Attached files
file | filename |
---|---|
8-K - HERSHA HOSPITALITY TRUST 8-K 11-12-2009 - HERSHA HOSPITALITY TRUST | form8k.htm |
EX-99.2 - EXHIBIT 99.2 - HERSHA HOSPITALITY TRUST | ex99_2.htm |
EX-23.1 - EXHIBIT 23.1 - HERSHA HOSPITALITY TRUST | ex23_1.htm |
EX-99.1 - EXHIBIT 99.1 - HERSHA HOSPITALITY TRUST | ex99_1.htm |
Exhibit
99.3
Item
8.
|
Financial
Statements and Supplementary Data
|
Hersha
Hospitality Trust
Report
of Independent Registered Public Accounting Firm
|
2
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
3
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006
|
4
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the years
ended December 31, 2008, 2007 and 2006
|
6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
7
|
Notes
to Consolidated Financial Statements
|
8
|
1
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, 2008 and 2007, 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,
2008. These consolidated financial statements are the responsibility
of Hersha Hospitality Trust’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of
Mystic Partners, LLC an equity method investee company (See note 3) as of and
for the year ended December 31, 2006. The Company's equity in
earnings of Mystic Partners, LLC was $1,691,000 for the year ended December 31,
2006. The 2006 financial statements of Mystic Partners, LLC
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Mystic Partners as of
and for the year ended December 31, 2006, is based on the report of the other
auditors.
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, based on our audits and the report of other auditors related to 2006,
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, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1 to the consolidated financial statements, the Company has
retrospectively applied certain adjustments upon the adoption of new accounting
standards related to noncontrolling interests.
/s/ KPMG
LLP
Philadelphia,
Pennsylvania
March 5,
2009, except as to notes 1, 4, 10 and 12 which are as of November 11,
2009
2
HERSHA
HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND 2007
[IN
THOUSANDS, EXCEPT SHARE AMOUNTS]
December 31,
2008
|
December 31,
2007
|
|||||||
Assets:
|
||||||||
Investment
in Hotel Properties, net of Accumulated Depreciation
|
$ | 982,082 | $ | 893,297 | ||||
Investment
in Unconsolidated Joint Ventures
|
46,283 | 51,851 | ||||||
Development
Loans Receivable
|
81,500 | 58,183 | ||||||
Cash
and Cash Equivalents
|
15,697 | 12,327 | ||||||
Escrow
Deposits
|
12,404 | 13,706 | ||||||
Hotel
Accounts Receivable, net of allowance for doubtful accounts of $120 and
$47
|
6,870 | 7,287 | ||||||
Deferred
Costs, net of Accumulated Amortization of $3,606 and
$3,252
|
9,157 | 8,048 | ||||||
Due
from Related Parties
|
3,595 | 1,256 | ||||||
Intangible
Assets, net of Accumulated Amortization of $595 and $764
|
7,300 | 5,619 | ||||||
Other
Assets
|
13,517 | 16,033 | ||||||
Total
Assets
|
$ | 1,178,405 | $ | 1,067,607 | ||||
Liabilities
and Equity:
|
||||||||
Line
of Credit
|
$ | 88,421 | $ | 43,700 | ||||
Mortgages
and Notes Payable, net of unamortized discount of $61 and
$72
|
655,360 | 619,308 | ||||||
Accounts
Payable, Accrued Expenses and Other Liabilities
|
17,745 | 17,728 | ||||||
Dividends
and Distributions Payable
|
11,240 | 9,688 | ||||||
Due
to Related Parties
|
302 | 2,025 | ||||||
Total
Liabilities
|
773,068 | 692,449 | ||||||
Redeemable
Noncontrolling Interests - Common Units (Note 1)
|
$ | 18,739 | $ | - | ||||
Equity:
|
||||||||
Shareholders'
Equity:
|
||||||||
Preferred
Shares - 8% Series A, $.01 Par Value, 2,400,000 Shares Issued and
Outstanding at December 31, 2008 and 2007 (Aggregate Liquidation
Preference $60,000)
|
24 | 24 | ||||||
Common
Shares - Class A, $.01 Par Value, 80,000,000 Shares Authorized, 48,276,222
and 41,203,612 Shares Issued and Outstanding at December 31, 2008 and
2007, respectively
|
483 | 412 | ||||||
Common
Shares - Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued
and Outstanding
|
- | - | ||||||
Accumulated
Other Comprehensive Loss
|
(109 | ) | (23 | ) | ||||
Additional
Paid-in Capital
|
463,772 | 397,127 | ||||||
Distributions
in Excess of Net Income
|
(114,207 | ) | (67,135 | ) | ||||
Total
Shareholders' Equity
|
349,963 | 330,405 | ||||||
Noncontrolling
Interests (Note 1):
|
||||||||
Noncontrolling
Interests - Common Units
|
34,781 | 42,845 | ||||||
Noncontrolling
Interests - Consolidated Joint Ventures
|
1,854 | 1,908 | ||||||
Total
Noncontrolling Interests
|
36,635 | 44,753 | ||||||
Total
Equity
|
386,598 | 375,158 | ||||||
Total
Liabilities and Equity
|
$ | 1,178,405 | $ | 1,067,607 |
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
3
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
2008
|
2007
|
2006
|
||||||||||
Revenue:
|
||||||||||||
Hotel
Operating Revenues
|
$ | 236,162 | $ | 214,883 | $ | 117,705 | ||||||
Interest
Income from Development Loans
|
7,890 | 6,046 | 2,487 | |||||||||
Other
Revenues
|
1,141 | 980 | 737 | |||||||||
Total
Revenues
|
245,193 | 221,909 | 120,929 | |||||||||
Operating
Expenses:
|
||||||||||||
Hotel
Operating Expenses
|
133,817 | 119,499 | 65,915 | |||||||||
Hotel
Ground Rent
|
1,040 | 856 | 804 | |||||||||
Real
Estate and Personal Property Taxes and Property Insurance
|
12,384 | 10,803 | 5,492 | |||||||||
General
and Administrative
|
8,710 | 7,945 | 5,820 | |||||||||
Acquisition
and Terminated Transaction Costs
|
380 | 149 | 316 | |||||||||
Impairment
of Development Loan Receivable and Other Assets
|
21,004 | - | - | |||||||||
Depreciation
and Amortization
|
38,904 | 31,943 | 16,786 | |||||||||
Total
Operating Expenses
|
216,239 | 171,195 | 95,133 | |||||||||
Operating
Income
|
28,954 | 50,714 | 25,796 | |||||||||
Interest
Income
|
306 | 686 | 1,182 | |||||||||
Interest
Expense
|
41,218 | 40,237 | 23,500 | |||||||||
Other
Expense
|
129 | 83 | 102 | |||||||||
Loss
on Debt Extinguishment
|
1,568 | - | 1,485 | |||||||||
(Loss)
income before income from Unconsolidated Joint Venture Investments and
Discontinued Operations
|
(13,655 | ) | 11,080 | 1,891 | ||||||||
Unconsolidated
Joint Ventures
|
||||||||||||
Income
from Unconsolidated Joint Venture Investments
|
1,373 | 3,476 | 1,799 | |||||||||
Impairment
of Investment in Unconsolidated Joint Venture
|
(1,890 | ) | - | - | ||||||||
(Loss)
income from Unconsolidated Joint Venture Investments
|
(517 | ) | 3,476 | 1,799 | ||||||||
(Loss)
income from Continuing Operations
|
(14,172 | ) | 14,556 | 3,690 | ||||||||
Discontinued
Operations (Note 12):
|
||||||||||||
Gain
on Disposition of Hotel Properties
|
2,888 | 4,248 | 784 | |||||||||
(Loss)
income from Discontinued Operations
|
855 | 1,368 | 1,330 | |||||||||
Income
from Discontinued Operations
|
3,743 | 5,616 | 2,114 | |||||||||
Net
(Loss) income
|
(10,429 | ) | 20,172 | 5,804 | ||||||||
Loss
(income) allocated to Noncontrolling Interests
|
1,621 | (2,325 | ) | (706 | ) | |||||||
Preferred
Distributions
|
(4,800 | ) | (4,800 | ) | (4,800 | ) | ||||||
Net
(Loss) income applicable to Common Shareholders
|
$ | (13,608 | ) | $ | 13,047 | $ | 298 |
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
4
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
2008
|
2007
|
2006
|
||||||||||
Earnings Per Share:
|
||||||||||||
BASIC
|
||||||||||||
Loss
from continuing operations applicable to common
shareholders
|
$ | (0.38 | ) | $ | 0.20 | $ | (0.05 | ) | ||||
Income
from discontinued operations applicable to common
shareholders
|
0.07 | 0.12 | 0.06 | |||||||||
Net
loss applicable to common shareholders
|
$ | (0.31 | ) | $ | 0.32 | $ | 0.01 | |||||
DILUTED
|
||||||||||||
Loss
from continuing operations applicable to common
shareholders
|
$ | (0.38 | ) * | $ | 0.20 | * | $ | (0.05 | ) * | |||
Income
from discontinued operations applicable to common
shareholders
|
0.07 | * | 0.12 | * | 0.06 | * | ||||||
Net
loss applicable to common shareholders
|
$ | (0.31 | ) * | $ | 0.32 | * | $ | 0.01 | * | |||
Weighted Average Common Shares
Outstanding:
|
||||||||||||
Basic
|
45,184,127 | 40,718,724 | 27,118,264 | |||||||||
Diluted
|
45,184,127 | * | 40,718,724 | * | 27,118,264 | * |
* Income
allocated to noncontrolling interest in the Partnership has been excluded from
the numerator and OP 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. Weighted
average OP Units outstanding for the years ended December 31, 2008, 2007 and
2006 were 8,034,737, 5,464,670 and 3,554,361,
respectively. Unvested stock awards have been omitted
from the denominator for the purpose of computing diluted earnings per share for
the years ended December 31, 2008, 2007 and 2006 since the effect of including
these awards in the denominator would be anti-dilutive to income from continuing
operations applicable to common shareholders.
