, PA
Residence Inn,
Tyson's Corner, VA
Hilton Garden Inn,
JFK Airport, NY
Hawthorne Suites,
Franklin, MA
Comfort Inn,
Dartmouth, MA (1)
Residence Inn,
Dartmouth, MA
Holiday Inn Exp,
Cambridge, MA
Residence Inn,
Norwood, MA
Hampton Inn,
Brookhaven, NY
Holiday Inn Exp,
Hauppauge, NY
Residence Inn,
Langhorne, PA
(5,874)
-
-
-
-
-
-
426
-
157
300
213
807
-
2,645
2,720
2,511
2,787
1,934
5,714
12,159
(8,409)
1,325
12,737
(25,303)
5,472
23,280
(11,482)
2,615
14,815
-
(7,196)
-
927
(6,275)
1,088
(3,899)
2,639
19,939
6,120
6,573
5,324
(12,406)
2,557
13,339
(12,195)
-
988
898
10,295
4,515
(6,921)
1,911
11,625
(4,712)
1,430
10,293
(38,710)
(5,987)
-
761
47,414
7,193
(14,791)
3,064
16,068
(5,912)
1,399
6,778
(8,588)
4,283
14,475
(20,838)
-
25,018
(8,165)
1,872
8,968
410
214
93
99
81
4
-
-
-
-
-
-
-
654
-
-
-
-
-
-
-
-
-
-
-
-
4,043
1,203
2,507
1,267
1,414
1,067
333
869
664
784
836
214
250
399
294
811
-
1,325
5,472
2,615
6,688
3,923
5,018
4,054
3,348
6,781
7,524
4,137
5,268
4,453
3,642
7,592
(2,249)
5,275
10/01/97
(1,277)
2,860
05/15/98
(1,861)
3,407
09/12/96
(1,283)
3,170
08/28/97
(999)
2,643
03/06/98
(2,141)
5,451
01/01/00
12,492
12,492
(2,347)
10,145
10/01/03
13,606
14,931
(2,529)
12,402
03/26/04
23,944
29,416
(3,587)
25,829
04/01/05
15,599
18,214
(2,535)
15,679
07/16/04
(2,061)
-
17,878
17,878
(2,723)
15,155
09/30/05
997
158
171
848
1,178
786
615
117
1,524
1,598
920
343
307
861
201
927
1,088
3,293
2,557
988
898
1,911
1,430
-
761
3,064
1,399
4,283
7,117
6,731
5,495
8,044
7,819
8,788
(1,289)
6,755
01/31/05
(962)
(781)
6,857
05/26/05
8,007
05/24/05
14,187
16,744
(2,001)
14,743
05/23/05
11,473
12,461
(1,770)
10,691
06/17/05
5,301
6,199
(982)
5,217
06/17/05
12,240
14,151
(2,843)
11,308
11/22/05
10,410
11,840
(2,349)
9,491
11/22/05
48,938
48,938
(6,896)
42,042
06/15/05
8,791
9,552
(1,347)
8,205
02/01/06
16,988
20,052
(2,180)
17,872
01/03/06
7,121
8,520
(1,019)
7,501
01/03/06
14,782
19,065
(1,880)
17,185
02/02/06
-
25,879
25,879
(3,330)
22,549
02/16/06
1,872
9,169
2,055
11,041
(1,109)
9,932
04/25/06
2,510
(536)
1,974
05/01/06
(2,968)
902
3,525
(447)
(1,470)
455
(8,268)
1,933
10,434
(10,604)
1,956
9,793
-
1,970
11,761
(14,085)
3,130
17,345
(9,415)
2,737
14,080
-
-
-
-
1
-
1,463
12,094
94
266
1,933
10,700
12,633
(1,291)
11,342
05/01/06
1,056
1,956
10,849
12,805
(1,389)
11,416
05/03/06
156
871
853
889
1,970
3,131
2,737
1,557
11,917
13,887
(1,329)
12,558
07/27/06
18,216
21,347
(2,196)
19,151
09/06/06
14,933
17,670
(1,815)
15,855
09/01/06
12,983
14,540
(1,282)
13,258
01/08/07
(1) Costs capitalized subsequent to acquisition include reductions of asset value due to impairment.
