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HT > SEC Filings for HT > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for HERSHA HOSPITALITY TRUST

Form 10-Q for HERSHA HOSPITALITY TRUST


1-Aug-2013

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, 2012, 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;

? 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;

? ability to complete development and redevelopment projects;

? 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;

? 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, 2012 under the heading "Risk Factors" and in other reports we file with the SEC from time to time.

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 June 30, 2013, we owned interests in 65 hotels, many of which are located in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles and Miami, including 59 wholly-owned hotels and interests in six hotels owned through unconsolidated joint ventures. Our "Summary of Operating Results" section below contains operating results for 57 consolidated hotel assets and six hotel assets owned through an unconsolidated joint venture. These results exclude the Hampton Inn Pearl Street, New York, NY, which is currently undergoing re-development and is expected to open during the first quarter of 2014 and the Holiday Inn Express, Camp Springs, MD, whose results are included in discontinued operations. 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 June 30, 2013, 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

As we continue through 2013, we believe the improvements in our equity and debt capitalization and repositioning of our portfolio better enables us to capitalize on further improvement in lodging fundamentals. During 2013, we expect continued improvements in ADR, RevPAR and operating margins, led by hotels in our core urban markets of New York, Washington DC, Boston, Philadelphia, Los Angeles, San Diego and Miami. We continue to seek acquisition opportunities in urban centers and central business districts. In addition, we will continue to look for attractive opportunities to dispose of properties in secondary and 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 in the near term; however, we may seek to buy out, or sell our joint venture interests to, select existing joint venture partners. We do not expect to actively pursue additional development loans or land leases in the near term. 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 improvement in consumer and commercial spending and lodging demand during 2013, the manner in which the economy will recover, if at all, is not predictable, and certain core economic metrics, including unemployment, are not rebounding as quickly as many had hoped. 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. 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, 2012 and other documents that we may file with the SEC in the future. We will continue to cautiously monitor the recovery in lodging demand and rates, our third-party hotel managers, our remaining portfolio of hotel development loans and our performance generally.

In October of 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. However, our Holiday Inn Express on Water Street in lower Manhattan experienced flooding and was forced to close. In April 2013, repairs were completed and this hotel was re-opened. Additionally, our hotel redevelopment project at 32 Pearl Street in lower Manhattan experienced some flooding at the job site and portions of the project did suffer damage. The continued strength in business transient and leisure transient customer demand in Manhattan partially offset the losses from the storm.


SUMMARY OF OPERATING RESULTS

The following table outlines operating results for the three and six months ended June 30, 2013 and 2012 for the Company's portfolio of wholly owned hotels and those owned through joint venture interests (excluding hotel assets classified as discontinued operations and the Hampton Inn Pearl Street, which is a hotel undergoing a re-development project) that are consolidated in our financial statements for the three and six months ended June 30, 2013 and 2012:

CONSOLIDATED HOTELS:
                          Three Months Ended June 30,                     Six Months Ended June 30,
                                                              2013                                         2013
                                                            vs. 2012                                     vs. 2012
                            2013               2012        % Variance        2013            2012       % Variance

Occupancy                       81.5%             81.4%         0.1%            76.1%          74.0%         2.1%
Average Daily Rate
(ADR)                  $       174.42     $      168.65         3.4%    $      164.41     $   157.65         4.3%
Revenue Per Available
Room (RevPAR)          $       142.13     $      137.25         3.6%    $      125.18     $   116.71         7.3%

Room Revenues          $       97,922     $      87,044        12.5%    $     167,515     $  146,454        14.4%
Hotel Operating
Revenues               $      106,092     $      94,785        11.9%    $     182,095     $  158,855        14.6%

RevPAR for the three and six months ended June 30, 2013 increased 3.6% and 7.3%, respectively, for our consolidated hotels. This represents a growth trend in RevPAR which is primarily due to improving economic conditions in 2013 and the acquisition of hotel properties consummated since June 30, 2012 that are accretive to RevPAR.

The following table outlines operating results for the three and six months ended June 30, 2013 and 2012 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 June 30,                       Six Months Ended June 30,
                                                               2013                                            2013
                                                             vs. 2012                                        vs. 2012
                            2013               2012         % Variance        2013              2012        % Variance

Occupancy                       72.0%              73.8%         -1.8%           67.5%             69.3%         -1.8%
Average Daily Rate
(ADR)                  $       156.47     $       162.26         -3.6%   $      150.70     $      151.62         -0.6%
Revenue Per Available
Room (RevPAR)          $       112.69     $       119.74         -5.9%   $      101.70     $      105.01         -3.1%

Room Revenues          $       15,502     $       20,108        -22.9%   $      27,840     $      35,512        -21.6%
Total Revenues         $       21,460     $       26,280        -18.3%   $      39,084     $      47,018        -16.9%

