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HT > SEC Filings for HT > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for HERSHA HOSPITALITY TRUST

Form 10-K for HERSHA HOSPITALITY TRUST


27-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements appearing in this Item 7 are forward-looking statements within the meaning of the federal securities laws. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. See "CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS" for additional information regarding our forward-looking statements.

BACKGROUND

As of December 31, 2013, we owned interests in 54 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles and Miami, including 48 wholly-owned hotels and interests in six hotels owned through unconsolidated joint ventures. Our "Summary of Operating Results" section below contains operating results for 43 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 under redevelopment and is expected to open during the first quarter of 2014. The results below also exclude a portfolio of four non-core hotels, for which a purchase and sale agreement has been entered into and the sale of which is expected to close in the first quarter of 2014. As a result, results for these four non-core hotels 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 December 31, 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

In 2013, lodging fundamentals for those markets in which we focus, and for our Company in particular, continued to stabilize following the economic recession that began in 2008 and 2009. As we conclude 2013, we believe the improvements in our equity and debt capitalization and repositioning of our portfolio enables us to capitalize on further improvements in lodging fundamentals. We continue to expect improvements in ADR, RevPAR and operating margins, led by hotels in our core urban markets of New York, Boston, Philadelphia, Los Angeles, San Diego and Miami. We also 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 development loans or land leases in the near term. While property joint ventures and development loans 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.

The repositioning of our portfolio, to focus more on high barrier to entry and major urban markets, continued in 2012 and 2013. We acquired seven hotels, including three in Miami, one in San Diego, one in Philadelphia, one in Boston, and one in New York City. During 2012 and 2013, we closed on the sale of 33 wholly owned and 5 joint venture hotels in secondary and tertiary markets that we determined to be non-core. We believe these efforts to reposition our portfolio have yielded positive results in both 2013 and 2012. As shown in the tables below under "Summary of Operating Results," in 2013, we grew occupancy by approximately 110 basis points, ADR by 2.6% and RevPAR by 4.0% across our portfolio of consolidated hotels. Likewise, 2012 resulted in increases in occupancy by 200 basis points, ADR by 5.2% and RevPAR by 7.9% across our portfolio of consolidated hotels.

Although we are planning for continued stabilization and improvement in consumer and commercial spending and lodging demand as we enter 2014, the manner in which the economy will continue to grow, if at all, is not predictable, and certain core economic metrics, including unemployment, are not rebounding as quickly as many had hoped. In addition, the availability for hotel-level financing for the acquisition of 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. Factors that might contribute to less than anticipated performance include those described under the heading "Item 1A. Risk Factors" and other documents that we may file with the SEC in the future. We will continue to cautiously monitor recovery in lodging demand and rates, our third party hotel managers 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 re-development project at 32 Pearl Street in lower Manhattan experienced some flooding at the job site and portions of the project suffered 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 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 years ended December 31, 2013, 2012 and 2011.

CONSOLIDATED HOTELS:
                                                            2013                         2012
                             Year Ended    Year Ended     vs. 2012    Year Ended       vs. 2011
                                2013          2012       % Variance      2011         % Variance

Occupancy                         79.7%         78.6%       1.1%           76.6%         2.0%
Average Daily Rate (ADR)     $   179.70    $   175.23       2.6%      $   166.58         5.2%
Revenue Per Available Room
(RevPAR)                     $   143.30    $   137.78       4.0%      $   127.64         7.9%

Room Revenues                $  309,452    $  273,410      13.2%      $  218,314        25.2%
Hotel Operating Revenues     $  338,064    $  299,005      13.1%      $  229,156        30.5%

RevPAR for the year ended December 31, 2013 increased 4.0% for our consolidated hotels when compared to the same period in 2012. This increase represents a continued growth trend in RevPAR, which is primarily due to the improving economic conditions in 2013 and the acquisition of hotel properties consummated in 2013 that are accretive to RevPAR.