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
5
CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
[IN
THOUSANDS, EXCEPT SHARES]
Shareholders'
Equity
|
Noncontrolling
Interests
|
Redeemable
Noncontrolling Interests
|
||||||||||||||||||||||||||||||||||||||||||||||||||
Class
A
|
Class
B
|
Series
A
|
||||||||||||||||||||||||||||||||||||||||||||||||||
Common
Shares
|
Common
Shares
|
Preferred
Shares
|
Common
Units
|
Common
Units
|
||||||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Dollars
|
Shares
|
Dollars
|
Shares
|
Dollars
|
Additional
Paid-In Capital
|
Other
Comprehensive Income
|
Distributions
in Excess of Net Earnings
|
Total
Shareholders' Equity
|
Shares
|
Dollars
|
Consolidated
Joint Ventures
|
Total
Noncontrolling Interests
|
Total
Equity
|
Shares
|
Dollars
|
||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2005
|
20,373,752 | $ | 203 | - | - | 2,400,000 | $ | 24 | $ | 193,228 | $ | 327 | $ | (29,079 | ) | $ | 164,703 | 2,834 | $ | 15,147 | $ | 2,079 | $ | 17,226 | $ | 181,929 | - | $ | - | |||||||||||||||||||||||
Common
Stock Issuance
|
20,118,750 | 201 | - | - | - | - | 191,875 | - | - | 192,076 | - | - | - | - | 192,076 | - | - | |||||||||||||||||||||||||||||||||||
Issuance
Costs
|
- | - | - | - | - | - | (1,061 | ) | (1,061 | ) | - | - | - | - | (1,061 | ) | - | - | ||||||||||||||||||||||||||||||||||
Unit
Conversion
|
82,077 | 1 | - | - | - | - | 649 | - | - | 650 | (82 | ) | (651 | ) | - | (651 | ) | (1 | ) | - | - | |||||||||||||||||||||||||||||||
Common
Units Issued for Acquisitions
|
- | - | - | - | - | - | - | - | - | - | 1,083 | 9,940 | - | 9,940 | 9,940 | - | - | |||||||||||||||||||||||||||||||||||
Reallocation
of Noncontrolling Interest
|
- | - | - | - | - | - | (3,467 | ) | - | - | (3,467 | ) | - | 3,467 | - | 3,467 | - | - | - | |||||||||||||||||||||||||||||||||
Dividends
declared:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Common
Stock ($0.72 per share)
|
- | - | - | - | - | - | - | - | (21,854 | ) | (21,854 | ) | - | (2,638 | ) | - | (2,638 | ) | (24,492 | ) | - | - | ||||||||||||||||||||||||||||||
Preferred
Stock ($2.00 per share)
|
- | - | - | - | - | - | - | - | (4,800 | ) | (4,800 | ) | - | - | - | - | (4,800 | ) | - | - | ||||||||||||||||||||||||||||||||
Consolidated
Joint Ventures:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions
for Consolidated Joint Ventures
|
- | - | - | - | - | - | - | - | - | - | - | - | 1,196 | 1,196 | 1,196 | - | - | |||||||||||||||||||||||||||||||||||
Distributions
from Consolidated Joint Ventures
|
- | - | - | - | - | - | - | - | - | - | - | - | (221 | ) | (221 | ) | (221 | ) | - | - | ||||||||||||||||||||||||||||||||
Dividend
Reinvestment Plan
|
2,871 | - | - | - | - | - | 29 | - | - | 29 | - | - | - | - | 29 | - | - | |||||||||||||||||||||||||||||||||||
Stock
Based Compensation
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted
Share Award Grants
|
89,500 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Restricted
Share Award Vesting
|
- | - | - | - | - | - | 293 | 293 | - | - | - | - | 293 | - | - | |||||||||||||||||||||||||||||||||||||
Share
Grants to Trustees
|
5,000 | - | - | - | - | - | 46 | - | - | 46 | - | - | - | - | 46 | - | - | |||||||||||||||||||||||||||||||||||
Comprehensive
Income (Loss):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Other
Comprehensive Loss
|
- | - | - | - | - | - | - | (94 | ) | - | (94 | ) | - | - | - | - | (94 | ) | - | - | ||||||||||||||||||||||||||||||||
Net
Income
|
- | - | - | - | - | - | - | - | 5,098 | 5,098 | - | 668 | 38 | 706 | 5,804 | - | - | |||||||||||||||||||||||||||||||||||
Total
Comprehensive Income
|
5,004 | - | 668 | 38 | 706 | 5,710 | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2006
|
40,671,950 | $ | 405 | - | $ | - | 2,400,000 | $ | 24 | $ | 381,592 | $ | 233 | $ | (50,635 | ) | $ | 331,619 | 3,835 | $ | 25,933 | $ | 3,092 | $ | 29,025 | $ | 360,644 | - | $ | - | ||||||||||||||||||||||
Unit
Conversion
|
306,460 | 3 | - | - | - | - | 2,366 | - | - | 2,369 | (306 | ) | (2,369 | ) | - | (2,369 | ) | - | - | - | ||||||||||||||||||||||||||||||||
Unit
Conversion Costs
|
- | - | - | - | - | - | (142 | ) | - | - | (142 | ) | - | - | - | - | (142 | ) | - | - | ||||||||||||||||||||||||||||||||
Common
Units Issued for Acquisitions
|
- | - | - | - | - | - | - | - | - | - | 2,896 | 33,530 | - | 33,530 | 33,530 | - | - | |||||||||||||||||||||||||||||||||||
Reallocation
of Noncontrolling Interest
|
- | - | - | - | - | - | 12,422 | - | - | 12,422 | - | (12,422 | ) | - | (12,422 | ) | - | - | - | |||||||||||||||||||||||||||||||||
Dividends
declared:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Common
Stock ($0.72 per share)
|
- | - | - | - | - | - | - | - | (29,547 | ) | (29,547 | ) | - | (4,222 | ) | - | (4,222 | ) | (33,769 | ) | - | - | ||||||||||||||||||||||||||||||
Preferred
Stock ($2.00 per share)
|
- | - | - | - | - | - | - | - | (4,800 | ) | (4,800 | ) | - | - | - | - | (4,800 | ) | - | - | ||||||||||||||||||||||||||||||||
Consolidated
Joint Ventures:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions
of Remaining Interest in Consolidated Joint Ventures
|
- | - | - | - | - | - | - | - | - | - | - | - | (587 | ) | (587 | ) | (587 | ) | - | - | ||||||||||||||||||||||||||||||||
Distributions
from Consolidated Joint Ventures
|
- | - | - | - | - | - | - | - | - | - | - | - | (527 | ) | (527 | ) | (527 | ) | - | - | ||||||||||||||||||||||||||||||||
Dividend
Reinvestment Plan
|
2,620 | 1 | - | - | - | - | 29 | - | - | 30 | - | - | - | - | 30 | - | - | |||||||||||||||||||||||||||||||||||
Stock
Based Compensation
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted
Share Award Grants
|
214,582 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Restricted
Share Award Vesting
|
- | 2 | - | - | - | - | 766 | - | - | 768 | - | - | - | - | 768 | - | - | |||||||||||||||||||||||||||||||||||
Share
Grants to Trustees
|
8,000 | 1 | - | - | - | - | 94 | - | - | 95 | - | - | - | - | 95 | - | - | |||||||||||||||||||||||||||||||||||
Comprehensive
Income (Loss):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Other
Comprehensive Loss
|
- | - | - | - | - | - | - | (256 | ) | - | (256 | ) | - | - | - | - | (256 | ) | - | - | ||||||||||||||||||||||||||||||||
Net
Income
|
- | - | - | - | - | - | - | - | 17,847 | 17,847 | - | 2,395 | (70 | ) | 2,325 | 20,172 | - | - | ||||||||||||||||||||||||||||||||||
Total
Comprehensive Income
|
17,591 | - | 2,395 | (70 | ) | 2,325 | 19,916 | - | - | |||||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
41,203,612 | $ | 412 | - | $ | - | 2,400,000 | $ | 24 | $ | 397,127 | $ | (23 | ) | $ | (67,135 | ) | $ | 330,405 | 6,425 | $ | 42,845 | $ | 1,908 | $ | 44,753 | $ | 375,158 | - | $ | - | |||||||||||||||||||||
Common
Stock Issuance
|
6,600,000 | 66 | - | - | - | - | 62,007 | - | - | 62,073 | - | - | - | - | 62,073 | - | - | |||||||||||||||||||||||||||||||||||
Issuance
Costs
|
- | - | - | - | - | - | (228 | ) | - | - | (228 | ) | - | - | - | - | (228 | ) | - | - | ||||||||||||||||||||||||||||||||
Unit
Conversion
|
175,843 | 2 | - | - | - | - | 1,370 | - | - | 1,372 | (176 | ) | (1,372 | ) | - | (1,372 | ) | - | - | - | ||||||||||||||||||||||||||||||||
Common
Units Issued for Acquisitions
|
- | - | - | - | - | - | - | - | - | - | 2,497 | 21,624 | - | 21,624 | 21,624 | - | - | |||||||||||||||||||||||||||||||||||
Reallocation
of Noncontrolling Interest
|
- | - | - | - | - | - | 1,966 | - | - | 1,966 | - | (683 | ) | - | (683 | ) | 1,283 | - | (1,283 | ) | ||||||||||||||||||||||||||||||||
Reclassification
of Noncontrolling Interests
|
- | - | - | - | - | - | - | - | (3,064 | ) | (20,670 | ) | - | (20,670 | ) | (20,670 | ) | 3,064 | 20,670 | |||||||||||||||||||||||||||||||||
Dividends
declared:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Common
Stock ($0.72 per share)
|
- | - | - | - | - | - | - | - | (33,464 | ) | (33,464 | ) | - | (5,492 | ) | - | (5,492 | ) | (38,956 | ) | - | (552 | ) | |||||||||||||||||||||||||||||
Preferred
Stock ($2.00 per share)
|
- | - | - | - | - | - | - | - | (4,800 | ) | (4,800 | ) | - | - | - | - | (4,800 | ) | - | - | ||||||||||||||||||||||||||||||||
Dividend
Reinvestment Plan
|
5,092 | - | - | - | - | - | 31 | - | - | 31 | - | - | - | - | 31 | - | - | |||||||||||||||||||||||||||||||||||
Stock
Based Compensation
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted
Share Award Grants
|
281,675 | 3 | - | - | - | - | (3 | ) | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
Restricted
Share Award Vesting
|
- | - | - | - | - | - | 1,411 | - | - | 1,411 | - | - | - | - | 1,411 | - | - | |||||||||||||||||||||||||||||||||||
Share
Grants to Trustees
|
10,000 | - | - | - | - | - | 91 | - | - | 91 | - | - | - | - | 91 | - | - | |||||||||||||||||||||||||||||||||||
Comprehensive
Income (Loss):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Other
Comprehensive Loss
|
- | - | - | - | - | - | - | (86 | ) | - | (86 | ) | - | - | - | - | (86 | ) | - | - | ||||||||||||||||||||||||||||||||
Net
Loss
|
- | - | - | - | - | - | - | - | (8,808 | ) | (8,808 | ) | - | (1,471 | ) | (54 | ) | (1,525 | ) | (10,333 | ) | - | (96 | ) | ||||||||||||||||||||||||||||
Total
Comprehensive Loss
|
(8,894 | ) | - | (1,471 | ) | (54 | ) | (1,525 | ) | (10,419 | ) | - | (96 | ) | ||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2008
|
48,276,222 | $ | 483 | - | $ | - | 2,400,000 | $ | 24 | $ | 463,772 | $ | (109 | ) | $ | (114,207 | ) | $ | 349,963 | 5,682 | $ | 34,781 | $ | 1,854 | $ | 36,635 | $ | 386,598 | 3,064 | $ | 18,739 |
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
6
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
2008
|
2007
|
2006
|
||||||||||
Operating
activities:
|
||||||||||||
Net
(loss) income
|
$ | (10,429 | ) | $ | 20,172 | $ | 5,804 | |||||
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
Gain
on disposition of hotel assets held for sale
|
(2,888 | ) | (4,248 | ) | (784 | ) | ||||||
Impairment
of development loan receivable and other asset
|
21,004 | - | - | |||||||||
Depreciation
|
41,219 | 34,963 | 20,131 | |||||||||
Amortization
|
1,958 | 1,812 | 1,118 | |||||||||
Debt
extinguishment
|
1,587 | - | 1,485 | |||||||||
Equity
in loss (income) of unconsolidated joint ventures
|
517 | (3,476 | ) | (1,799 | ) | |||||||
Distributions
from unconsolidated joint ventures
|
3,036 | 4,501 | 4,578 | |||||||||
Loss
(gain) recognized on change in fair value of derivative
instrument
|
71 | (89 | ) | (197 | ) | |||||||
Stock
based compensation expense
|
1,502 | 852 | 339 | |||||||||
Change
in assets and liabilities:
|
||||||||||||
(Increase)
decrease in:
|
||||||||||||
Hotel
accounts receivable
|
420 | (2,500 | ) | (1,731 | ) | |||||||
Escrows
|
1,302 | 1,845 | (87 | ) | ||||||||
Other
assets
|
(1,132 | ) | (261 | ) | (2,781 | ) | ||||||
Due
from related party
|
(3,251 | ) | 3,691 | (2,131 | ) | |||||||
Increase
(decrease) in:
|
||||||||||||
Due
to related party
|
(1,115 | ) | (1,291 | ) | (1,448 | ) | ||||||
Accounts
payable and accrued expenses
|
93 | 3,329 | 4,720 | |||||||||
Net
cash provided by operating activities
|
53,894 | 59,300 | 27,217 | |||||||||
Investing
activities:
|
||||||||||||
Purchase
of hotel property assets
|
(63,626 | ) | (32,658 | ) | (395,359 | ) | ||||||
Capital
expenditures
|
(19,226 | ) | (16,773 | ) | (11,020 | ) | ||||||
Proceeds
from disposition of hotel assets held for sale
|
6,456 | 11,905 | 9,800 | |||||||||
Deposits
on hotel acquisitions
|
- | - | (2,100 | ) | ||||||||
Cash
paid for franchise fee intangible
|
(57 | ) | (11 | ) | (46 | ) | ||||||
Investment
in notes receivable
|
- | - | (1,057 | ) | ||||||||
Repayment
of notes receivable
|
1,350 | 34 | 1,909 | |||||||||
Investment
in development loans receivable
|
(64,200 | ) | (65,700 | ) | (51,616 | ) | ||||||
Repayment
of development loans receivable
|
22,416 | 53,000 | 37,050 | |||||||||
Distributions
from unconsolidated joint venture
|
2,113 | 6,485 | 2,767 | |||||||||
Advances
and capital contributions to unconsolidated joint ventures
|
(96 | ) | (2,309 | ) | (4,209 | ) | ||||||
Net
cash used in investing activities
|
(114,870 | ) | (46,027 | ) | (413,881 | ) | ||||||
Financing
activities:
|
||||||||||||
Proceeds
from (repayments of) borrowings under line of credit, net
|
44,721 | 19,700 | 24,000 | |||||||||
Principal
repayment of mortgages and notes payable
|
(57,421 | ) | (20,717 | ) | (80,222 | ) | ||||||
Proceeds
from mortgages and notes payable
|
59,156 | 28,543 | 280,205 | |||||||||
Settlement
of interest rate derivative
|
- | - | 79 | |||||||||
Cash
paid for deferred financing costs
|
(1,244 | ) | (286 | ) | (1,224 | ) | ||||||
Proceeds
from issuance of common stock, net
|
61,845 | - | 191,015 | |||||||||
Stock
issuance costs related to conversion of partnership units
|
- | (143 | ) | - | ||||||||
Distributions
to partners in consolidated joint ventures
|
- | (526 | ) | (221 | ) | |||||||
Dividends
paid on common shares
|
(32,169 | ) | (29,424 | ) | (18,174 | ) | ||||||
Dividends
paid on preferred shares
|
(4,800 | ) | (4,800 | ) | (4,800 | ) | ||||||
Distributions
paid on common partnership units
|
(5,742 | ) | (3,609 | ) | (2,458 | ) | ||||||
Net
cash provided by (used in) financing activities
|
64,346 | (11,262 | ) | 388,200 | ||||||||
Net
increase in cash and cash equivalents
|
3,370 | 2,011 | 1,536 | |||||||||
Cash
and cash equivalents - beginning of year
|
12,327 | 10,316 | 8,780 | |||||||||
Cash
and cash equivalents - end of year
|
$ | 15,697 | $ | 12,327 | $ | 10,316 |
The
Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
7
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE 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 (“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 formed a wholly owned taxable REIT subsidiary, 44 New England
Management Company (“44 New England” or “TRS Lessee”), to lease certain of the
Company’s hotels.
On May 5,
2008, we transferred the listing of our common shares of beneficial interest and
8.0% Series A preferred shares of beneficial interest from the American Stock
Exchange to the New York Stock Exchange (the
“NYSE”). Hersha’s common shares now trade on the NYSE
under the ticker symbol "HT" and its Series A preferred shares now trade on the
NYSE under the ticker symbol "HT PR A."
As of
December 31, 2008, the Company, through the Partnership and subsidiary
partnerships, wholly owned fifty-eight limited and full service hotels. All of
the wholly owned hotel facilities are leased to the Company’s taxable REIT
subsidiary (“TRS”), 44 New England.
