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HT > SEC Filings for HT > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for HERSHA HOSPITALITY TRUST

Form 10-Q for HERSHA HOSPITALITY TRUST


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this and other reports filed by us with the SEC, including, but not limited to those discussed in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:

? our business or investment strategy;

? our projected operating results;

? our distribution policy;

? our liquidity;

? completion of any pending transactions;

? our ability to obtain future financing arrangements;

? our understanding of our competition;

? market trends; and

? projected capital expenditures.

Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:

? general volatility of the capital markets and the market price of our common shares;

? changes in our business or investment strategy;

? availability, terms and deployment of capital;

? availability of qualified personnel;

? changes in our industry and the market in which we operate, interest rates, or the general economy;

? the degree and nature of our competition;

? financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;

? the depth and duration of the current economic downturn;

? levels of spending in the business, travel and leisure industries, as well as consumer confidence;

? declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;

? hostilities, including future terrorist attacks, or fear of hostilities that affect travel;

? financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;

? the degree and nature of our competition;

? increased interest rates and operating costs;

? risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;

? risks associated with our development loan portfolio, including the ability of borrowers to repay outstanding principal and accrued interest at maturity;

? availability of and our ability to retain qualified personnel;

? our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended;

? environmental uncertainties and risks related to natural disasters;

? changes in real estate and zoning laws and increases in real property tax rates; and

? the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 under the heading "Risk Factors" and in other reports we file with the SEC from time to time.


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These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.

All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

BACKGROUND

As of September 30, 2012, we owned interests in 64 hotels, many of which are located in clusters around major markets in the Northeastern Corridor, including 57 wholly-owned hotels and interests in seven hotels owned through consolidated and unconsolidated joint ventures. Our "Summary of Operating Results" section below contains operating results for 57 consolidated hotel assets and seven hotel assets owned through an unconsolidated joint venture. These results exclude one hotel, the Hampton Inn Pearl Street, New York, NY, which is currently undergoing re-development which is expected to open during the fourth quarter of 2012. We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of September 30, 2012, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.

OVERVIEW

We believe the improvements we made in our equity and debt capitalization and repositioning of our portfolio in 2011 better enables us to capitalize on further improvements in lodging fundamentals. During the first nine months of 2012, we have seen continued improvements in ADR, RevPAR and operating margins, led by hotels in our core urban markets of New York, Washington, D.C., Miami, Boston, Los Angeles and Philadelphia. We will continue to seek acquisition opportunities in urban centers and central business districts. In addition, we are looking, and will continue to look, for attractive opportunities to dispose of stabilized properties in tertiary markets at favorable prices, potentially redeploying that capital in our focus markets.

We do not expect to actively pursue acquisitions made through joint ventures; however, we may seek to buy out, or sell our joint venture interest to, select existing joint venture partners. We do not expect to actively pursue additional development loans or land leases. While property joint ventures, development loans and land leases played an important role in our growth in the past, we do not expect them to play the same role in our near-term future.

Although we are planning for continued stabilization and improvement in consumer and commercial spending and lodging demand during 2012, the manner in which the economy will recover is not predictable, and certain core economic metrics, including unemployment, are not rebounding as quickly as many had hoped. In addition, the market for hotel level financing for new hotels is not recovering as quickly as the economy or broader financial markets. As a result, there can be no assurances that we will be able to grow hotel revenues, occupancy, ADR or RevPAR at our properties as we hope. Further, we cannot assure that we will not experience defaults under our development loans. The lack of financing for our borrowers and potential buyers may result in borrower defaults or prevent borrowers or us from disposing of properties held for sale. Factors that might contribute to less-than-anticipated performance include those described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 and other documents that we may file with the SEC in the future. We will continue to cautiously monitor recovery in lodging demand and rates, our third-party hotel managers, our remaining portfolio of hotel development loans and our performance generally.