81 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2010 (continued)
[IN THOUSANDS]
Initial Costs
Costs Capitalized
Subsequent to
Acquisition
Gross Amounts at which
Carrried at Close of
Period
Description
Encumbrances
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Land
Buildings &
Improvements
Total
Accumulated
Depreciation
Buildings &
Improvements
Net Book
Value
Land
Buildings &
Improvements
Date of
Acquisition
Hampton Inn,
Chelsea, NY
Hyatt Summerfield Suites,
Bridgewater, NJ
Hyatt Summerfield Suites,
Charlotte, NC
Hyatt Summerfield Suites,
Gaithersburg, MD
Hyatt Summerfield Suites,
Pleasant Hills, CA
Hyatt Summerfield Suites,
Pleasanton, CA
Hyatt Summerfield Suites,
Scottsdale, AZ
Hyatt Summerfield Suites,
White Plains, NY
Holiday Inn Exp & Suites,
Chester, NY
Residence Inn,
Carlisle, PA
Hampton Inn,
Seaport, NY
Hotel 373-5th Ave,
New York, NY
Holiday Inn,
Norwich, CT
Sheraton Hotel,
JFK Airport, NY
Hampton Inn,
Philadelphia, PA
Duane Street,
Tribeca, NY
NU Hotel,
Brooklyn, NY
Towneplace Suites,
Harrisburg, PA
Holiday Inn Express,
Camp Springs, MD
Hampton Inn,
Smithfield, RI
Hilton Garden Inn,
Tribeca, NY
Hampton Inn,
West Haven, CT
Hilton Garden Inn,
Glastonbury, CT
Hampton Inn,
Times Square, NY
Holiday Inn Express,
Times Square, NY
Candlewood Suites,
Times Square, NY
Hyatt Place,
KOP, PA
Holiday Inn Express,
Wall Street, NY
Hampton Inn,
Washington, DC
Courtyard Inn,
Alexandria, VA
8th Ave Land,
New York City, NY (1)
Nevins Street Land,
Brooklyn, NY (1)
$
(35,543)
$
8,905
$
33,500
$
-
$
1,213
$
8,905
$
34,713
$
43,618
$
(3,870)
$
39,748
09/29/06
(14,492)
3,373
19,685
(7,330)
770
7,315
(13,720)
2,912
16,001
(20,160)
6,216
17,229
(14,490)
3,941
12,560
(16,778)
3,060
19,968
(33,030)
8,823
30,273
(6,640)
1,500
(6,732)
1,015
6,671
7,511
(19,349)
7,816
19,040
(22,000)
14,239
16,778
-
-
-
1,984
12,037
-
27,315
3,490
24,382
(15,000)
8,213
12,869
(18,000)
-
-
-
1,237
1,629
22,042
10,136
11,094
(6,684)
2,057
9,486
(32,000)
21,077
42,955
(7,552)
1,053
10,751
(11,902)
1,898
12,981
-
-
-
-
-
-
10,691
41,637
11,075
43,113
10,281
36,687
1,133
7,267
12,152
21,100
9,335
58,048
(24,683)
6,376
26,089
(11,913)
21,575
(5,948)
10,650
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
271
3,373
19,956
23,329
(2,006)
21,323
12/28/06
1,647
770
8,962
9,732
(1,372)
8,360
12/28/06
363
148
155
218
2,912
6,216
3,941
3,060
16,364
19,276
(1,752)
17,524
12/28/06
17,377
23,593
(1,753)
21,840
12/28/06
12,715
16,656
(1,291)
15,365
12/28/06
20,186
23,246
(2,044)
21,202
12/28/06
1,558
8,823
31,831
40,654
(3,102)
37,552
12/28/06
105
28
158
1,500
1,015
7,816
6,776
7,539
8,276
8,554
(667)
(755)
7,609
01/25/07
7,799
01/10/07
19,198
27,014
(1,903)
25,111
02/01/07
82
14,239
16,860
31,099
(1,526)
29,573
06/01/07
562
264
1,984
12,599
14,583
(1,138)
13,445
07/01/07
-
27,579
27,579
(1,793)
25,786
06/13/08
3,458
3,490
27,840
31,330
(5,967)
25,363
02/15/06
559
8,213
13,428
21,641
(1,088)
20,553
01/04/08
50
45
-
22,092
22,092
(1,372)
20,720
01/14/08
1,237
10,181
11,418
(675)
10,743
05/08/08
295
1,629
11,389
13,018
(768)
12,250
06/26/08
40
74
34
5
1
1
-
2,057
9,526
11,583
(575)
11,008