In
addition to the wholly owned hotel properties, as of December 31, 2008, the
Company owned joint venture interests in another eighteen 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
|
50.0%
|
Courtyard
|
Ewing/Princeton,
NJ
|
Hersha
Inn America TRS Inc.
|
||||
PRA
Glastonbury, LLC
|
48.0%
|
Hilton
Garden Inn
|
Glastonbury,
CT
|
Hersha
PRA TRS, Inc
|
||||
PRA
Suites at Glastonbury, LLC
|
48.0%
|
Homewood
Suites
|
Glastonbury,
CT
|
Hersha
PRA LLC
|
||||
Mystic
Partners, LLC
|
66.7%
|
Marriott
|
Mystic,
CT
|
Mystic
Partners Leaseco, LLC
|
||||
8.8%
|
Hilton
|
Hartford,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
66.7%
|
Courtyard
|
Norwich,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
66.7%
|
Courtyard
|
Warwick,
RI
|
Mystic
Partners Leaseco, LLC
|
|||||
66.7%
|
Residence
Inn
|
Danbury,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
66.7%
|
Residence
Inn
|
Mystic,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
44.7%
|
Residence
Inn
|
Southington,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
66.7%
|
Springhill
Suites
|
Waterford,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
15.0%
|
Marriott
|
Hartford,
CT
|
Mystic
Partners Leaseco, LLC
|
|||||
Hiren
Boston, LLC
|
50.0%
|
Courtyard
|
South
Boston, MA
|
South
Bay Boston, LLC
|
||||
SB
Partners, LLC
|
50.0%
|
Holiday
Inn Express
|
South
Boston, MA
|
South
Bay Sandeep, LLC
|
||||
Metro
29th Street Associates, LLC.
|
50.0%
|
Holiday
Inn Express
|
New
York, NY
|
Metro
29th Sublessee, LLC
|
||||
Consolidated
Joint Ventures
|
||||||||
Logan
Hospitality Associates, LLC
|
55.0%
|
Four
Points – Sheraton
|
Revere/Boston,
MA
|
Revere
Hotel Group, LLC
|
||||
LTD
Associates One, LLC
|
75.0%
|
Springhill
Suites
|
Williamsburg,
VA
|
HT
LTD Williamsburg One LLC
|
||||
LTD
Associates Two, LLC
|
75.0%
|
Residence
Inn
|
Williamsburg,
VA
|
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.
8
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The
properties are managed by eligible independent management companies, including
Hersha Hospitality Management, LP (“HHMLP”), HHMLP is owned in part by four of
the Company’s executive officers, two of its 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 (“US GAAP”) 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 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. 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;
Hersha PRA 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 $27,977 as of December
31, 2008. Also, Mystic Partners Leaseco, LLC; Hersha PRA
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 variable interest entities. 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 the Logan Hospitality Associates, LLC; 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.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (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.
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.
9
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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
|
7
to 40 Years
|
Furniture,
Fixtures and Equipment
|
5
to 7 Years
|
The
Company periodically reviews the carrying value of each hotel to determine if
circumstances exist indicating 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 and determine if the investment in such hotel is
recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment will be made to the carrying value of the hotel to
reflect the hotel at fair value.
In
accordance with the provisions of Financial Accounting Standards Board Statement
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a
hotel is considered 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 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 exist indicating
impairment to the carrying value of the investment. When
an impairment indicator is present, we will review the recoverability of our
investment. It the investment’s carrying value is not
considered recoverable, 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 at each balance sheet date. 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 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.
10
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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. 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 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, 2008, 2007 and 2006 was 84.5%,
86.4% and 91.4%, 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 Company’s
equity. Revenues, expenses and net income or loss
attributable to both the Company and noncontrolling interests are reported on
the consolidated statements of operations.
11
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 have
reclassified the noncontrolling interests of our consolidated joint ventures
from the mezzanine section of our consolidated balance sheets to
equity. These noncontrolling interests totaled $1,854 as
of December 31, 2008 and $1,908 as of December 31,
2007. In addition, certain common units of limited
partnership interests in HHLP (“Nonredeemable Common Units”) were reclassified
from the mezzanine section of our consolidated balance sheets to
equity. These noncontrolling interests of Nonredeemable
Common Units totaled $34,781 as of December 31, 2008 and $42,845 as of December
31, 2007. As of December 31, 2008, there were 5,682,048
Nonredeemable Common Units outstanding with a fair market value of $17,046 based
on the price per share of our common shares on the New York Stock Exchange 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.
During
the fourth quarter of 2008, certain common units of limited partnership
interests in HHLP (“Redeemable Common Units”) were 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, 2008, there were
3,064,252 Redeemable Common Units outstanding with a redemption value equal to
the fair value of the Redeemable Common Units, or $9,193. The
redemption value of the Redeemable Common Units is based on the price per share
of our common shares on the New York Stock Exchange on such
date. As of December 31, 2008, the Redeemable Common
Units were valued on the consolidated balance sheets at carrying value based on
historical cost of $18,739, respectively, since historical cost exceeded the
Redeemable Common Units redemption value as of each such date.
Net
income or loss related 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 related 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.
We also
maintain noncontrolling interests for the equity interest owned by third parties
in Logan Hospitality Associates, LLC; LTD Associates One, LLC; and LTD
Associates Two, LLC. Third parties own a 45% interest in Logan Hospitality
Associates, LLC and a 25% interest in each of LTD Associates One LLC and LTD
Associates Two, 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.
Shareholders’
Equity
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.
12
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
We lease
land to hotel developers under fixed lease agreements. In addition to base
rents, these lease agreements contain provisions that require the lessee to
reimburse real estate taxes, debt service and other impositions. Base rents and
reimbursements for real estate taxes, debt service and other impositions are
recorded in land lease revenue on an accrual
basis. Expenses for real estate taxes, interest expense,
and other costs that are reimbursed under the land leases are recorded in land
lease expense when they are incurred.
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 the hotels 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 (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.
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.
13
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent Accounting
Pronouncements
Business
Combinations
In
December 2007, the FASB issued a standard that requires most identifiable
assets, liabilities, noncontrolling interests, and goodwill acquired in a
business combination to be recorded at “full fair value.” The standard is
effective for fiscal years beginning after December 15, 2008. The Company has
not determined whether the adoption of this standard will have a material effect
on the Company’s financial statements. Adoption of the standard on January 1,
2009 could have a material effect on the Company’s financial statements and the
Company’s future financial results to the extent the Company acquires
significant amounts of real estate assets. Costs related to future acquisitions
will be expensed as incurred compared to the Company’s current practice of
capitalizing such costs and amortizing them over the useful life of the acquired
assets. In addition, to the extent the Company enters into acquisition
agreements with earn-out provisions, a liability may be recorded at the time of
acquisition based on an estimate of the earn-out to be paid compared to our
current practice of recording a liability for the earn-out when amounts are
probable and determinable.
Disclosures
about Derivative Instruments and Hedging Activities
In March
2008, the FASB issued a standard that requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. The objective of the guidance is to provide users of
financial statements with an enhanced understanding of how and why an entity
uses derivative instruments; how derivative instruments and related hedged items
are accounted for; and how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This standard is effective for fiscal years beginning after November 15,
2008. The Company has determined that the adoption of
this standard will not have a material effect on the Company’s financial
statements.
Participating
Securities
In June
2008, the FASB issued a pronouncement which states that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share (“EPS”) pursuant to the
two-class method. This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those years. All prior-period EPS data presented shall be adjusted
retrospectively (including interim financial statements, summaries of earnings,
and selected financial data) to conform with the provisions of this
pronouncement. Early application is not permitted. We
expect that the adoption of this pronouncement will not impact our financial
position or net income.
Accounting
Standards Codification
In June
2009, the FASB issued a pronouncement that established the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with US GAAP. This standard is
effective for interim and annual periods ending after September 15, 2009. The
Company has adopted this standard in accordance with US GAAP.
14
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES
Investment
in hotel properties consist of the following at December 31, 2008 and
2007:
December 31,
2008
|
December 31,
2007
|
|||||||
Land
|
$ | 184,879 | $ | 172,061 | ||||
Buildings
and Improvements
|
802,760 | 706,038 | ||||||
Furniture,
Fixtures and Equipment
|
121,991 | 105,979 | ||||||
Construction
in Progress
|
- | 1,541 | ||||||
1,109,630 | 985,619 | |||||||
Less
Accumulated Depreciation
|
(127,548 | ) | (92,322 | ) | ||||
Total
Investment in Hotel Properties
|
$ | 982,082 | $ | 893,297 |
Depreciation
expense was $41,219, $34,895 and $20,120 for the years ended December 31, 2008,
2007 and 2006, respectively.
During
the year ended December 31, 2008 we acquired the following wholly owned hotel
properties:
Hotel
|
Acquisition
Date
|
Land
|
Buildings
and Improvements
|
Furniture
Fixtures and Equipment
|
Franchise
Fees, Loan Costs, and Leasehold Intangible
|
Total
Purchase Price
|
Fair
Value of Assumed Debt
|
|||||||||||||||||||
Duane
Street Hotel, TriBeCa, New York, NY
|
1/4/2008
|
$ | 8,213 | $ | 12,869 | $ | 2,793 | $ | - | $ | 23,875 | $ | - | |||||||||||||
nu
Hotel, Brooklyn, NY
|
1/14/2008
|
- | 17,343 | - | - | 17,343 | - | |||||||||||||||||||
TownePlace
Suites, Harrisburg, PA
|
5/8/2008
|
1,238 | 10,182 | 1,792 | 42 | 13,254 | - | |||||||||||||||||||
Sheraton
Hotel, JFK Airport, Jamaica, NY
|
6/13/2008
|
- | 27,584 | 4,413 | 2,893 | 34,890 | 23,800 | |||||||||||||||||||
Holiday
Inn Express, Camp Springs, MD
|
6/26/2008
|
1,629 | 11,115 | 931 | 5 | 13,680 | - | |||||||||||||||||||
Hampton
Inn, Smithfield, RI
|
8/1/2008
|
2,057 | 9,502 | 1,156 | 102 | 12,817 | 6,990 | |||||||||||||||||||
Total
2008 Wholly Owned Acquisitions
|
$ | 13,137 | $ | 88,595 | $ | 11,085 | $ | 3,042 | $ | 115,859 | $ | 30,790 |
In
connection with the acquisitions made during the year ended December 31, 2008,
we acquired $344 in working capital assets and assumed $662 in working capital
liabilities.
Interest
rates on debt assumed in the acquisitions of the Sheraton Hotel, JFK Airport,
Jamaica, NY and the Hampton Inn, Smithfield, RI were at market
rates. In connection with the acquisition of the Sheraton
Hotel, the Company assumed a $23,800 variable rate mortgage which accrued
interest at LIBOR plus 2.00% per annum. This debt was
repaid in October 2008 with borrowings from our revolving line of credit, and
this property now serves as collateral for borrowings under our revolving line
of credit. In connection with the acquisition of the
Sheraton Hotel, we assumed a lease for the underlying land with a remaining term
of approximately 94 years. The remaining lease payments
were determined to be below market value and, as a result, $2,171 of the
purchase price was allocated to a leasehold intangible
asset. This asset is recorded in intangible assets on the
consolidated balance sheet and is being amortized over the remaining life of the
lease.
In
connection with the acquisition of the Duane Street Hotel, the Company entered
into a $15,000 fixed rate mortgage with interest at
7.15%. The mortgage matures in February 2018 and is
interest only for the first three years. Upon
acquisition of the nu Hotel, located in Brooklyn, NY, we commenced
renovations to fit out the building prior to its
opening. Costs associated with the building while it was
being renovated, including interest, were capitalized. On
July 7, 2008, the property opened and all renovation costs were capitalized to
building and improvements and furniture, fixtures and equipment and are being
depreciated over the useful lives of these assets. In
connection with the acquisition of the nu Hotel the Company entered into an
$18,000 variable rate mortgage debt facility with interest at LIBOR plus
2.00%. Principal of $13,240 was drawn on the date of
acquisition, while the remainder of the balance has been drawn as renovations
progressed and as interest was incurred. The mortgage
requires the payment of interest only and matures in January of
2011.
15
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (continued)
In
connection with the acquisition of the Hampton Inn, Smithfield, RI, the Company
assumed a $6,990 fixed rate mortgage which accrues interest at
6.98%. The mortgage matures in December 12,
2016. In connection with the acquisition of the property,
the sellers provided a $500 note payable which accrued interest at a rate of
7.00% per annum. This note was repaid prior to September
30, 2008.
The Duane
Street Hotel, New York, NY was acquired from entities that are owned
by certain of the Company’s executives and affiliated
trustees. Included in the consideration paid for the
Duane Street Hotel were 779,585 units of limited partnership interest (“OP
Units”) in Hersha Hospitality Limited Partnership ("HHLP" or the “Partnership”),
our operating partnership subsidiary, valued at $6,862. The OP Units were issued
to certain executives and affiliated trustees of the
Company. The Sheraton Hotel, JFK Airport, Jamaica, NY,
was acquired from entities that are owned by certain of the Company’s executives
and affiliated trustees and an unrelated third
party. Included in the consideration paid for the
Sheraton Hotel were 1,177,306 OP Units in HHLP valued at
$10,596. The OP Units were issued to certain executives
and affiliated trustees of the Company and an unrelated third
party. The Holiday Inn Express, Camp Springs, MD, was
acquired from entities that are owned by certain of the Company’s executives and
affiliated trustees and an unrelated third
party. Included in the consideration paid for the Holiday
Inn Express were 540,337 OP Units in HHLP valued at
$4,166. The OP Units were issued to certain executives
and affiliated trustees of the Company and an unrelated third
party.
Our newly
acquired hotels are leased to our wholly-owned taxable REIT subsidiary (“TRS”),
44 New England Management Company and all are managed by Hersha Hospitality
Management, LP (“HHMLP”). HHMLP is owned by three of the
Company’s executives, two of its affiliated trustees and other investors that
are not affiliated with the Company.