Subsequent to the quarter ended September 30, 2012, our hotels across the eastern seaboard experienced the effects of Hurricane Sandy. Most of our hotels in these markets were able to remain open and continued to serve our guests through the duration of the storm. Our Holiday Inn Express on Water Street in lower Manhattan experienced flooding and was forced to close. We anticipate this hotel will remain closed for between two to four weeks, depending on access to resources, while restoration is in process. Five of our other lower Manhattan properties lost power during the storm and were forced to operate on limited power from back-up generators while the properties were without power. As of November 5, 2012, all five of these hotels have had their power restored and are in position to resume operations. Our hotel redevelopment project at 32 Pearl Street in lower Manhattan experienced some flooding at the job site and experienced some damage to the project. The development of Hyatt Union Square, for which we are under agreement to acquire, was not significantly damaged during the storm. Both projects may experience delays due to time required to repair damage caused by the storm and the availability power and resources in tower Manhattan to continue construction efforts. We are continuing to evaluate the financial impact of Hurricane Sandy and our ability to recover, through our Insurance policies, any loss due to interruption of business or damage to property.


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SUMMARY OF OPERATING RESULTS

The following table outline operating results for the three and nine months ended September 30, 2012 and 2011 for the Company's portfolio of wholly owned hotels and those owned through joint venture interests (excluding hotel assets classified as discontinued operations and one hotel undergoing a re-development project) that are consolidated in our financial statements for the three and nine months ended September 30, 2012 and 2011:

CONSOLIDATED HOTELS:
                                        Three Months Ended September 30,                                Nine Months Ended September 30,
                                                                                 2012 vs. 2011                                                   2012 vs. 2011
                                           2012                  2011              Variance               2012                   2011               Variance

Occupancy                                        80.6 %                80.8 %              -0.2 %               76.0 %                 74.7 %               1.3 %
Average Daily Rate (ADR)              $        161.58       $        157.88                 2.3 %   $         158.36       $         151.32                 4.7 %
Revenue Per Available Room (RevPAR)   $        130.17       $        127.48                 2.1 %   $         120.28       $         112.97                 6.5 %

Room Revenues                         $        89,456       $        76,599                16.8 %   $        238,028       $        197,671                20.4 %
Hotel Operating Revenues              $        96,558       $        80,053                20.6 %   $        257,547       $        206,856                24.5 %

RevPAR for the three and nine months ended September 30, 2012 increased 2.1% and 6.5%, respectively for our consolidated hotels. This represents a growth trend in RevPAR which is primarily due to improving economic conditions in 2012 and the acquisition of hotel properties consummated since September 30, 2011 that are accretive to RevPAR.

The following table outlines operating results for the three and nine months ended September 30, 2012 and 2011 for hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and other noncontrolling interest holders.

UNCONSOLIDATED JOINT VENTURES:
                                        Three Months Ended September 30,                               Nine Months Ended September 30,
                                                                                 2012 vs. 2011                                                 2012 vs. 2011
                                           2012                  2011              Variance              2012                  2011              Variance

Occupancy                                        70.9 %                72.8 %              -1.9 %              69.9 %                67.5 %               2.4 %
Average Daily Rate (ADR)              $        149.51       $        153.37                -2.5 %   $        149.56       $        146.60                 2.0 %
Revenue Per Available Room (RevPAR)   $        106.03       $        111.59                -5.0 %   $        104.54       $         99.00                 5.6 %

Room Revenues                         $        16,202       $        20,153               -19.6 %   $        53,036       $        50,116                 5.8 %
Total Revenues                        $        21,156       $        25,122               -15.8 %   $        69,651       $        65,811                 5.8 %

For our unconsolidated hotels, RevPAR decreased 5.0% and increased 5.6% for three and nine months ended September 30, 2012, respectively. The decrease in RevPAR during the three months ended September 30, 2012 when compared to the same period in 2011 is primarily the result of joint venture assets that have been sold or those that we now consolidate for financial reporting purposes and therefore no longer contribute to the operating results of our portfolio of unconsolidated hotels. Properties such as the Holiday Inn Express 29th Street, New York, NY, which, as of June 18, 2012, is no longer included in our unconsolidated joint ventures, tended to have higher occupancy and ADR than the remaining hotels in our unconsolidated joint venture hotel portfolio. When compared to the same period in 2011, the remaining unconsolidated joint venture hotels follow the same growth trend for RevPAR as experienced in our consolidated hotels during the nine months ended September 30, 2012.