The following table outlines operating results for the three years ended December 31, 2013, 2012 and 2011 for hotels we own through an unconsolidated joint venture interest (excluding those hotel assets have been sold to an independent third party during the period presented). 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:
                                                          2013                        2012
                             Year Ended   Year Ended    vs. 2012    Year Ended      vs. 2011
                                2013         2012      % Variance      2011        % Variance

Occupancy                        68.3%        68.6%      -0.3%          68.3%         0.3%
Average Daily Rate (ADR)     $  154.57    $  152.51       1.4%      $  154.44        -1.2%
Revenue Per Available Room
(RevPAR)                     $  105.52    $  104.66       0.8%      $  105.48        -0.8%

Room Revenues                $  58,273    $  62,058      -6.1%      $  63,896        -2.9%
Total Revenues               $  80,879    $  84,364      -4.1%      $  85,841        -1.7%

For our unconsolidated hotels, RevPAR for the year ended December 31, 2013 was consistent with RevPAR achieved during the year ended December 31, 2012. The relatively stable results in RevPAR during the year of 2013 when compared to the year of 2012 is primarily the result of joint venture assets that are now consolidated 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, resulting in the lower room revenues and total revenues in the above table. When compared to the same period in 2012, the remaining unconsolidated joint venture hotels follow the same growth trend for RevPAR as experienced in our same store consolidated hotels reported below during the year ended December 31, 2013.


We define a same store consolidated 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 each of the periods being presented, and is deemed fully operational. Based on this definition, for the years ended December 31, 2013 and 2012, there are 34 same store consolidated hotels and 31 same store consolidated hotels for the years ended December 31, 2012 and 2011. The following table outlines operating results for the years ended December 31, 2012, 2011, and 2010, for our same store consolidated hotels:

SAME STORE CONSOLIDATED
HOTELS:
                               (includes 34 hotels in both years)          (includes 31 hotels in both years)
                                                                2013                        Year        2012
                                               Year Ended     vs. 2012    Year Ended       Ended      vs. 2011
                           Year Ended 2013        2012       % Variance      2012           2011     % Variance

Occupancy                            80.5%          78.6%       1.9%           80.0%        77.2%       2.8%
Average Daily Rate (ADR)  $         174.65     $   172.67       1.1%      $   175.61    $  169.58       3.6%
Revenue Per Available
Room (RevPAR)             $         140.55     $   135.69       3.6%      $   140.45    $  130.99       7.2%

Room Revenues             $        258,047     $  249,848       3.3%      $  227,589    $ 211,776       7.5%
Total Revenues            $        272,780     $  263,893       3.4%      $  237,608    $ 220,670       7.7%

RevPAR for our same store consolidated hotels increased 3.6% for the year ended December 31, 2013 when compared to the same period in 2012. As noted above, this increase represents a continued growth trend in RevPAR, which is primarily due to the improving economic conditions of the markets in which we operated during 2013.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2013 TO DECEMBER 31, 2012

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

Revenue

Our total revenues for the years ended December 31, 2013 and 2012 consisted of hotel operating revenues, interest income from our development loan program and other revenue. Hotel operating revenues were approximately 99.9% and 99.3% of total revenues for the years ended December 31, 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 were consolidated in our financial statements during the period. Hotel operating revenues increased $39,059, or 13.1%, from $299,005 for the year ended December 31, 2012 to $338,064 for the same period in 2013. This increase in hotel operating revenues was primarily attributable to the acquisitions consummated in 2013 and 2012 as well as increases in hotel operating revenues for our same store consolidated hotels.

We acquired interests in the following consolidated hotels that contributed the following operating revenues for the year ended December 31, 2013.

                                                                              2013 Hotel
                                                                              Operating
        Brand                Location        Acquisition Date     Rooms        Revenues
Hyatt Union Square       New York, NY        April 9, 2013          178    $      11,272
Courtyard by Marriott    San Diego, CA       May 30, 2013           245            8,350
Residence Inn            Coconut Grove, FL   June 12, 2013          140            2,889
Winter Haven             Miami, FL           December 20, 2013       70              203
Blue Moon                Miami, FL           December 20, 2013       75              175
                                                                    708    $      22,889

Revenues for all hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the year ended December 31, 2013 included revenues for the following hotels that were purchased during the year ended December 31, 2012. Hotels acquired during the year ended December 31, 2012 would have a full year of results included in the year ended December 31, 2013 but not necessarily a full year of results during the same period in 2012. We acquired interests in the following consolidated hotels during the year ended December 31, 2012:


                                                                         2013 Hotel     2012 Hotel
                                                                         Operating      Operating
        Brand               Location       Acquisition Date   Rooms       Revenues       Revenues
The Rittenhouse Hotel   Philadelphia, PA   March 1, 2012        111    $    16,969    $    16,809
The Boxer               Boston, MA         May 7, 2012           80          3,799          2,791
Holiday Inn Express     New York, NY       June 18, 2012        228         16,746         10,170
                                                                419    $    37,515    $    29,770