During
the year ended December 31, 2007 we acquired the following wholly owned hotel
properties:
Hotel
|
Acquisition
Date
|
Land
|
Buildings
and Improvements
|
Furniture
Fixtures and Equipment
|
Franchise
Fees and Loan Costs
|
Total
Purchase Price
|
Fair
Value of Assumed Debt
|
|||||||||||||||||||
Residence
Inn, Langhorne, PA
|
1/8/2007
|
$ | 1,463 | $ | 12,125 | $ | 2,170 | $ | 50 | $ | 15,808 | - | ||||||||||||||
Residence
Inn, Carlisle, PA
|
1/10/2007
|
1,015 | 7,511 | 1,330 | 89 | 9,945 | 7,000 | |||||||||||||||||||
Holiday
Inn Express, Chester, NY
|
1/25/2007
|
1,500 | 6,701 | 1,031 | 126 | 9,358 | 6,700 | |||||||||||||||||||
Hampton
Inn - Seaport, New York, NY
|
2/1/2007
|
7,816 | 19,056 | 1,729 | 1,036 | 29,637 | 20,202 | |||||||||||||||||||
Hotel
373 and Starbucks Lease - 5th Avenue, New York, NY
|
6/1/2007
|
14,239 | 16,801 | 3,294 | 11 | 34,345 | 22,000 | |||||||||||||||||||
Nevins
Street, Brooklyn, NY
|
6/11/2007
& 7/11/2007
|
10,650 | - | - | 269 | 10,919 | 6,500 | |||||||||||||||||||
Holiday
Inn, Norwich, CT
|
7/1/2007
|
1,984 | 12,037 | 2,041 | 67 | 16,129 | 8,162 | |||||||||||||||||||
Total
2007 Wholly Owned Acquisitions
|
$ | 38,667 | $ | 74,231 | $ | 11,595 | $ | 1,648 | $ | 126,141 | $ | 70,564 |
Interest
rates on debt assumed in the acquisition of the Residence Inn, Carlisle, PA and
the Holiday Inn Express & Suites, Chester, NY were at market
rates. We assumed $19,250 in debt with the acquisition of
the Hampton Inn-Seaport, New York, NY bearing interest at a fixed rate of 6.36%
which was determined on the date of acquisition to be above market
rates. We recorded a premium of $952 related to the
assumption of this debt. In the acquisition of Hotel 373 – 5th Avenue, New York,
NY, we assumed $22,000 in variable rate debt bearing interest at LIBOR plus
2.00% and an interest rate cap which effectively caps interest on this debt at
7.75%. The debt matures and the interest rate cap
terminates on April 9, 2009. The interest rate cap had a
fair value of $15 on the date of acquisition. We assumed
$6,500 in variable rate debt bearing interest at LIBOR plus 2.70% with the
acquisition of a parcel of land on Nevins Street in Brooklyn,
NY. This parcel of land is being leased to a hotel
developer that is owned in part by certain executives and affiliated trustees of
the Company. Lease income on the land includes payment of
debt service on the assumed debt. We assumed $8,162 in
debt with the acquisition of the Holiday Inn, Norwich, CT which was repaid on
July 30, 2007.
16
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (continued)
The
Residence Inn, Carlisle, PA and the Hampton Inn-Seaport, New York, NY were
acquired from entities that are owned by certain of the Company’s executives and
affiliated trustees. Included in the consideration paid
for the Residence Inn, Carlisle, PA were 119,818 OP Units in HHLP valued at
$1,330. The OP Units were issued to sellers that are not
affiliated with the Company. Consideration paid for the
Hampton Inn-Seaport, New York, NY, included 15,016 OP Units valued at $168 and
an $8,208 note payable. The OP Units and note payable
were issued to certain executives and affiliated trustees of the
Company.
On May
24, 2007, the note payable was fully repaid. Interest
expense of $203 was incurred on the notes payable during the year ended December
31, 2007. Included in the consideration paid for the
Hotel 373 – 5th Avenue, New York, NY were 1,000,000 OP Units valued at
$12,320. The OP Units were issued to a seller that is not
affiliated with the Company. Consideration paid for the
Holiday Inn, Norwich, CT, included 659,312 OP Units valued at
$7,800. The OP Units were issued to certain executives
and affiliated trustees of the Company.
On
January 8, 2007, we closed on the acquisition of the Residence Inn, Langhorne,
PA. The purchase agreement for this acquisition contained certain provisions
that entitle the seller to an earn-out payment of up to $1,000 based on the net
operating income of the property, as defined in the purchase agreement. The
earn-out period expired on July 31, 2008. Based on
results for this property through July 31, 2008, a $1,000 earn-out was paid in
October 2008. This additional purchase price was
capitalized to land, building and improvements, and furniture, fixtures and
equipment and is being depreciated over the useful lives of these
assets.
The
purchase agreements for some of our acquisitions contain certain provisions that
entitle the seller to an earn-out payment based on the Net Operating Income of
the properties, as defined in each purchase
agreement. The following table summarizes our existing
earn-out provisions:
Acquisition
Date
|
Acquisition
Name
|
Maximum
Earn-Out Payment Amount
|
Earn-Out
Period Expiration
|
|||||||
12/28/2006
|
Summerfield
Suites Portfolio
|
$ | 6,000,000 | December 31, 2009 | ||||||
6/26/2008
|
Holiday
Inn Express, Camp Springs, MD
|
1,905,000 | December 31, 2010 | |||||||
8/1/2008
|
Hampton
Inn & Suites, Smithfield, RI
|
1,515,000 | December 31, 2010 |
We are
currently unable to determine whether amounts will be paid under these three
earn-out provisions since significant time remains until the expiration of the
earn-out periods. Due to uncertainty of the amounts that
will ultimately be paid, no accrual has been recorded on the consolidated
balance sheet for amounts due under these earn-out provisions. In the event
amounts are payable under these provisions, payments made will be recorded as
additional consideration given for the properties.
On
February 15, 2006, we acquired an 80% joint venture interest in an entity that
owns the Hampton Inn, Philadelphia, PA. The entity that sold the 80% interest
was owned, in part, by certain executives and affiliated trustees of the
Company. On October 1, 2007, we acquired the remaining 20% interest from our
joint venture partners. The following is the allocation of purchase price for
each step of the acquisition:
Acquisition
Date
|
Land
|
Buildings
and Improvements
|
Furniture
Fixtures and Equipment
|
Franchise
Fees and Loan Costs
|
Total
|
||||||||||||||||
Acquisition
of 80% Interest
|
2/15/2006
|
$ | 2,928 | $ | 21,062 | $ | 3,029 | $ | 117 | $ | 27,136 | ||||||||||
Acquisition
of Remaining 20% Interest
|
10/1/2007
|
744 | 4,850 | 790 | - | 6,384 |
17
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
2 - INVESTMENT IN HOTEL PROPERTIES (continued)
Consideration
paid for the remaining 20% interest in the Hampton Inn, Philadelphia, PA
consisted of 406,877 OP Units valued at $4,162, which were issued to certain
executives and affiliated trustees of the Company. Prior to the acquisition of
the remaining 20% interest, the Hampton Inn, Philadelphia, PA was reported as a
consolidated joint venture and its assets and liabilities were included in the
Company’s consolidated balance sheet and non-controlling interest of $588 was
reported as Noncontrolling Interests. As a result of
acquiring the remaining 20% interest in the venture, our investment in hotel
properties was increased as follows:
Land
|
Buildings
and Improvements
|
Furniture
Fixtures and Equipment
|
Total
|
|||||||||||||
Purchase
Price
|
$ | 744 | $ | 4,850 | $ | 790 | $ | 6,384 | ||||||||
Less:
|
||||||||||||||||
Net
book value included in consolidated financial statements prior to
acquisition
|
(193 | ) | (2,396 | ) | (220 | ) | (2,809 | ) | ||||||||
Step-up
in value included in consolidated financial statements after
acquisition
|
$ | 551 | $ | 2,454 | $ | 570 | $ | 3,575 |
Pro
Forma Operating Results (Unaudited)
The
following condensed pro forma financial data is presented as if all 2008 and
2007 acquisitions had been consummated as of January 1, 2007. 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 at the beginning of the year
presented, nor does it purport to represent the results of operations for future
periods.
For
the Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Pro
Forma Total Revenues
|
$ | 246,844 | $ | 223,557 | ||||
Pro
Forma (Loss) income from Continuing Operations applicable to Common
Shareholders
|
$ | (14,025 | ) | $ | 13,970 | |||
Income
(Loss) from Discontinued Operations
|
3,743 | 5,616 | ||||||
Pro
Forma Net (Loss) income
|
(10,282 | ) | 19,586 | |||||
Loss
(Income) allocated to Noncontrolling Interest
|
1,599 | (2,256 | ) | |||||
Preferred
Distributions
|
(4,800 | ) | (4,800 | ) | ||||
Pro
Forma Net (Loss) income applicable to Common Shareholders
|
$ | (13,483 | ) | $ | 12,530 | |||
Pro
Forma (Loss) income applicable to Common Shareholders per Common
Share
|
||||||||
Basic
|
$ | (0.30 | ) | $ | 0.31 | |||
Diluted
|
$ | (0.30 | ) | $ | 0.31 | |||
Weighted
Average Common Shares Outstanding
|
||||||||
Basic
|
45,184,127 | 40,718,724 | ||||||
Diluted
|
45,184,127 | 40,718,724 |
18
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of
December 31, 2008 and December 31, 2007 our investment in unconsolidated joint
ventures consisted of the following:
Percent
|
Preferred
|
December 31,
|
|||||||||||||||
Joint
Venture
|
Hotel
Properties
|
Owned
|
Return
|
2008
|
2007
|
||||||||||||
PRA
Glastonbury, LLC
|
Hilton
Garden Inn, Glastonbury, CT
|
48 | %* |
11.0%
cumulative
|
$ | 738 | $ | 945 | |||||||||
Inn
American Hospitality at Ewing, LLC
|
Courtyard
by Marriott, Ewing, NJ
|
50.0 | % |
11.0%
cumulative
|
736 | 1,016 | |||||||||||
Hiren
Boston, LLC
|
Courtyard
by Marriott, Boston, MA
|
50.0 | % | N/A | 3,960 | 4,148 | |||||||||||
SB
Partners, LLC
|
Holiday
Inn Express, Boston, MA
|
50.0 | % | N/A | 2,091 | 2,010 | |||||||||||
Mystic
Partners, LLC
|
Hilton
and Marriott branded hotels in CT and RI
|
8.8%-66.7 | % |
8.5%
non-cumulative
|
27,977 | 32,928 | |||||||||||
PRA
Suites at Glastonbury, LLC
|
Homewood
Suites, Glastonbury, CT
|
48 | %* |
10.0%
non-cumulative
|
2,800 | 2,808 | |||||||||||
Metro
29th Street Associates, LLC
|
Holiday
Inn Express, New York, NY
|
50.0 | % | N/A | 7,981 | 7,996 | |||||||||||
$ | 46,283 | $ | 51,851 |
* Percent
owned was 40.0% through March 31, 2007. On April 1, 2007
our percent owned increased to 48.0%.
On
February 1, 2007 we acquired a 50.0% interest in Metro 29th Street
Associates, LLC (“Metro 29th”), the lessee of the 228 room Holiday Inn
Express-Manhattan, New York, NY, for approximately $6,817. Metro
29th holds a twenty five year lease with certain renewal options at
the end of the lease term. We also acquired an option to
acquire a 50% interest in the entity that owns the Holiday Inn
Express-Manhattan. The 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. The
fair value of the option was $933 at the time of acquisition and is recorded in
other assets on our consolidated balance sheet. We issued
694,766 OP Units valued at $7,747 for our interest in Metro 29th and
the option. Metro 29th Street entered into an
agreement with Metro 29th Sublessee, LLC, a joint venture owned by 44
New England and our joint venture partner, to sublease the hotel
property. The hotel is managed by HHMLP.
On April
1, 2007, we increased our investment in PRA Glastonbury, LLC, the owner of the
Hilton Garden Inn, Glastonbury, CT, and PRA Suites at Glastonbury, LLC, the
owner of the Homewood Suites, Glastonbury, CT by acquiring an additional 8%
preferred interest from our partner in each venture. The
purchase prices for our additional equity interests were $780 and $716 for PRA
Glastonbury, LLC and PRA Suites at Glastonbury, LLC, respectively.
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 as impairment of investment in
unconsolidated joint venture on the Company’s consolidated statements of
operations. This charge reduced our investment in the
Hartford Hilton to $0.
19
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
Income
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, 2008, 2007, and 2006 for
our Investments in Unconsolidated Joint Ventures is as follows:
Twelve
Months Ended
|
||||||||||||
12/31/2008
|
12/31/2007
|
12/31/2006
|
||||||||||
PRA
Glastonbury, LLC
|
$ | 94 | $ | 47 | $ | (257 | ) | |||||
Inn
American Hospitality at Ewing, LLC
|
20 | 73 | 160 | |||||||||
Hiren
Boston, LLC
|
(189 | ) | 304 | (167 | ) | |||||||
SB
Partners, LLC
|
80 | 191 | (24 | ) | ||||||||
Mystic
Partners, LLC
|
(345 | ) | 1,612 | 1,691 | ||||||||
PRA
Suites at Glastonbury, LLC
|
(8 | ) | (7 | ) | (2 | ) | ||||||
Metro
29th Street Associates, LLC
|
1,721 | 1,256 | - | |||||||||
HT/CNL
Metro Hotels, LP
|
- | - | 398 | |||||||||
Income
from Unconsolidated Joint Venture Investments
|
1,373 | 3,476 | 1,799 | |||||||||
Less: Impairment
of Investment in Unconsolidated Joint Venture
|
(1,890 | ) | - | - | ||||||||
Net
(Loss) Income from Unconsolidated Joint Venture
Investments
|
$ | (517 | ) | $ | 3,476 | $ | 1,799 |
The SB
Partners and Hiren Boston joint venture agreements provided for a 10% preferred
return during the first two years of the ventures based on our equity interest
in the ventures. The preferred return period expired on
July 1, 2007 for Hiren and October 1, 2007 for SB
Partners. Subsequent to this initial two year period,
cash distributions are made 50% to us and 50% to our joint venture partners in
the ventures.