We define a same store hotel as one that is currently consolidated and that have owned in whole or in part for the entire period being reported and the comparable period in the prior year. For the three months ended September 30, 2012 and 2011 there are 52 same store hotels and for the nine months ended September 30, 2012 and 2011 there are 48 same store hotels. The following table outlines operating results for the three and nine months ended September 30, 2012, and 2011, for our same store consolidated hotels:

SAME STORE CONSOLIDATED HOTELS
                                        Three Months Ended September 30,                                Nine Months Ended September 30,
                                                                                 2012 vs. 2011                                                   2012 vs. 2011
                                           2012                  2011              Variance               2012                   2011              Variance

Occupancy                                        81.0 %                80.7 %               0.3 %               76.3 %                 74.6 %               1.7 %
Average Daily Rate (ADR)              $        160.91       $        159.43                 0.9 %   $         156.33       $         152.65                 2.4 %
Revenue Per Available Room (RevPAR)   $        130.34       $        128.65                 1.3 %   $         119.23       $         113.93                 4.7 %

Room Revenues                         $        82,607       $        81,535                 1.3 %   $        205,448       $        195,662                 5.0 %
Total Revenues                        $        86,394       $        85,102                 1.5 %   $        214,314       $        203,948                 5.1 %

RevPAR for our same store consolidated hotels increased 1.3% during the three months ended September 30, 2012 and 4.7%, during the nine months ended September 30, 2012, when compared to the same periods in 2011. This RevPAR growth is primarily due to the continuing improvement in economic conditions in our markets during these periods.


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COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(dollars in thousands, except ADR, RevPAR, and per share data)

Revenue

Our total revenues for the three months ended September 30, 2012 consisted of hotel operating revenues, interest income from our development loan program and other revenue. Hotel operating revenues were approximately 99.5% and 99.1% of total revenues for the three months ended September 30, 2012 and 2011, respectively. Hotel operating revenues are recorded for wholly owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating revenues increased $16,505, or 20.6%, to $96,558 for the three months ended September 30, 2012 compared to $80,053 for the same period in 2011. This increase in hotel operating revenues was primarily attributable to the acquisition of hotel properties consummated since September 30, 2011.

We acquired interests in the following six consolidated hotels which contributed the following operating revenues for the three months ended September 30, 2012.

                                                                                    Hotel Operating Revenues
                                                                                       Three Months Ended
        Brand                 Location          Acquisition Date       Rooms           September 30, 2012

Courtyard by Marriott   Miami, FL               November 16, 2011          263     $                    3,005
Sheraton                New Castle, DE          December 28, 2010          192                          1,905
The Rittenhouse Hotel   Philadelphia, PA          March 1, 2012            111                          4,554
Bulfinch Hotel          Boston, MA                 May 7, 2012              80                          1,181
Holiday Inn Express     New York, NY              June 18, 2012            228                          4,267
Courtyard by Marriott   Ewing, NJ              September 10, 2012          130                            537
                                                                         1,004     $                   15,449

While we acquired a 100% interest in the Sheraton, New Castle, DE in 2010, the property did not open until December 2011.

In addition, our same store portfolio experienced a $1.48, or 0.9% improvement in ADR, increasing from $159.43 for the three months ended September 30, 2011 to $160.91 during the same period in 2012. For the same store hotels, occupancy increased by 30 basis points from approximately 80.7% during the three months ended September 30, 2011 to approximately 81.0% for the same period in 2012. The resulting improvement in RevPAR, was the product of improvements in lodging trends in the markets in which our hotels are located.

We have invested in hotel development projects by providing mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Effective June 1, 2012, we amended the interest rates on two of our development loans from 11.0% to 9.0%. Interest income from development loans receivable was $463 for the three months ended September 30, 2012 compared to $656 for the same period in 2011.