For our unconsolidated hotels, RevPAR decreased 5.9% and 3.1% for the three and six months ended June 30, 2013 and ADR decreased 3.6% and 0.6%, respectively, for the three and six months ended June 30, 2013. The decrease, when compared to the same period in 2012, is primarily the result of the sale of our joint venture interest in Holiday Inn Express 29th Street, which, as of June 18, 2012, was no longer included as an unconsolidated joint venture. This hotel tended to have higher occupancy and room rates than the remaining hotels in our unconsolidated joint venture hotel portfolio. In addition, our Courtyard South Boston property underwent and completed a rooms and public space renovation during the six months ended June 30, 2013, which resulted in year over year occupancy and room rate decreases.

We define a same store hotel as one that is currently consolidated, that we have owned in whole or in part for the entire period being reported and the comparable period in the prior year, and is deemed fully operational. For the three and six months ended June 30, 2013 and 2012 there are 52 and 51 same store hotels, respectively. The following table outlines operating results for the three and six months ended June 30, 2013 and 2012, for our same store consolidated hotels:


SAME STORE
CONSOLIDATED HOTELS
                            (includes 52 hotels in both years)            (includes 51 hotels in both years)
                         Three Months Ended June 30,                    Six Months Ended June 30,
                                                            2013                                         2013
                                                          vs. 2012                                     vs. 2012
                            2013              2012       % Variance        2013             2012      % Variance

Occupancy                       82.2%           81.2%         1.0%             76.4%         73.4%         3.0%
Average Daily Rate
(ADR)                  $       173.02     $    168.99         2.4%    $       159.45     $  153.81         3.7%
Revenue Per Available
Room (RevPAR)          $       142.24     $    137.19         3.7%    $       121.86     $  112.87         8.0%

Room Revenues          $       89,004     $    85,863         3.7%    $      149,196     $ 139,003         7.3%
Total Revenues         $       95,818     $    93,124         2.9%    $      157,452     $ 146,771         7.3%

RevPAR for our same store consolidated hotels increased 3.7% and 8.0% during the three and six months ended June 30, 2013, respectively, when compared to the same period in 2012. This RevPAR growth is primarily due to the continuing improvement in economic conditions in our markets during these periods.

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012

(dollars in thousands, except ADR, RevPAR, and per share data)

Revenue

Our total revenues for the three months ended June 30, 2013 consisted of hotel operating revenues, interest income from our development loan program and other revenue. Hotel operating revenues were approximately 99.9% and 99.4% of total revenues for the three months ended June 30, 2013 and 2012, 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 $11,307, or 11.9% to $106,092 for the three months ended June 30, 2013 compared to $94,785 for the same period in 2012. This increase in hotel operating revenues was primarily attributable to the acquisition of hotel properties consummated during or subsequent to the three months ended June 30, 2012 as well as improvements in ADR and occupancy at our existing hotels.

We acquired interests in the following four consolidated hotels since July 1, 2012 which contributed the following operating revenues for the three months ended June 30, 2013 and 2012.

                                                                         Hotel Operating
                                                                            Revenues
                                                                          Three Months
                                                                         Ended June 30,
        Brand               Location        Acquisition Date   Rooms          2013
Courtyard by Marriott   Ewing, NJ           August 13, 2012     130    $          1,243
Hyatt Union Square      New York, NY        April 9, 2013       178               2,203
Courtyard by Marriott   San Diego, CA       May 30, 2013        245               1,314
Residence Inn           Coconut Grove, FL   June 12, 2013       140                 261
                                                                693    $          5,021

Revenues for all hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the three months ended June 30, 2013 included revenues for a full quarter related to the two hotels that were purchased during the three months ended June 30, 2012. We acquired interests in the following consolidated hotels during the three months ended June 30, 2012:

                                                                     Hotel            Hotel
                                                                   Operating        Operating
                                                                    Revenues         Revenues
                                                                  Three Months     Three Months
                                                                   Ended June       Ended June
                                                                      30,              30,
       Brand            Location     Acquisition Date   Rooms         2013             2012
The Boxer             Boston, MA     May 7, 2012          80    $       1,046    $         728
Holiday Inn Express   New York, NY   June 18, 2012       228            4,678              557
                                                         308    $       5,724    $       1,285


In addition, our same store portfolio experienced a $4.03, or 2.4%, improvement in ADR, increasing from $168.99 for the three months ended June 30, 2012 to $173.02 during the same period in 2013. For the same store hotels, occupancy increased by 100 basis points from approximately 81.2% during the three months ended June 30, 2012 to approximately 82.2% for the same period in 2013. The resulting improvement in RevPAR was the product of improvements in lodging trends in the markets in which our hotels are located and aggressive asset management.