The
Mystic Partners 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 allocates income to us and our joint venture partner consistent with
the allocation of cash distributions in accordance with the joint venture
agreements.
Each of
the Mystic Partners 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 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.
20
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
3 — INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (continued)
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, 2008 and December 31, 2007 and
for the years ended December 31, 2008, 2007, and 2006.
Balance
Sheets
|
||||||||
December 31,
|
December 31,
|
|||||||
2008
|
2007
|
|||||||
Investment
in hotel properties, net
|
$ | 209,468 | $ | 229,829 | ||||
Other
Assets
|
25,334 | 30,000 | ||||||
Total
Assets
|
$ | 234,802 | $ | 259,829 | ||||
Liabilities
and Equity
|
||||||||
Mortgages
and notes payable
|
$ | 219,889 | $ | 221,398 | ||||
Other
liabilities
|
11,636 | 12,305 | ||||||
Equity:
|
||||||||
Hersha
Hospitality Trust
|
44,938 | 47,311 | ||||||
Joint
Venture Partner(s)
|
(41,661 | ) | (21,185 | ) | ||||
Total
Equity
|
3,277 | 26,126 | ||||||
Total
Liabilities and Equity
|
$ | 234,802 | $ | 259,829 |
The
following table is a reconciliation of the Company’s share in the unconsolidated
joint ventures to the Company’s investment in the unconsolidated joint ventures
as presented on the Company’s balance sheets as of December 31, 2008 and
2007.
December 31,
|
December 31,
|
|||||||
2008
|
2007
|
|||||||
Company's
Share
|
$ | 44,938 | $ | 47,311 | ||||
Excess
Investment (1)
|
1,345 | 4,540 | ||||||
Investment
in Joint Venture
|
$ | 46,283 | $ | 51,851 |
(1)
Excess investment represents the unamortized difference between the Company's
investment and the Company's share of the equity in the underlying net
investment in the partnerships. The excess investment is
amortized over the life of the properties, and the amortization is included in
Net (Loss) Income from Unconsolidated Joint Venture Investments.
Statements
of Operations
|
||||||||||||
Twelve
Months Ended
|
||||||||||||
12/31/2008
|
12/31/2007
|
12/31/2006
|
||||||||||
Room
Revenue
|
$ | 99,530 | $ | 98,581 | $ | 81,285 | ||||||
Other
Revenue
|
28,344 | 31,586 | 30,016 | |||||||||
Operating
Expenses
|
(82,327 | ) | (81,873 | ) | (74,370 | ) | ||||||
Interest
Expense
|
(13,442 | ) | (15,421 | ) | (15,687 | ) | ||||||
Debt
Extinguishment
|
- | (2,858 | ) | (517 | ) | |||||||
Loss
on Impairment of Building and Equipment
|
(9,171 | ) | - | - | ||||||||
Lease
Expense
|
(5,538 | ) | (5,332 | ) | (393 | ) | ||||||
Property
Taxes and Insurance
|
(6,459 | ) | (6,159 | ) | (5,537 | ) | ||||||
Federal
and State Income Taxes
|
121 | (141 | ) | (224 | ) | |||||||
General
and Administrative
|
(7,835 | ) | (7,446 | ) | (7,264 | ) | ||||||
Depreciation
and Amortization
|
(16,171 | ) | (16,680 | ) | (16,993 | ) | ||||||
Net
loss
|
$ | (12,948 | ) | $ | (5,743 | ) | $ | (9,684 | ) |
21
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 - DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES
We have
approved first mortgage and mezzanine lending to hotel developers, including
entities in which our executive officers and affiliated trustees own an
interest, to enable such entities to construct hotels and conduct related
improvements on specific hotel projects at interest rates ranging from 10% to
20%. As of December 31, 2008 and December 31, 2007, we had Development Loans
Receivable of $81,500 and $58,183, respectively. Interest income from
development loans was $7,890, $6,046, and $2,487 for the years ended December
31, 2008, 2007, and 2006, respectively. Accrued interest on our
development loans receivable was $2,785 as of December 31, 2008 and $1,591 as of
December 31, 2007.
As of
December 31, 2008 and 2007, our development loans receivable consisted of the
following:
Hotel
Property
|
Borrower
|
Principal
Outstanding 12/31/2008
|
Principal
Outstanding 12/31/2007
|
Interest
Rate
|
Maturity
Date **
|
||||||||||||
Sheraton
- JFK Airport, NY
|
Risingsam
Hospitality, LLC
|
$ | - | $ | 10,016 | 10 | % |
October
9, 2008
|
|||||||||
Hampton
Inn & Suites - West Haven, CT
|
44
West Haven Hospitality, LLC
|
2,000 | 2,000 | 10 | % | October 9, 2009 | * | ||||||||||
Hilton
Garden Inn - New York, NY
|
York
Street LLC
|
15,000 | 15,000 | 11 | % |
May
31, 2009
|
|||||||||||
Hampton
Inn - Smithfield, RI
|
44
Hersha Smithfield, LLC
|
- | 2,000 | 10 | % | October 9, 2008 | * | ||||||||||
Homewood
Suites - Newtown, PA
|
Reese
Hotels, LLC
|
500 | 700 | 11 | % |
November
14, 2009
|
|||||||||||
Union
Square Hotel - Union Square, NY
|
Risingsam
Union Square, LLC
|
10,000 | 10,000 | 10 | % |
May
31, 2009
|
|||||||||||
Hyatt
Place - Manhattan, NY
|
Brisam
East 52, LLC
|
10,000 | - | 10 | % |
January
16, 2010
|
|||||||||||
Lexington
Avenue Hotel - Manhattan, NY
|
44
Lexington Holding, LLC
|
10,000 | - | 11 | % | May 30, 2009 | * | ||||||||||
Renaissance
by Marriott - Woodbridge, NJ
|
Hersha
Woodbridge Associates, LLC
|
5,000 | - | 11 | % | April 1, 2009 | * | ||||||||||
32
Pearl - Manhattan, NY
|
SC
Waterview, LLC
|
8,000 | - | 10 | % |
July
4, 2009
|
|||||||||||
Greenwich
Street Courtyard - Manhattan, NY
|
Brisam
Greenwich, LLC
|
10,000 | - | 10 | % |
September
12, 2009
|
|||||||||||
Independent
Hotel - New York, NY
|
Maiden
Hotel, LLC
|
10,000 | - | 20 | % |
March
8, 2009
|
|||||||||||
Hilton
Garden Inn - Dover, DE
|
44
Aasha Hospitality Associates, LLC
|
1,000 | - | 10 | % | November 1, 2009 | * | ||||||||||
Hilton
Garden Inn/Homewood Suites - Brooklyn, NY
|
167
Johnson Street, LLC
|
||||||||||||||||
Tranche
1
|
- | 11,000 | 11 | % | |||||||||||||
Tranche
2
|
- | 9,000 | 13.5 | % | |||||||||||||
Discount
|
- | (1,533 | ) | ||||||||||||||
Total
Hilton Garden Inn/Homewood Suites - Brooklyn, NY
|
- | 18,467 | |||||||||||||||
Total
Development Loans Receivable
|
$ | 81,500 | $ | 58,183 |
*
Indicates borrower is a related party
**
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.
We
monitor our portfolio of development loans on an on-going basis to determine
collectability of the loan principal and accrued
interest. As part of our review we determined that the
developer of the Hilton Garden Inn/Homewood Suites – Brooklyn, NY has failed to
make payments to the senior lender on the property’s first
mortgage. After discussions with the
developer and the senior lender, we have determined that the fair value of the
loan receivable and discount is $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.
Subsequent
to December 31, 2008, 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 September 30, 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 (unaudited), which includes
$1,408 (unaudited) of interest income paid in-kind. The
fair value of these loans 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.
22
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
4 - DEVELOPMENT LOANS RECEIVABLE AND LAND LEASES (continued)
Advances
and repayments on our development loans receivable consisted of the following
for the years ended December 31, 2008, 2007, and 2006:
2008
|
2007
|
2006
|
||||||||||
Balance
at January 1
|
$ | 58,183 | $ | 47,016 | $ | 32,450 | ||||||
New
Advances
|
64,200 | 65,700 | 51,616 | |||||||||
Repayments
|
(22,416 | ) | (53,000 | ) | (37,050 | ) | ||||||
Discount
recorded
|
- | (1,687 | ) | - | ||||||||
Amortization
of discount
|
281 | 154 | - | |||||||||
Impairment
of Development Loan Receivable, net of discount
|
(18,748 | ) | - | - | ||||||||
Balance
at December 31
|
$ | 81,500 | $ | 58,183 | $ | 47,016 |
We
acquire land and improvements and lease them to entities, including entities in
which our executive officers and affiliated trustees own an interest, to enable
such entities to construct hotels and related improvements on the leased
land. The land is leased under fixed lease agreements
which earn rents at a minimum rental rate of 10% of our net investment in the
leased property. Additional rents are paid by the lessee for the interest on the
mortgage, real estate taxes and insurance. Revenues from our land leases are
recorded in land lease revenue on our consolidated statement of
operations. All expenses related to the land leases are
recorded in operating expenses as land lease
expense. Leased land and improvements are included in
investment in hotel properties on our consolidated balance
sheet. As of December 31, 2008 and 2007 our investment in
leased land and improvements consists of the following:
Investment
In Leased Properties
|
||||||||||||||||||||||||||||
Location
|
Land
|
Improvements
|
Other
|
Total
Investment
|
Debt
|
Net
Investment
|
Acquisition/
Lease Date
|
Lessee
|
||||||||||||||||||||
440
West 41st Street, New York, NY
|
$ | 10,735 | $ | 11,051 | $ | 196 | $ | 21,982 | $ | 12,100 | $ | 9,882 |
7/28/2006
|
Metro
Forty First Street, LLC
|
||||||||||||||
39th
Street and 8th Avenue, New York, NY
|
21,774 | - | 541 | 22,315 | 13,250 | 9,065 |
6/28/2006
|
Metro
39th Street Associates, LLC
|
||||||||||||||||||||
Nevins
Street, Brooklyn, NY
|
10,650 | - | 269 | 10,919 | 6,500 | 4,419 |
6/11/2007
& 7/11/2007
|
H Nevins Street Associates, LLC | * | |||||||||||||||||||
Total
|
$ | 43,159 | $ | 11,051 | $ | 1,006 | $ | 55,216 | $ | 31,850 | $ | 23,366 | ||||||||||||||||
*
Indicates lessee is a related party
|
* Indicates
lessee is a related party
Subsequent
to December 31, 2008, we transferred our investment in the land parcel located
at 440 West 41st
Street, New York, NY to Metro Forty First Street, LLC, an entity controlled by a
non-affiliated third party. As such, the Company has reclassified the
operating revenues and expenses for this land parcel as income (loss) from
discontinued operations. See “Note 12 – Discontinued Operations” for
more information related to this transfer.
Also
subsequent to December 31, 2008, the Company classified the land parcels located
at 39th
Street and 8th
Avenue, New York, NY, and Nevins Street, Brooklyn, NY as “Assets Held for
Sale”. As such, the Company has reclassified the operating revenues
and expenses for this land parcel as income (loss) from discontinued
operations. We determined that the carrying values of the two land
parcels exceeded their respective fair values and we recorded an impairment of
$14,545 (unaudited) as of September 30, 2009. We also
determined that accrued rents under the leases were uncollectible and accrued
rents receivable of $1,579 (unaudited) was expensed during the three months
ended September 30, 2009. See “Note 12 – Discontinued
Operations” for more information related to this transfer.
23
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
5 — OTHER ASSETS
Other
Assets consisted of the following at December 31, 2008 and 2007:
2008
|
2007
|
|||||||
Transaction
Costs
|
$ | 237 | $ | 209 | ||||
Investment
in Statutory Trusts
|
1,548 | 1,548 | ||||||
Notes
Receivable
|
1,267 | 2,581 | ||||||
Due
from Lessees
|
1,907 | 1,986 | ||||||
Prepaid
Expenses
|
3,182 | 3,402 | ||||||
Interest
due on Development Loans to Non-Related Parties
|
2,024 | 1,456 | ||||||
Deposits
on Property Improvement Plans
|
149 | 640 | ||||||
Hotel
Purchase Option
|
933 | 2,620 | ||||||
Other
|
2,270 | 1,591 | ||||||
$ | 13,517 | $ | 16,033 |
Transaction Costs -
Transaction costs include legal fees and other third party transaction costs
incurred relative to entering into debt facilities, issuances of equity
securities or acquiring interests in hotel properties 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, 2007 includes a loan made to one of our
unconsolidated joint venture partners in the amount of $1,120 bearing interest
at 13.5% with a maturity date of December 27, 2008. Notes
receivable as of December 31, 2007 also included $1,350 extended in November and
December 2006 to the purchaser of the Holiday Inn Express, Duluth, GA; Comfort
Suites, Duluth, GA; Hampton Inn, Newnan, GA; and the Hampton Inn Peachtree City,
GA (collectively the “Atlanta Portfolio”). The Atlanta
Portfolio notes receivables were repaid in September
2008. Notes receivable as of December 31, 2008 includes a
loan made to one of our unconsolidated joint venture partners in the amount of
$1,267 bearing interest at 11% with a maturity date of December 31,
2009.
Due from Lessees - Due from lessees represent
rents due under our land lease and hotel lease agreements.
Prepaid Expense - Prepaid expenses include
amounts paid for property tax, insurance and other expenditures that will be
expensed in the next twelve months.
Interest due on Development Loans
– Interest due
on development loans represents interest income due 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 due on development loans from loans
extended to related parties in the amounts of $761 and $135, as of December 31,
2008 and 2007, respectively, which is included in the Due from Related Parties
caption on the face of the consolidated balance sheets.