Of the $33,425 in development loans receivable outstanding as of September 30, 2012, $20,122 or 60.2%, is invested in hotels that are currently operating and generating revenue and $13,303, or 39.8%, is invested in a hotel construction project to develop the Hyatt Union Square in New York, NY, which is expected to be completed in 2012. On June 14, 2011, in connection with entering into a purchase and sale agreement to acquire the Hyatt Union Square project, we ceased accruing interest for this development loan.

Other revenue consists primarily of fees earned for asset management services provided to properties owned by certain of our unconsolidated joint ventures. These fees are earned as a percentage of the revenues of the unconsolidated joint ventures' hotels. Other revenues were $50 and $87 for the three months ended September 30, 2012 and 2011, respectively.


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Expenses

Total hotel operating expenses increased 27.8% to approximately $53,249 for the three months ended September 30, 2012 from $41,675 for the three months ended September 30, 2011. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since September 30, 2011, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization of 14.6% or $1,880 to $14,719 for the three months ended September 30, 2012 from $12,839 for the three months ended September 30, 2011. Similarly, real estate and personal property tax and property insurance increased $1,023, or 21.4%, in the three months ended September 30, 2012 when compared to the same period in 2011 due to our acquisitions along with a general overall increase in tax assessments and tax rates as the economy improves, which was partially offset by reductions resulting from our rigorous management of this expense.

General and administrative expense increased by approximately $729 from $3,976 in the three months ended September 30, 2011 to $4,705 for the same period in 2012. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the company's trustees, executives, and employees. Expense related to share based compensation increased $428 when comparing the three months ended September 30, 2012 to the same period in 2011. This increase in share based compensation expense is due primarily from the vesting of shares from prior restricted share issuances. In addition, the Compensation Committee adopted the 2012 Annual LTIP which included $179 of stock based compensation for three months ended September 30, 2012. Please refer to "Note 9 - Share Based Payments" of the notes to the consolidated financial statements for more information about our stock based compensation. Increased in other general and administrative expenses resulted primarily from increases in employee headcount and increases in base compensation.

Amounts recorded on our consolidated statement of operations for acquisition and terminated costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs decreased $62 from $147 for the three months ended September 30, 2011 to $85 for the same period in 2012. Acquisition and terminated transaction costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year.

Operating Income

Operating income for the three months ended September 30, 2012 was $18,295 compared to operating income of $17,196 during the same period in 2011. As noted above, the increase in operating income resulted primarily from improved performance of our portfolio and acquisitions that have occurred subsequent to September 30, 2011.

Interest Expense

Interest expense increased $1,004 from $10,145 for the three months ended September 30, 2011 to $11,149 for the three months ended September 30, 2012. The increase in interest expense is due primarily to the new debt and associated interest expense for the properties acquired subsequent to September 30, 2011.

Unconsolidated Joint Venture Investments

The income (loss) from unconsolidated joint ventures consists of our interest in the operating results of the properties we own in joint ventures. In addition, in 2011 we have impaired our interest in certain unconsolidated joint ventures based on our determination of the recoverability of our investment. In 2012, we have also remeasured our interest in a certain unconsolidated joint ventures due to acquisition of the remaining interests in that venture.. The operating results for the unconsolidated joint ventures improved by $130 for the three months ended September 30, 2012. This increase in income is primarily due to the results of the hotels owned by these joint ventures which have benefited from improved lodging fundamentals in the markets in which they operate.

As noted above, we entered into two purchase and sale agreements during 2011 to dispose of 18 non-core hotel properties, four of which were owned in part by the Company through an unconsolidated joint venture. On February 23, 2012, we closed on the sale of three of these properties, and the fourth was sold on May 8, 2012. See "Note 12-Discontinued Operations" for more information. For the three months ended September 30, 2011, we recorded an impairment loss of approximately $1,677 for those assets for which our investment in the joint venture exceeded the anticipated net proceeds distributable to us based on the purchase price.

On September 10, 2012, we purchased the remaining 50% interest in joint venture's ownership rights for the Courtyard by Marriott, Ewing, NJ and, as such, the hotel operations are recorded within our consolidated financial statement from that date. Our interest in Inn America Hospitality at Ewing was remeasured, and as a result, during the three months ended September 30, 2012; we recorded a loss of approximately $1,668.


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Discontinued Operations

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