In addition, our same store consolidated portfolio experienced improvements in ADR and occupancy during the year ended December 31, 2013 when compared to the same period in 2012. Occupancy in our same store consolidated hotels increased 190 basis points from 78.6% during the year ended December 31, 2012 to 80.5% for the same period in 2013. ADR improved 1.1%, increasing from $172.67 for the year ended December 31, 2012 to $174.65 during the same period in 2013. These improvements were due to improvements in lodging trends in the markets in which our hotels are located.

We had previously invested in hotel development projects by providing mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Interest income from development loans receivable was $158 for the year ended December 31, 2013 compared to $1,998 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. Furthermore, the only remaining development loan, related to the Hyatt 48Lex, was paid off in full during April 2013. As of December 31, 2013, we had no outstanding development loans receivable.

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 $191 and $212 for the years ended December 31, 2013 and 2012.

Expenses

Total hotel operating expenses increased 16.3% to approximately $188,431 for the year ended December 31, 2013 from $161,982 for the year ended December 31, 2012. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since the comparable period in 2012, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization of 15.6%, or $7,541, to $55,784 for the year ended December 31, 2013 from $48,243 for the year ended December 31, 2012. Real estate and personal property tax and property insurance increased $4,742, or 24.5%, for the year ended December 31, 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.

General and administrative expense increased by approximately $570 from $23,455 in 2012 to $24,025 in 2013. Increases in other general and administrative expenses were primarily from increases in employee headcount and resulting base compensation and payroll taxes increases. 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 $68 during the year ended December 31, 2013 when compared to the same period of 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.

Amounts recorded on our consolidated statement of operations for acquisition and terminated transactions costs will fluctuate from period to period based on our acquisition activities. Acquisition 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 decreased $205 from $1,179 for the year ended December 31, 2012 to $974 for the year ended December 31, 2013. While we acquired more properties during the year ended December 31, 2013 when compared to the same period in 2012, the manner in which acquisition targets are found can and do dictate the costs necessary to complete the acquisition. The costs incurred in 2013 were related to the following hotels: $500 related to our Hyatt Union Square acquisition; $152 related to our Residence Inn Coconut Grove acquisition; $65 related to our Courtyard San Diego acquisition; and $138 for our Winter Haven and Blue Moon Hotel acquisitions. The costs incurred in 2012 were related to following hotels: $963 related to our acquisition of The Rittenhouse Hotel; $61 related to acquisition of The Boxer; $67 related to our acquisition of Holiday Inn Express Manhattan. The remaining costs were primarily related to transactions that were terminated during the year.


Operating Income

Operating income for the year ended December 31, 2013 was $56,630 compared to operating income of $46,180 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 since the beginning of 2012, but is offset by increases in real estate taxes. In addition, we recognized a net gain of approximately $12,096 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. Excluding the gain on our purchase of the Hyatt Union Square, operating income would have decreased $1,646.

Interest Expense

Interest expense increased $2,689 from $37,295 for the year ended December 31, 2012 to $39,984 for the year ended December 31, 2013. The increase in interest expense is due primarily to an increase in borrowings drawn on our senior unsecured term loan and our line of credit throughout the year. A portion of these borrowings were used to repay various mortgage loans, which lowered our overall consolidated secured mortgage indebtedness outstanding. Additionally, we used proceeds from the line of credit to fund the purchase of our Residence Inn Coconut Grove and Courtyard San Diego acquisitions. Finally, we financed a portion of our Hyatt Union Square acquisition with variable rate mortgage debt and borrowed an additional $10,000 to fund construction of the tower at our Courtyard Miami Beach hotel.

Unconsolidated Joint Venture Investments

The loss from unconsolidated joint ventures consists of our interest in the operating results of the properties we own in joint ventures. The operating results of the unconsolidated joint ventures improved by $210 for the year ended December 31, 2013.

Since the beginning of 2012, we have made efforts to decrease our investment in unconsolidated joint ventures resulting in the sale of 5 of these assets to third parties and the purchase of the remaining 50% interest in our Holiday Inn Express, New York, NY hotel on June 18, 2012. Accordingly, the results of this hotel are now included in our consolidated results and our interest in Metro 29th was remeasured. As a result, during the year ended December 31, 2012, we recorded a loss from the remeasurement of our investments in the unconsolidated joint venture of approximately $224.