Deposits on Property Improvement
Plans – Deposits
on property improvement plans consists of amounts advanced to HHMLP that is to
be used to fund capital expenditures as part of our property improvement
programs at certain properties.
Hotel Purchase Option – We have options to acquire
interests in two hotel properties at fixed purchase
prices. An option valued at $1,687 is for the development
property related to the impaired development loan receivable noted in Footnote
4. We determined that the fair value of this option as of
December 31, 2008 is $0. Therefore, we recorded an
impairment charge for the option value of $1,687, which is included in
Impairment of Development Loan Receivable and Other Asset on the Company’s
consolidated statements of operations.
24
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 - DEBT
Mortgages and Notes
Payable
The total
mortgages payable balance at December 31, 2008, and December 31, 2007, was
$603,538 and $567,507, respectively, and consisted of mortgages with fixed and
variable interest rates ranging from 4.0% to 8.94%. The maturities for the
outstanding mortgages ranged from July 2009 to January 2032. Aggregate interest
expense incurred under the mortgages payable totaled $34,855, $33,767
and $20,579 during 2008, 2007 and 2006, respectively. The mortgages are secured
by first deeds of trust on various hotel properties with a combined net book
value of $919,815 and $829,008 as of December 31, 2008, and 2007,
respectively. Our indebtedness contains various financial
and non-financial event of default covenants customarily found in financing
arrangements. Our mortgages 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. As of December 31, 2008 we were in compliance with
all event of default covenants under the applicable loan agreement.
We have
two junior subordinated notes payable in the aggregate amount of $51,548 to the
Hersha Statutory Trusts pursuant to indenture agreements. The $25,774 note
issued to Hersha Statutory Trust I will mature on June 30, 2035, but may be
redeemed at our option, in whole or in part, beginning on June 30, 2010 in
accordance with the provisions of the indenture agreement. The $25,774 note
issued to Hersha Statutory Trust II 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. The note issued to
Hersha Statutory Trust I bears interest at a fixed rate of 7.34% per annum
through June 30, 2010, and the note issued to Hersha Statutory Trust II bears
interest at a fixed rate of 7.173% per annum through July 30, 2010. Subsequent
to June 30, 2010 for notes issued to Hersha Statutory Trust I and July 30, 2010
for notes issued to Hersha Statutory Trust II, the notes bear interest at a
variable rate of LIBOR plus 3.0% per annum. Interest
expense in amount of $3,729, $3,793, and $3,766 was recorded during the years
ended December 31, 2008, 2007, and 2006, respectively.
As part
of the acquisition of the Hyatt Summerfield Suites Portfolio, HHLP entered into
a management agreement with Lodgeworks, L.P.
(“Lodgeworks”). Lodgeworks extended an interest-free loan
to HHLP for working capital contributions that are due at either the termination
or expiration of the management agreement. Because the
interest rate on the note payable is below the market rate of interest at the
date of the acquisition, a discount was recorded on the note
payable. The discount reduced the principal balances
recorded in the mortgages and notes payable and is being amortized over the
remaining life of the loan and is recorded as interest
expense. The balance of the note payable, net of
unamortized discount, was $274 as of December 31, 2008 and $253 as of December
31, 2007.
Aggregate
annual principal payments for the Company’s mortgages and notes payable for the
five years following December 31, 2008 and thereafter are as
follows:
Year
Ending December 31,
|
Amount
|
|||
2009
|
72,196 | |||
2010
|
21,833 | |||
2011
|
41,587 | |||
2012
|
11,938 | |||
2013
|
25,265 | |||
Thereafter
|
482,602 | |||
Unamortized
Discount
|
(61 | ) | ||
$ | 655,360 |
The loan
agreements for two debt obligations totaling $34,100, which mature during the
next twelve months, contain extension options that can be exercised at our
discretion, effectively extending the maturity of $12,100 to 2011 and extending
the maturity of $22,000 to 2012. As of December 31, 2008,
mortgages and notes payable and borrowings under our line of credit had a
carrying value of $743,842, which exceeded the fair value by approximately
$48,511 due to an increase in market borrowing rates.
25
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 – DEBT (continued)
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. The credit agreement
provides 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 existing bank group has committed $135,000, and the credit agreement
is structured to allow for an increase of an additional $40,000 under the line
of credit, provided that additional collateral is supplied.
On
October 14, 2008, 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, including payment of
distributions or dividends and for the future purchase of additional
hotels. The line of credit expires on December 31, 2011,
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.
At HHLP’s
option, the interest rate on the line of credit is either (i) the Wall Street
Journal variable prime rate per annum or (ii) LIBOR available for the periods of
1, 2, 3, or 6 months plus two and one half percent (2.5%) per
annum. Our interest rate swap agreement entered into on
February 1, 2008 which fixed the interest rate on a $40,000 portion of our
existing line of credit remains in place. See Note 8 for
more information on this interest rate swap.
The line
of credit is collateralized by a first lien-security interest in all existing
and future 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 properties:
|
-
Fairfield Inn, Laurel, MD
|
-
Holiday Inn Express, Hershey, PA
|
|
-
Hampton Inn, Danville, PA
|
-
Holiday Inn Express, New Columbia, PA
|
|
-
Hampton Inn, Philadelphia, PA
|
-
Mainstay Suites and Sleep Inn, King of Prussia, PA
|
|
-
Holiday Inn, Norwich, CT
|
-
Residence Inn, Langhorne, PA
|
|
-
Holiday Inn Express, Camp Springs, MD
|
-
Residence Inn, Norwood, MA
|
|
-
Holiday Inn Express and Suites, Harrisburg, PA
|
-
Sheraton Hotel, JFK Airport, New York,
NY
|
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
$300,000; (2) a 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
debt service coverage ratio of not less than 1.35 to
1.00;
|
·
|
a
total funded liabilities to gross asset value ratio of not more than 0.67
to 1.00; and
|
·
|
a
EBITDA to debt service ratio of not less than 1.40 to
1.00;
|
The
Company maintained a line of credit balance of $88,421 at December 31, 2008 and
$43,700 at December 31, 2007. The Company recorded interest expense of $3,094,
$4,239 and $2,134 related to the line of credit borrowings, for the years ended
December 31, 2008, 2007, and 2006, respectively. The weighted average interest
rate on our Line of Credit during the years ended December 31, 2008, 2007, and
2006 was 5.07%, 7.30%, and 7.33%, respectively. As of
December 31, 2008 our remaining borrowing capacity under the Line of Credit was
$42,143.
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, 2008
and 2007, we capitalized $544 and $389, respectively, of interest
expense related to these projects.
26
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
6 – DEBT (continued)
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, 2008, deferred costs were $9,157, net of accumulated amortization of
$3,606. Deferred costs were $8,048, net of accumulated
amortization of $3,252, as of December 31, 2007. Amortization of deferred costs
for the years ended December 31, 2008, 2007, and 2006 was $2,030, $1,724 and
$944, respectively.
Debt
Extinguishment
On July 1, 2008, we settled
on the defeasance of loans associated with four of our
properties. These mortgage loans had an aggregate
outstanding principal balance of approximately $11,028 as of June 30,
2008. As a result of this extinguishment, we expensed
$1,399 in unamortized deferred costs and defeasance premiums for three of the
four properties, which are included in the Debt Extinguishment caption on the
consolidated statements of operations for the year ended December 31, 2008 and
now serve as collateral for our revolving credit facility entered into on
October 14, 2008. The fourth property, the
Holiday Inn Conference Center, New Cumberland,
PA was sold on October 30, 2008 and $19 in unamortized deferred costs expensed
as a result of the debt extinguishment is included in the Income (Loss) from
Discontinued Operations caption on the consolidated statements of operations for
the year ended December 31, 2008.
On September 30, 2008, we
repaid $8,188 on our mortgage with M&T Bank for the Holiday Inn Express,
Cambridge property as a result of debt refinancing. The
new debt of $11,000 has a fixed interest rate of 6.625% and a maturity date of
September 30, 2023. As a result of this extinguishment,
we expensed $17 in unamortized deferred costs, which are included in the Loss on
Debt Extinguishment caption on the consolidated statements of operations for the
year ended December 31, 2008.
On
October 14, 2008, 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 the termination of the
existing line of credit, we expensed $152 in unamortized deferred costs related
to the origination of the original Commerce Bank Line of Credit, which are
included in the Loss on Debt Extinguishment caption on the consolidated
statements of operations for the year ended December 31, 2008.
In
January 2006, we replaced our line of credit with Sovereign Bank and various
other lenders with a line of credit with Commerce Bank and various other
lenders. As a result of this termination, we expensed $255 in unamortized
deferred costs related to the origination of the Sovereign Bank line of credit,
which are included in the Loss on Debt Extinguishment caption on the
consolidated statements of operations for the year ended December 31,
2006.
On April
7, 2006, we repaid $21,900 on our mortgage with Merrill Lynch for the
Hampton Inn Herald Square property as a result of a debt refinancing. The new
debt of $26,500 has a fixed interest rate of 6.085% and a maturity date of May
1, 2016. As a result of this extinguishment, we expensed $534 in unamortized
deferred costs and prepayment penalties, which are included in the Loss on Debt
Extinguishment caption on the consolidated statements of operations for the year
ended December 31, 2006.
On June
9, 2006, we repaid $34,200 on our mortgage with UBS for the McIntosh Portfolio,
as a result of a debt refinancing. The new debt of $36,300 has a fixed interest
rate of 6.33% and maturity date of June 11, 2016 for each of the loans
associated with the McIntosh Portfolio. As a result of this extinguishment, we
expensed $374 in unamortized deferred costs, which are included in the Loss on
Debt Extinguishment caption on the consolidated statements of operations for the
year ended December 31, 2006.
On
September 9, 2006, we repaid $8,287 on our mortgage with South New Hampshire
Bank for the Residence Inn, Norwood, using proceeds from a draw on our line of
credit with Commerce Bank. In connection with the mortgage assumption, the
seller agreed to reimburse all pre-payment related fees associated with this
payoff.
On December 27, 2006, we
repaid $12,907 on our mortgage with GE Capital for the Hilton Garden Inn, JFK,
NY property as a result of a debt payoff. The new debt of
$21,000 was acquired on March 7, 2007 and has a fixed interest rate of 5.82% and
a maturity date of March 1, 2017. As a result of this
extinguishment, we expensed $322 in prepayment penalties, which are included in
the Loss on Debt Extinguishment caption on the consolidated statements of
operations for the year ended December 31, 2006.
27
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
We are
the sole general partner in our operating partnership subsidiary, HHLP, which is
indirectly the sole general partner of the subsidiary partnerships. At December
31, 2008, there were 8,746,300 non-controlling OP Units outstanding with a fair
market value of $26,239, based on the price per share of our common shares on
the New York Stock Exchange on such date. These units are
redeemable by the unitholders for cash or, at our option, common shares on a
one-for-one basis.
Management
Agreements
Our
wholly owned TRS, 44 New England, engages eligible independent contractors
pursuant to REIT qualifications, including HHMLP, as the property managers for
hotels it leases from us pursuant to management agreements. 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,
2008, 2007 and 2006, base management fees incurred totaled $6,136, $5,571 and
$4,361, respectively and are recorded as Hotel Operating
Expenses. For the years ended December 31, 2008, 2007 and
2006, incentive management fees of $363, $0, and $0, respectively were recorded
as Hotel Operating Expenses.
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, 2008, 2007, and 2006 was $17,041, $16,333 and $9,773
respectively. The initial fees incurred to enter into the
franchise agreements are amortized over the life of the franchise
agreements.
Administrative Services
Agreement
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, 2008,
2007 and 2006, the Company incurred accounting fees of $1,426, $1,408 and
$1,053, respectively. For the years ended December 31,
2008, 2007 and 2006, the Company incurred information technology fees of $316,
$276 and $251, respectively. Administrative services fees, accounting fees, and
information technology fees are included in General and Administrative
expenses.
Capital Expenditure
Fees
Beginning
April 1, 2006, HHMLP began to charge 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,
2008, 2007 and 2006, we incurred fees of $271, $292, and $155,
respectively, which were capitalized in with the cost of fixed asset
additions.
28
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
7 - COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(continued)
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, 2008, 2007 and 2006, we incurred expenses of $1,588,
$2,113 and $1,686, respectively, for hotel supplies from Hersha Hotel Supply, an
unconsolidated related party, which are expenses included in Hotel Operating
Expenses. Approximately $39 and $149 is included in accounts payable at December
31, 2008 and 2007.
Due From Related
Parties
The Due
from Related Party balance as of December 31, 2008 and December 31, 2007 was
approximately $4,645 and $1,256, respectively. The balances primarily consisted
of accrued interest due on our development loans, and the remaining due from
related party balance are receivables owed from our unconsolidated joint
ventures.
Due to Related
Parties
The Due
to Related Parties balance as of December 31, 2008 and December 31, 2007 was
approximately $1,352 and $2,025, respectively. The balances consisted of amounts
payable to HHMLP for administrative, management, and benefit related
fees.
Hotel Ground
Rent
During
2003, in conjunction with the acquisition of the Hilton Garden Inn, Edison, NJ,
we assumed a land lease from a third party with an original term of 75 years.
Monthly payments as determined by the lease agreement are due through the
expiration in August 2074. On February 16, 2006, in conjunction with the
acquisition of the Hilton Garden Inn, JFK Airport, we assumed a land
lease with an original term of 99 years. Monthly payments
are determined by the lease agreement and are due through the expiration in July
2100. On June 13, 2008, in conjunction with the
acquisition of the Sheraton Hotel, JFK Airport, we assumed a land
lease with an original term of 99 years. Monthly payments
are determined by the lease agreement and are due through the expiration in
November 2103. Each land leases provide rent increases at
scheduled intervals. We record rent expense on a straight-line basis over the
life of the lease from the beginning of the lease term. For the years ended
December 31, 2008, 2007 and 2006, we incurred $1,040, $856, and $804
respectively, in hotel ground rent from continuing operations under the
agreements.