08/01/08
21,077
43,029
64,106
(1,799)
62,307
05/01/09
1,053
1,898
10,785
11,838
(315)
11,523
11/04/09
12,986
14,884
(325)
14,559
01/01/10
10,691
41,637
52,328
(924)
51,404
02/09/10
11,075
43,114
54,189
(957)
53,232
02/09/10
10,281
36,688
46,969
(815)
46,154
02/09/10
3,762
1,133
11,029
12,162
(1,863)
10,299
08/17/10
1
12,152
21,101
33,253
(344)
32,909
05/09/10
-
9,335
58,048
67,383
(484)
66,899
09/01/10
510
6,376
26,599
32,975
(2,927)
30,048
09/29/06
(9,365)
108
12,210
108
12,318
(65)
12,253
(6,168)
-
4,482
-
4,482
-
4,482
06/28/06
6/11/07 &
07/11/07
Total Real Estate
$
(596,949)
$
247,999
$
1,013,900
$
(14,130)
$
43,444
$
233,869
$
1,057,344
$
1,291,213
$
(112,161)
$
1,179,052
(1) Costs capitalized subsequent to acquisition include reductions of asset value due to impairment.
* Assets are depreciated over a 7 to 40 year life, upon which the latest income statement is computed
82 HERSHA 2010 ANNUAL REPORT
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2010 (continued)
[IN THOUSANDS]
2010
2009
2008
Reconciliation of Real Estate
Balance at beginning of year
Additions during the year
Dispositions during the year
Changes in Assets Held for Sale
Investment in Real Estate
Assets Held for Sale, net of impairment
Total Real Estate
Reconciliation of Accumulated Depreciation
Balance at beginning of year
Depreciation for year
Accumulated depreciation on assets sold
Balance at the end of year
$
997,212
297,450
(3,449)
-
1,291,213
-
$
1,291,213
$
83,556
29,654
(1,049)
112,161
$
$
987,639
79,170
(53,493)
(37,406)
975,910
21,302
997,212
$
$
$
67,824
22,667
(6,935)
83,556
$
878,099
114,596
(5,056)
-
987,639
-
$
987,639
$
$
49,091
20,965
(2,232)
67,824
The aggregate cost of land, buildings and improvements for Federal income tax purposes for the years ended December 31, 2010, 2009
and 2008 is approximately $1,183,694, $911,634, and $894,596, respectively.
Depreciation is computed for buildings and improvements using a useful life for these assets of 7 to 40 years.
See Accompanying Report of Independent Registered Public Accounting Firm
83 HERSHA 2010 ANNUAL REPORT
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the
information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
disclosure. A control system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been
detected.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined within Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the processes designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes policies and procedures that:
·
·
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on
the criteria contained in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission as of December 31, 2010. Based on that evaluation, management has concluded that, as of December 31, 2010,
the Company’s internal control over financial reporting was effective based on those criteria. The effectiveness of our internal control
over financial reporting as of December 31, 2010 has been audited by KPMG LLP, an independent registered public accounting firm, as
stated in their attestation report which is included herein.