On August 13, 2012, the Company purchased the remaining 50% ownership interest in Inn America Hospitality at Ewing, the lessee of the Courtyard by Marriot, Ewing, NJ. As such, we ceased to account for our investment in Inn America Hospitality at Ewing under the equity method of accounting as of August 10, 2012 because it became a consolidated subsidiary. Our interest in Inn America Hospitality at Ewing, which consisted of our investment in Inn America Hospitality at Ewing and a receivable, was remeasured and as a result based on the appraised value of the hotel, we recorded a loss from the remeasurement of our investments in the unconsolidated joint venture of approximately $1,668 during the twelve months ended December 31, 2012.

We recorded an impairment loss of $1,813 related to the Courtyard, Norwich, CT, one of the properties owned by Mystic Partners, LLC. Mystic Partners, LLC is currently in discussions to transfer title to the property to the lender. As we do not anticipate recovering our investment balance in this asset, we have reduced our investment attributed to this property to $0 as of December 31, 2013.

Income Tax Benefit

During the year ended December 31, 2013, the Company recorded an income tax benefit of $5,600 compared an income tax benefit of $3,355 in 2012. Excluded from the income tax benefit for 2013 is $190 of income tax expense related to discontinued operations. Approximately $2,866 of the income tax benefit relates to deferred tax assets that the Company now believes are realizable and variances between the tax return and year end provision for the year ended December 31, 2012. The remaining income tax benefit is a result of the operations of the Company's taxable REIT subsidiary, 44 New England.

Discontinued Operations

On September 20, 2013, the Company entered into a purchase and sale agreement to sell a portfolio of 16 non-core hotels for an aggregate purchase price of approximately $217,000. During the third quarter of 2013, the Company had recorded an impairment of $6,591 in connection with the anticipated disposition. As of December 31, 2013, the Company had closed on the sale of 12 of the hotels. Accordingly, a gain of $31,559 was recognized during the fourth quarter of 2013 as the proceeds from the sale exceeded the carrying value. The Company expects to close on the remaining four non-core hotels during the first quarter of 2014.


On June 12, 2013, we closed on the sale of our Comfort Inn, Harrisburg, PA. The Company sold the hotel for $3,700 and recorded a gain on sale of $442. Additionally, on September 17, 2013, we closed on the sale of Holiday Inn Express Camp Springs, MD property. The Company sold the hotel for $8,500 and recorded a gain on the sale of $120 and an impairment charge of $3,723 during the second quarter of 2013 as the anticipated net proceeds did not exceed the carrying value.

During the year ended December 31, 2012, the Company closed on the sale of 18 non-core hotel properties, transferred the title of the Comfort Inn North Dartmouth, MA to the lender and 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 $11,231 for the year ended December 31, 2012.

The operating results for all 37 of the above described hotel properties and one land parcel have been reclassified to discontinued operations in the statement of operations for the years end December 31, 2013 and 2012, respectively.

We recorded income from discontinued operations of approximately $7,388 during the twelve months ended December 31, 2013, compared to income of approximately $3,489 during the twelve months ended December 31, 2012. See "Note 12 - Discontinued Operations" for more information.

Net Income/Loss

Net income applicable to common shareholders for the year ended December 31, 2013 was $32,752 compared to net income applicable to common shareholders of $8,376 for the same period in 2012. As previously discussed, net income applicable to common shareholders for the year ended December 31, 2013 was positively impacted by a net gain of approximately $12,096 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. Additionally, the $31,559 gain on the sale of 12 of the 16 non-core hotels that closed during the year ended December 31, 2013 positively impacted net income applicable to common shareholders.

Comprehensive Income

Comprehensive income applicable to common shareholders for the year ended December 31, 2013 was $34,162 compared to $7,741 for the same period in 2012. This amount was primarily attributable to net income/loss as more fully described above. Further change in other comprehensive income was primarily the result of the positive shift in the position of the fair value of our derivative instruments. For the year ended December 31, 2013, we recorded other comprehensive income of $1,410 when compared to $635 of other comprehensive loss for the year ended December 31, 2012. The expected rise in the interest rate yield curve in the next few years has favorably shifted many of our interest . . .

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