29
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE 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
|
|||
2009
|
$ | 891 | ||
2010
|
905 | |||
2011
|
935 | |||
2012
|
975 | |||
2013
|
981 | |||
Thereafter
|
93,160 | |||
$ | 97,847 |
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.
30
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE 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, 2008, 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.
The
Company incorporates credit valuation adjustments to appropriately reflect both
its 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,
the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads, to evaluate the likelihood of
default by itself and its counterparties. However, as of
December 31, 2008, the Company has assessed the significance of the effect of
the credit valuation adjustments on the overall valuation of its derivative
positions and has determined that the credit valuation adjustments are not
significant to the overall valuation of its derivatives. As a result, the
Company has determined that its derivative valuations in their entirety are
classified in Level 2 of the fair value hierarchy.
Derivative
Instruments
On
January 15, 2008, we entered into an interest rate swap agreement that fixes the
interest rate on the variable rate mortgage, bearing interest at one month U.S.
dollar LIBOR plus 2.0%, originated to finance the acquisition of the nu Hotel,
Brooklyn, NY. Under the terms of this interest rate swap,
we pay fixed rate interest of 3.245% on the $13,240 notional amount and we
receive floating rate interest equal to the one month U.S. dollar LIBOR,
effectively fixing our interest at a rate of 5.245%. On
January 12, 2009, we entered into a new interest rate swap agreement for this
variable rate mortgage, bearing interest at one month U.S. LIBOR plus
2.0%.
31
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
8 — FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (continued)
Under the
terms of this interest rate swap, we pay fixed rate interest of 1.1925% up to a
$18,000 notional amount and we receive floating rate interest equal to the one
month U.S. LIBOR, effectively fixing our interest at a rate of
3.1925%. This interest rate swap matures on January 10,
2011.
On
February 1, 2008, we entered into 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
2.0%. 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
4.6275%. This interest rate swap agreement matured on
February 1, 2009, and we did not replace it with another agreement.
On
December 31, 2008, we entered into an interest rate swap agreement that 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 amortizes in tandem with the amortization of the underlying
hedged debt and is $7,300 as of December 31, 2008.
We
maintain an interest rate cap that effectively fixes interest payments when
LIBOR exceeds 5.75% on our debt financing 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.
We
maintain an interest rate swap that fixes our interest rate on a variable rate
mortgage on the Sheraton Four Points, Revere, MA. Under
the terms of this interest rate swap, we pay fixed rate interest of 4.73% of the
notional amount and we receive floating rate interest equal to the one month
U.S. dollar LIBOR. The notional amount amortizes in
tandem with the amortization of the underlying hedged debt and is $7,619 as of
December 31, 2008. We entered into this interest rate
swap in July of 2004 and designated it as a cash flow hedge in November of 2004
when the fair value of the swap was a liability of $342, causing ineffectiveness
in the hedge relationship. 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. The change in fair
value of this interest rate swap for the year ended December 31, 2008
was a loss of $52 and was recorded in Interest Expense on the Statement of
Operations.
At
December 31, 2008 and December 31, 2007, the fair value of the interest rate
swaps and cap were:
Value
|
||||||||||||||
Date
of Transaction
|
Hedged
Debt
|
Type
|
Maturity
Date
|
December 31,
2008
|
December 31,
2007
|
|||||||||
July
2, 2004
|
Variable
Rate Mortgage - Sheraton Four Points, Revere, MA
|
Swap
|
July 23,
2009
|
$ | (172 | ) | $ | (120 | ) | |||||
July
1, 2007
|
Variable
Rate Mortgage - Hotel 373, New York, NY
|
Cap
|
April 9,
2009
|
- | 1 | |||||||||
January
15, 2008
|
Variable
Rate Mortgage - Nu Hotel, Brooklyn, NY
|
Swap
|
January 12,
2009
|
(6 | ) | - | ||||||||
February
1, 2008
|
Revolving
Variable Rate Credit Facility
|
Swap
|
February 1,
2009
|
(74 | ) | - | ||||||||
December
31, 2008
|
Variable
Rate Mortgage - Hilton Garden Inn, Edison, NJ
|
Swap
|
January 1,
2011
|
(25 | ) | |||||||||
$ | (277 | ) | $ | (119 | ) |
The fair
value of the derivative instrument is included in Accounts Payable, Accrued
Expenses and Other Liabilities at December 31, 2008 and December 31,
2007.
The
change in fair value of derivative instruments designated as cash flow hedges
was a loss of $86, $256, and $94 for the years ended December 31, 2008, 2007,
and 2006, respectively. These unrealized losses were
reflected on our Balance Sheet in Accumulated Other Comprehensive Income. Hedge
ineffectiveness of $1, $15, and $14 on cash flow hedges was recognized in
interest expense for the years ended December 31, 2008, 2007, and 2006,
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 $13 of net unrealized gains/losses
from accumulated other comprehensive income as a reduction to interest expense
during 2008. During 2009, the Company estimates that an additional $37 will be
reclassified as a reduction to interest expense.
32
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE 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
Compensation
expense related to restricted stock awards issued to executives of the Company
of $1,411, $766 and $293 was incurred during the years ended December 31, 2008,
2007 and 2006, respectively, related to the restricted share awards and is
recorded in general and administrative expense on the statement of operations.
Unearned compensation as of December 31, 2008 and 2007 was $4,118 and $3,008,
respectively. The following table is a summary of all of
the grants issued to executives under the 2004 and 2008 Plans:
Shares
Vested
|
Unearned
Compensation
|
||||||||||||||||||||||||||
December 31,
|
December 31,
|
||||||||||||||||||||||||||
Original
Issuance Date
|
Shares
Issued
|
Share
Price on date of grant
|
Vesting
Period
|
Vesting
Schedule
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||
June
1, 2005
|
71,000 | $ | 9.60 |
4
years
|
25%/year
|
53,250 | 35,500 | $ | 71 | $ | 242 | ||||||||||||||||
June
1, 2006
|
89,500 | $ | 9.40 |
4
years
|
25%/year
|
44,750 | 22,375 | 298 | 508 | ||||||||||||||||||
June
1, 2007
|
214,582 | $ | 12.32 |
4
years
|
25%/year
|
53,645 | - | 1,597 | 2,258 | ||||||||||||||||||
June
2, 2008
|
278,059 | $ | 8.97 |
4
years
|
25%/year
|
- | - | 2,130 | - | ||||||||||||||||||
September
30, 2008
|
3,616 | $ | 7.44 |
1-4
years
|
25-100%/year
|
- | - | 22 | - | ||||||||||||||||||
656,757 | 151,645 | 57,875 | $ | 4,118 | $ | 3,008 |
Trustees
Compensation
expense related to stock awards issued to the Board of Trustees of $91, $86, and
$45 was incurred during the years ended December 31, 2008, 2007, and
2006. 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 under the 2004 and 2008
Plans:
Date
of Award Issuance
|
Shares
Issued
|
Share
Price on date of grant
|
||||||
March 1,
2005
|
2,095 | $ | 11.97 | |||||
January 3,
2006
|
5,000 | 9.12 | ||||||
January 2,
2007
|
4,000 | 11.44 | ||||||
July 2,
2007
|
4,000 | 12.12 | ||||||
January 2,
2008
|
4,000 | 9.33 | ||||||
June 2,
2008
|
6,000 | 8.97 | ||||||
January 2,
2009
|
12,500 | 2.96 | ||||||
37,595 |
33
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 - EARNINGS PER SHARE
The
following table is a reconciliation of the income (numerator) and weighted
average shares (denominator) used in the calculation of basic earnings per
common share and diluted earnings per common share. The computation
of basic and diluted earnings per share is presented below.
Year
Ended
|
||||||||||||
December 31,
2008
|
December 31,
2007
|
December 31,
2006
|
||||||||||
Numerator:
|
||||||||||||
BASIC
AND DILUTED*
|
||||||||||||
(Loss)
Income from Continuing Operations
|
$ | (14,172 | ) | $ | 14,556 | $ | 3,690 | |||||
Loss
(Income) from Continuing Operations allocated to Noncontrolling
Interests
|
2,134 | (1,612 | ) | (354 | ) | |||||||
Distributions
to 8.0% Series A Preferred Shareholders
|
(4,800 | ) | (4,800 | ) | (4,800 | ) | ||||||
Dividends
Paid on Unvested Restricted Shares
|
(329 | ) | (197 | ) | (95 | ) | ||||||
(Loss)
Income from Continuing Operations applicable to Common
Shareholders
|
(17,167 | ) | 7,947 | (1,559 | ) | |||||||
Discontinued
Operations
|
||||||||||||
Income
from Discontinued Operations
|
3,743 | 5,616 | 2,114 | |||||||||
Income
from Discontinued Operations allocated to Noncontrolling
Interests
|
(513 | ) | (713 | ) | (352 | ) | ||||||
Income
from Discontinued Operations applicable to Common
Shareholders
|
3,230 | 4,903 | 1,762 | |||||||||
Net
(Loss) Income applicable to Common Shareholders
|
$ | (13,937 | ) | $ | 12,850 | $ | 203 | |||||
Denominator:
|
||||||||||||
Weighted
average number of common shares – basic
|
45,184,127 | 40,718,724 | 27,118,264 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Stock
awards
|
- | ** | - | ** | - | ** | ||||||
Weighted
average number of common shares - diluted*
|
45,184,127 | 40,718,724 | 27,118,264 |
* Income
allocated to noncontrolling interest in the Partnership has been excluded from
the numerator and OP 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. Weighted
average OP Units outstanding for years ended December 31, 2008, 2007 and 2006
were 8,034,737, 5,464,670 and 3,554,361, respectively.
**
Unvested stock awards have been omitted from the denominator for the purpose of
computing diluted earnings per share for the years ended December 31, 2008, 2007
and 2006 since the effect of including these awards in the denominator would be
anti-dilutive to income from continuing operations applicable to common
shareholders.
34
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
10 - EARNINGS PER SHARE (continued)
Year
Ended
|
||||||||||||
December 31,
2008
|
December 31,
2007
|
December 31,
2006
|
||||||||||
Earnings Per Share:
|
||||||||||||
BASIC
|
||||||||||||
(Loss)
Income from Continuing Operations applicable to Common
Shareholders
|
$ | (0.38 | ) | $ | 0.20 | $ | (0.05 | ) | ||||
Income
from Discontinued Operations applicable to Common
Shareholders
|
0.07 | 0.12 | 0.06 | |||||||||
Net
(Loss) Income applicable to Common
Shareholders
|
$ | (0.31 | ) | $ | 0.32 | $ | 0.01 | |||||
DILUTED*
|
||||||||||||
(Loss)
Income from Continuing Operations applicable to Common
Shareholders
|
$ | (0.38 | ) | $ | 0.20 | $ | (0.05 | ) | ||||
Income
from Discontinued Operations applicable to Common
Shareholders
|
0.07 | 0.12 | 0.06 | |||||||||
Net
(Loss) Income applicable to Common Shareholders
|
$ | (0.31 | ) | $ | 0.32 | $ | 0.01 |
* Income
allocated to noncontrolling interest in the Partnership has been excluded from
the numerator and OP 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. Weighted
average OP Units outstanding for years ended December 31, 2008, 2007 and 2006
were 8,034,737, 5,464,670 and 3,554,361, respectively.
35
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
11 - CASH FLOW DISCLOSURES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
Interest
paid in 2008, 2007 and 2006 totaled $41,797, $40,594, and $25,349, respectively.
The following non-cash investing and financing activities occurred during 2008,
2007 and 2006:
2008
|
2007
|
2006
|
||||||||||
Common
Shares issued as part of the Dividend Reinvestment Plan
|
$ | 31 | $ | 30 | $ | 29 | ||||||
Issuance
of Common Shares to the Board of Trustees
|
91 | 95 | 46 | |||||||||
Issuance
of OP Units for acquisitions of hotel properties
|
21,624 | 25,781 | 9,940 | |||||||||
Debt
assumed in acquisition of hotel properties
|
30,790 | 70,564 | 101,900 | |||||||||
Issuance
of OP Units for acquisition of unconsolidated joint
venture
|
- | 6,817 | - | |||||||||
Issuance
of OP Units for acquisition of option to acquire interest in hotel
property
|
- | 933 | - | |||||||||
Conversion
of OP Units to Common Shares
|
1,372 | 2,369 | 650 | |||||||||
Reallocation
to noncontrolling interest
|
1,966 | 12,422 | 3,467 | |||||||||
Issuance
of notes receivable in disposition of hotel properties held for
sale
|
- | - | 1,350 |
36
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE 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.
In
September of 2005, our Board of Trustees authorized management of the Company to
sell the Holiday Inn Express, Hartford, CT. The operating results for this hotel
were reclassified to discontinued operations in the statements of operations in
the statements of operations for the year ended December 31, 2006. The hotel was
acquired by the Company in January 2004 and was sold on April 12, 2006. Proceeds
from the sale were $3,600, and the gain on the sale was $497, of which $61 was
allocated to noncontrolling interest in HHLP. During
2004, in conjunction with the acquisition of the Holiday Inn Express, Hartford,
CT, we assumed a land lease from a third party with an original term of 99
years. Monthly payments as determined by the lease agreement were due through
the expiration in September 2101. Subsequent to the sale of this property in the
second quarter of 2006, we did not incur further lease
expense. For the year ended December 31, 2006, we
incurred $85 in hotel ground rent under this agreement, which have been
reclassified to discontinued operations in the statement of
operations. The lease was assumed by the purchaser of
this property.