84 HERSHA 2010 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders of
Hersha Hospitality Trust:
We have audited Hersha Hospitality Trust and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Hersha Hospitality Trust's management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hersha Hospitality Trust maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Hersha Hospitality Trust and subsidiaries as of December 31, 2010 and 2009, and the related consolidated
statements of operations, equity and comprehensive income, and cash flows for each of the years in the three-year period ended
December 31, 2010, and our report dated March 3, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 3, 2011
85 HERSHA 2010 ANNUAL REPORT
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2010, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
86 HERSHA 2010 ANNUAL REPORT
H E R S H A
53502 Part 1 Cover:53502 Part 1 Cover 4/8/11 6:26 PM Page 2
H E R S H A
Hersha Portfolio by Location
(1)
Hersha Hospitality Trust (HT) is a real estate
investment trust (REIT) focused on the
acquisition and aggressive management of
New York Metro & New Jersey 50%
Boston Metro & New England 19%
Philadelphia Metro & Pennsylvania 17%
Washington, D.C. Metro & Mid-Atlantic 11%
West Coast & Arizona 3%
primarily select service and extended stay
Hersha Portfolio by Market Segment
(1)
hotels in metropolitan markets. Hersha trades
under the symbol HT on the New York Stock
Exchange. As of December 31, 2010, the
Company owned interests in 77 upper
upscale, upscale and midscale hotels located
predominantly 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.
Upscale Transient 27%
Upscale Extended Stay 22%
Midscale 49%
Upper Upscale 2%
Hersha Portfolio by Hotel Brand
(1)
Hilton 33%
Marriott 27%
InterContinental 21%
Hyatt 10%
Other 9%
Hersha Portfolio by Destination
(1)
Major Metro 84%
Secondary 9%
Destination 7%
(1) Based on pro-rata ownership share of 2010 EBITDA.
Management Team
Jay H. Shah
Chief Executive Officer
Neil H. Shah
President and Chief Operating Officer
Ashish R. Parikh
Chief Financial Officer
Michael R. Gillespie
Chief Accounting Officer
David L. Desfor
Treasurer and Corporate Secretary
William J. Walsh
Vice President of Asset Management
Robert C. Hazard III
Vice President of Acquisitions and Development
Bennett Thomas
Vice President of Finance
H E R S H A
Board of Trustees
Hasu P. Shah
Chairman,
Hersha Hospitality Trust
Jay H. Shah
Chief Executive Officer,
Hersha Hospitality Trust
Donald J. Landry
Lead Director, Hersha Hospitality Trust
Former President & CEO, Sunburst Hospitality Inc.
Thomas S. Capello
Founder and Principal,
First Capital Equities
Eduardo S. Elsztain
Chairman,
IRSA Inversiones y Representaciones, S.A.
Thomas J. Hutchison III
Former CEO,
CNL Hotels & Resorts, Inc.
Dianna F. Morgan
Former Senior Vice President,
Walt Disney World Co.
Kiran P. Patel
Partner,
Hersha Development Corp.
John M. Sabin
Executive Vice President,
Phoenix Health Systems, Inc.
Corporate Headquarters
44 Hersha Drive
Harrisburg, PA 17102
Telephone: (717) 236-4400
Facsimile: (717) 774-7383
Independent Auditors
KPMG LLP
Certified Public Accountants
1601 Market Street
Philadelphia, PA 19103
Telephone: (267) 256-7000
Legal Counsel
Hunton & Williams
Riverfront Plaza
951 East Byrd Street
Richmond, VA 23219
Telephone: (804) 788-8200
Philadelphia Executive Offices
Penn Mutual Towers
510 Walnut Street, 9th Floor
Philadelphia, PA 19106
Telephone: (215) 238-1046
Facsimile: (215) 238-0157
Registrar & Stock Transfer Agent
American Stock Transfer & Trust Company
10150 Mallard Creek Drive, Suite 307
Charlotte, NC 28262
Telephone: (800) 829-8432
Common Stock Information
The Common Stock of
Hersha Hospitality Trust is traded on
the New York Stock Exchange under the
Symbol “HT”
53502 Part 1 Cover:53502 Part 1 Cover 4/8/11 6:26 PM Page 1
H E R S H A
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