We had previously invested in hotel development projects by providing mortgage or mezzanine financing to hotel developers and through the acquisition of land that was then leased to hotel developers. Interest income from development loans receivable was $12 for the three months ended June 30, 2013 compared to $518 for the same period in 2012.

In April 2013, we acquired the Hyatt Union Square and as part of the consideration we agreed to cancel the $13,303 development loan receivable in its entirety. In April 2013, the development loan related to Hyatt 48Lex was paid off in full. As of June 30, 2013, we had no outstanding development loan receivables.

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 from the operation of the unconsolidated joint ventures' hotels. Other revenues were $60 and $52 for the three months ended June 30, 2013 and 2012, respectively.

Expenses

Total hotel operating expenses increased 11.2% to approximately $55,765 for the three months ended June 30, 2013 from $50,130 for the three months ended June 30, 2012. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since June 30, 2012, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization of 15.5%, or $2,159, to $16,083 for the three months ended June 30, 2013 from $13,924 for the three months ended June 30, 2012. Real estate and personal property tax and property insurance increased $1,335, or 26.2%, for the three months ended June 30, 2013 when compared to the same period in 2012 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 $359 from $5,340 in the three months ended June 30, 2012 to $5,699 for the same period in 2013. 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 $173 when comparing the three months ended June 30, 2013 to the same period in 2012. This increase in share based compensation expense is due primarily to additional restricted shares issued since June 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. Increases in other general and administrative expenses were primarily the result of 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 typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Acquisition and terminated transaction costs increased $649 from $124 for the three months ended June 30, 2012 to $773 for the same period in 2013. The expenses incurred in 2013 were primarily the result of the Hyatt Union Square acquisition.

Operating Income

Operating income for the three months ended June 30, 2013 was $33,260 compared to operating income of $20,533 during the same period in 2012. As noted above, the increase in operating income resulted partially from improved performance of our portfolio and acquisitions that have occurred subsequent to June 30, 2012.
In addition, we recognized a net gain of approximately $12,107 on the purchase of the Hyatt Union Square, New York, NY as the fair value of the assets acquired less any liabilities assumed exceeded the consideration transferred.

Interest Expense

Interest expense increased $696 from $10,442 for the three months ended June 30, 2012 to $11,138 for the three


months ended June 30, 2013. The increase in interest expense is due primarily to an increase in our line of credit balance as a result of our Residence Inn Coconut Grove, FL and Courtyard San Diego, CA acquisitions. This increase was partially offset by a reduction in the weighted average interest rate on our credit facility as a result of us entering into a new unsecured credit facility in November 2012.

Unconsolidated Joint Venture Investments

The income from unconsolidated joint ventures consists of our interest in the operating results of the properties we own in joint ventures. Income from our unconsolidated joint ventures decreased by $266 for the three months ended June 30, 2013. The decrease in income from unconsolidated joint ventures is primarily the result of our purchase of the remaining 50% interest in our Holiday Inn Express Manhattan joint venture during the three months ended June 30, 2012. Operating results for the three months ended June 30, 2013 for this hotel are now included in our consolidated results. In connection with this acquisition, our interest in Metro 29th was remeasured, and as a result, during the three months ended June 30, 2012, we recorded a loss of approximately $224.

We have made an effort to decrease our investment in unconsolidated joint ventures. Since January 1, 2012 we closed on the sale of 5 of our unconsolidated joint venture assets to third parties and we purchased the remaining ownership from our joint venture partners in 2 assets, which are now included in our consolidated results.

Income Tax Expense

During the three months ended June 30, 2013, the Company recorded an income tax expense of $1,438. There was no comparable income tax expense recorded in the prior year as the Company recorded a full valuation allowance against the net operating loss.

Discontinued Operations

On June 12, 2013, we closed on the sale of our Comfort Inn, Harrisburg, PA. The Company sold the asset for $3,700 and recorded a gain on sale of $1,043. During the three months ended June 30, 2013, the Company also entered into a purchase and sale agreement to sell our Holiday Inn Express Camp Springs, MD. The Company recorded an impairment of $3,723. The sale is expected to be completed during the third quarter of 2013. The operating results for these two properties have been reclassified to discontinued operations in the statement of operations for the three months ended June 30, 2013 and 2012, respectively.

During the second quarter of 2012, we closed on the sale of four of the 18 non-core hotel properties, transferred the title of the Comfort Inn, located In North Dartmouth, MA, to the lender and we closed on the sale of the land parcel and improvements located at 585 Eighth Avenue, New York, NY. As a result of these transactions, we recognized a gain of approximately $6,949 in the second quarter of 2012. The operating results for these properties have been reflected in discontinued operations in the statement of operations for the three months ended June 30, 2012.

We recorded income from discontinued operations of approximately $98 and $340 . . .

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