In March
of 2006, our Board of Trustees authorized management of the Company to sell four
properties located in metropolitan Atlanta, Georgia. These four properties are
the Holiday Inn Express, Duluth, Comfort Suites, Duluth, Hampton Inn, Newnan and
the
Hampton Inn Peachtree City. The
operating results for these hotels were reclassified to discontinued operations
in the statements of operations for the year ended December 31,
2006. These hotels were acquired by the Company in April
and May 2000 and were sold during November and December
2006. Proceeds from the sales were $18,100, and the gain
on the sale was $290, of which $33 was allocated to noncontrolling interest in
HHLP. Notes receivable in the aggregate amount of $1,350 were received as part
of the proceeds of the sale of the Atlanta Portfolio and were repaid in
September 2008.
In
September of 2007, our Board of Trustees authorized management of the Company to
sell the Hampton Inn, Linden, NJ (Hampton Inn) and Fairfield Inn, Mt. Laurel, NJ
(Fairfield Inn). The Company acquired the Hampton Inn in
October 2003 and the Fairfield Inn in January
2006. The operating results for these hotels
have been reclassified to discontinued operations in the statements of
operations for the years ended December 31, 2007 and
2006. Proceeds from the sales were $29,500, and the gain
on the sale was $4,248, of which $503 was allocated to noncontrolling interest
in HHLP.
In
October 2008, the Company sold the
Holiday Inn Conference Center, New Cumberland,
PA (Holiday Inn). Beginning on July 1, 2006, the Company
leased this hotel to an unrelated party and the lease agreement contained a
purchase provision by the lessee. Prior to July 1, 2006,
this hotel was leased to our wholly owned TRS and operating revenues and
expenses of the hotel were recorded in hotel operating revenues and hotel
operating expenses. The operating results for this hotel
have been reclassified to discontinued operations in the statements of
operations for the years ended December 31, 2008, 2007 and
2006. Proceeds from the sale of this property were $6,456
and the gain on this sale was $2,888, of which $436 was allocated to
noncontrolling interest in HHLP.
In May
2009, our Board of Trustees authorized management of the Company to sell the
Mainstay Suites, Frederick, MD (Mainstay Suites) and the Comfort Inn, Frederick,
MD (Comfort Inn). The operating results for these hotels were reclassified to
discontinued operations in the statements of operations for years ended December
31, 2008, 2007 and 2006. The Mainstay Suites was acquired by the Company in
January 2002 and the Comfort Inn in May 2004. These two properties were sold to
an unrelated buyer in July 2009. These properties were sold for $10,250
(unaudited) and the gain on the sale was approximately $1,495
(unaudited).
In May
2009, our Board of Trustees authorized management of the Company to sell its 55%
interest in its consolidated joint venture that owns the Sheraton Four Points,
Revere, MA. The operating results for this hotel were reclassified to
discontinued operations in the statements of operations for the years ended
December 31, 2008, 2007 and 2006. Our interest in the hotel was acquired in
March 2004 and was sold to our joint venture partner in July 2009. Proceeds from
the sale were $2,500 (unaudited) and the gain on the sale was approximately $165
(unaudited).
In June
2009, our Board of Trustees authorized management of the Company to sell the
Hilton Garden Inn, Gettysburg, PA. The operating results for this hotel were
reclassified to discontinued operations in the statements of operations for the
years ended December 31, 2008, 2007 and 2006. The hotel was acquired by the
Company in July 2004 and was sold to an unrelated buyer in July 2009 for $7,750
(unaudited). The gain on the sale was approximately $208
(unaudited).
37
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
12 - DISCONTINUED OPERATIONS (continued)
On
September 24, 2009, we transferred our investment in the land parcel located at
440 West 41st Street, New York, NY to Metro Forty First Street, LLC, an entity
controlled by a non-affiliated third party. This land parcel was part of the
consideration given to acquire our 100% interest in York Street, LLC. The
operating results from this land parcel were reclassified to discontinued
operations in the statements of operations for the years ended December 31,
2008, 2007 and 2006. The land parcel was acquired in June 2007.
Our Board
of Trustees authorized management of the Company to sell the Comfort Inn, North
Dartmouth, MA. The operating results for this hotel were reclassified to
discontinued operations in the statements of operations for the years ended
December 31, 2008, 2007 and 2006. The hotel was acquired by the Company in May
2006. As of September 30, 2009, we determined that carrying value of the
property exceeded fair value and we recorded an impairment charge on this
property of approximately $1,558 (unaudited). The fair
value of this property 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.
Our Board
of Trustees authorized management of the Company to sell our two remaining land
parcels located at 39th Street and 8th Avenue, New York, NY and Nevins Street,
Brooklyn, NY. The operating results from these land parcels were reclassified to
discontinued operations in the statements of operations for the years ended
December 31, 2008, 2007 and 2006. The land parcels were acquired in July 2007.
As of September 30, 2009, we determined that carrying value of these land
parcels exceeded fair value and we recorded an impairment charge on these land
parcels of approximately $14,545 (unaudited). The fair
value of these land parcels 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.
We
allocate interest and capital lease expense to discontinued operations for debt
that is to be assumed or that is required to be repaid as a result of the
disposal transaction. We allocated $2,083, $3,154, and $3,838 of interest and
capital lease expense to discontinued operations for the years ended December
31, 2008, 2007, and 2006, respectively.
The
following table sets forth the components of discontinued operations (excluding
the gains on sale) for the years ended December 31, 2008, 2007 and
2006:
2008
|
2007
|
2006
|
||||||||||
Revenue:
|
||||||||||||
Hotel
Operating Revenues
|
$ | 14,302 | $ | 21,263 | $ | 30,496 | ||||||
Hotel
Lease Revenue
|
628 | 781 | 391 | |||||||||
Land
Lease Revenue
|
5,276 | 4,860 | 2,071 | |||||||||
Total
Revenue
|
20,206 | 26,904 | 32,958 | |||||||||
Expenses:
|
||||||||||||
Hotel
Operating Expenses
|
11,155 | 15,411 | 21,578 | |||||||||
Hotel
Ground Rent
|
- | - | 85 | |||||||||
Land
Lease Expense
|
2,939 | 2,720 | 1,190 | |||||||||
Real
Estate and Personal Property Taxes and Property Insurance
|
634 | 1,056 | 1,453 | |||||||||
Depreciation
and Amortization
|
2,514 | 3,187 | 3,484 | |||||||||
General
and Administrative
|
7 | 8 | - | |||||||||
Loss
on Debt Extinguishment
|
- | - | - | |||||||||
Interest
Expense
|
2,083 | 3,154 | 3,838 | |||||||||
Other
Expense
|
19 | - | - | |||||||||
19,351 | 25,536 | 31,628 | ||||||||||
Total
Expenses
|
||||||||||||
(Loss)
Income from Discontinued Operations
|
$ | 855 | $ | 1,368 | $ | 1,330 |
38
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
13 - SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST 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 Partnership
Units
Units of
interest in our limited partnership, or OP Units are issued in connection with
the acquisition of wholly owned hotels and joint venture interests in hotel
properties. The total number of OP Units outstanding as
of December 31, 2008, 2007 and 2006 was 8,746,300; 6,424,915; and 3,835,586,
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 2008 and 2007,
175,843 and 306,460 common units were converted to Class A Common Shares,
respectively.
39
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE 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
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 adjusted 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 Company, a 100%
owned taxable REIT subsidiary, and Revere Hotel Group LLC, a 55% owned taxable
REIT subsidiary, (collectively “Consolidated TRS”) are both entities subject to
income taxes at the applicable federal, state and local tax rates.
In 2008,
2007 and 2006, 44 New England Management Company generated net operating losses
(income) of $2,554, $707 and ($420), respectively. In 2008, 2007 and
2006, Revere Hotel Group LLC generated net operating losses of $265,
$313, $521, respectively. The Company did not record an income
tax expense (benefit) for the net operating losses generated in 2008, 2007 or
2006.
There was
no income tax expense (benefit) recognized by the Consolidated TRS for 2008,
2007 and 2006.
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:
For
the year ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Computed
"Expected" federal tax expense (benefit) of TRS, at 35%
|
$ | (1,251 | ) | $ | (270 | ) | $ | (451 | ) | |||
State
income taxes, net of federal income tax effect
|
(181 | ) | (66 | ) | (6 | ) | ||||||
Changes
in valuation allowance
|
1,432 | 336 | 457 | |||||||||
Total
income tax expense
|
$ | - | $ | - | $ | - |
The
components of consolidated TRS’s deferred tax assets as of December 31, 2008 and
2007 were as follows:
as
of December 31,
|
||||||||
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforward
|
$ | 3,185 | $ | 1,743 | ||||
Depreciation
|
(29 | ) | (19 | ) | ||||
Net
deferred tax assets
|
3,156 | 1,724 | ||||||
Valuation
allowance
|
(3,156 | ) | (1,724 | ) | ||||
Deferred
tax assets
|
$ | - | $ | - |
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of 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 the
Consolidated TRS will not realize the benefits of these deferred tax assets at
December 31, 2008.
40
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
14 - INCOME TAXES (continued)
Earnings
and profits, which will determine the taxability of dividends 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, 2008, 2007 and 2006.
2008
|
2007
|
2006
|
||||||||||
Preferred
Shares - 8% Series A
|
||||||||||||
Ordinary
income
|
86.46 | % | 81.98 | % | 83.05 | % | ||||||
Capital
Gain Distribution
|
13.54 | % | 18.02 | % | 16.95 | % | ||||||
Common
Shares - Class A
|
||||||||||||
Ordinary
income
|
44.61 | % | 48.25 | % | 28.27 | % | ||||||
Return
of Capital
|
48.40 | % | 41.14 | % | 65.85 | % | ||||||
Capital
Gain Distribution
|
6.99 | % | 10.61 | % | 5.88 | % |
41
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
[IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
NOTE
15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year
Ended December 31, 2008
|
||||||||||||||||
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
Total
Revenues
|
$ | 51,397 | $ | 66,053 | $ | 70,383 | $ | 57,663 | ||||||||
Total
Expenses
|
54,016 | 58,032 | 65,040 | 82,062 | ||||||||||||
(Loss)
Income from Unconsolidated Joint Ventures
|
(738 | ) | 1,360 | 1,629 | (2,768 | ) | ||||||||||
(Loss)
Income from Continuing Operations
|
(3,357 | ) | 9,381 | 6,972 | (27,167 | ) | ||||||||||
(Loss)
Income from Discontinued Operations (including Gain on Disposition of
Hotel Properties)
|
(528 | ) | 581 | 788 | 2,901 | |||||||||||
Net
(Loss) Income
|
(3,885 | ) | 9,962 | 7,760 | (24,266 | ) | ||||||||||
(Loss)
Income Allocated to Noncontrolling Interests in Continuing
Operations
|
(1,006 | ) | 1,737 | 1,425 | (3,777 | ) | ||||||||||
Preferred
Distributions
|
1,200 | 1,200 | 1,200 | 1,200 | ||||||||||||
Net
(Loss) Income applicable to Common Shareholders
|
$ | (4,079 | ) | $ | 7,025 | $ | 5,135 | $ | (21,689 | ) | ||||||
Basic
and diluted earnings per share:
|
||||||||||||||||
(Loss)
Income from continuing operations applicable to common
shareholders
|
$ | (0.09 | ) | $ | 0.15 | $ | 0.10 | $ | (0.51 | ) | ||||||
Discontinued
Operations
|
(0.01 | ) | 0.01 | 0.01 | 0.05 | |||||||||||
Net
Loss (Income) applicable to Common Shareholders
|
$ | (0.10 | ) | $ | 0.16 | $ | 0.11 | $ | (0.46 | ) | ||||||
Weighted
Average Common Shares Outstanding
|
||||||||||||||||
Basic
|
40,891,140 | 44,253,641 | 47,764,168 | 47,770,780 | ||||||||||||
Diluted
|
40,891,140 | 44,253,641 | 47,764,168 | 47,770,780 | ||||||||||||
Year
Ended December 31, 2007
|
||||||||||||||||
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
Total
Revenues
|
$ | 43,550 | $ | 59,375 | $ | 63,132 | $ | 56,539 | ||||||||
Total
Expenses
|
47,455 | 52,684 | 55,828 | 55,547 | ||||||||||||
(Loss)
Income from Unconsolidated Joint Ventures
|
(838 | ) | 1,741 | 1,680 | 892 | |||||||||||
(Loss)
Income from Continuing Operations
|
(4,743 | ) | 8,432 | 8,984 | 1,884 | |||||||||||
(Loss)
Income from Discontinued Operations (including Gain on Disposition of
Hotel Properties)
|
(494 | ) | 539 | 904 | 4,666 | |||||||||||
Net
(Loss) Income
|
(5,237 | ) | 8,971 | 9,888 | 6,550 | |||||||||||
(Loss)
Income Allocated to Noncontrolling Interests in Continuing
Operations
|
(999 | ) | 1,176 | 1,392 | 757 | |||||||||||
Preferred
Distributions
|
1,200 | 1,200 | 1,200 | 1,200 | ||||||||||||
Net
(Loss) Income applicable to Common Shareholders
|
$ | (5,438 | ) | $ | 6,595 | $ | 7,296 | $ | 4,593 | |||||||
Basic
and diluted earnings per share:
|
||||||||||||||||
(Loss)
Income from continuing operations applicable to common
shareholders
|
$ | (0.12 | ) | $ | 0.15 | $ | 0.16 | $ | 0.01 | |||||||
Discontinued
Operations
|
(0.01 | ) | 0.01 | 0.02 | 0.10 | |||||||||||
Net
(Loss) Income applicable to Common Shareholders
|
$ | (0.13 | ) | $ | 0.16 | $ | 0.18 | $ | 0.11 | |||||||
Weighted
Average Common Shares Outstanding
|
||||||||||||||||
Basic
|
40,537,851 | 40,642,569 | 40,807,626 | 40,882,090 | ||||||||||||
Diluted
|
40,537,851 | 40,642,569 | 40,807,626 | 40,882,685 |
42