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Hersha Hospitality Trust 10-K 2008 Documents found in this filing:UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark One)
For the
fiscal year ended December 31, 2007
OR
For the transition period from
_______________ to _______________
Commission
file number: 001-14765
HERSHA
HOSPITALITY TRUST
(Exact
Name of Registrant as Specified in Its Charter)
Registrant’s
telephone number, including area code: (717) 236-4400
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
class)
1
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o Yes x No
Indicate
by check mark whether the registrant (i) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (ii) has been subject to such filing requirements for
the past 90 days. x
Yes o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). oYes x No
The
aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant, as of June 30, 2007, was approximately $484.5
million.
As of
March 12, 2008, the number of Class A common shares of beneficial interest
outstanding was 41,208,543.
Documents
Incorporated By Reference: Portions of the proxy statement for the registrant’s
2008 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Form 10-K. 2
HERSHA HOSPITALITY TRUST
INDEX
CAUTIONARY
FACTORS THAT MAY AFFECT FUTURE RESULTS
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, “believes,” “anticipates,” “expects” and words of similar
import. Such forward-looking statements relate to future events, our future
financial performance, and involve known and unknown risks, 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 report
including, but not limited to those discussed in the sections entitled “Risk
Factors,” “Growth Strategy” and “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations” that could cause actual results
to differ. We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments, except as required by
law.
Item 1. Business
OVERVIEW
Hersha
Hospitality Trust is a self-advised Maryland real estate investment trust, REIT,
that was organized in 1998 and completed its initial public offering in January
of 1999. Our common shares are traded on the American Stock Exchange under the
symbol “HT”. We invest primarily in institutional grade hotels in central
business districts, primary suburban office markets and stable destination and
secondary markets in the Northeastern United States and select markets on the
West Coast. Our primary strategy is to continue to acquire high quality,
upscale, mid-scale and extended-stay hotels in metropolitan markets with high
barriers to entry in the Northeastern United States and other markets with
similar characteristics.
As of
December 31, 2007, our portfolio consisted of 53 wholly owned limited and full
service properties and 18 limited and full service properties owned through
joint venture investments. Of the 18 limited and full service
properties owned through our investment in joint ventures investments, three are
consolidated. These 71 properties, with a total of 9,129 rooms, are located in
Arizona, California, Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
New York, North Carolina, Pennsylvania, Rhode Island and Virginia and operate
under leading brands, such as Marriott ®, Courtyard by Marriott ® , Residence Inn ®, Fairfield Inn ®, Hilton ®, Hilton Garden Inn ®, Springhill Suites ®, Hampton Inn ® , Holiday Inn ® , Holiday Inn Express ® , Comfort Inn ® , Mainstay Suites
® , Sleep Inn ®, Hawthorne Suites ®, Homewood Suites ®, Four Points by Sheraton
® and Hyatt Summerfield
Suites®.
We are
structured as an umbrella partnership REIT, or UPREIT, and we own our hotels and
our investments in joint ventures through our operating partnership, Hersha
Hospitality Limited Partnership, or HHLP, for which we serve as general partner.
Our hotels are managed by qualified independent management companies, including
Hersha Hospitality Management, L.P., or HHMLP. HHMLP is a private
management company owned by certain of our trustees, officers and other third
party investors. We have leased all but one of our wholly owned hotels to 44 New
England Management Company, or 44 New England, our wholly-owned taxable REIT
subsidiary, or TRS. The hotel not leased to 44 New England is leased to an
unrelated third party lessee. In addition, all of the hotels we own through
investments in joint ventures are leased to TRSs owned by the respective venture
or to corporations owned in part by our wholly owned TRS.
AVAILABLE
INFORMATION
Our
address is 44 Hersha Drive, Harrisburg, PA 17102. Our telephone number is
(717) 236-4400. Our Internet website address is: www.hersha.com. We make
available free of charge through our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after such documents are electronically filed with, or furnished to, the SEC.
The information available on our website is not, and shall not be deemed to be,
a part of this report or incorporated into any other filings we make with the
SEC. INVESTMENT
IN HOTEL PROPERTIES
Our
operating strategy focuses on increasing hotel performance for our portfolio.
The key elements of this strategy are:
As of
December 31, 2007, we owned interests in the following 71 hotels:
INVESTMENT
IN JOINT VENTURES
In
addition to the direct acquisition of hotels, we may make investments in hotels
through joint ventures with strategic partners. We seek to identify acquisition
candidates located in markets with economic, demographic and supply dynamics
favorable to hotel owners and operators. Through our extensive due diligence
process, we select those acquisition targets where we believe selective capital
improvements and intensive management will increase the hotel’s ability to
attract key demand segments, enhance hotel operations and increase long-term
value.
As of
December 31, 2007, we maintain ownership interest in the following 18 hotels
through joint ventures with third parties:
DEVELOPMENT
LOANS
We do not
develop properties, but we take advantage of our relationships with hotel
developers, including entities controlled by our officers or trustees, to
identify development and renovation projects that may be attractive to us. While
these developers bear the construction risks, we often provide secured
development loans and bear economic risks through these development loans. In
many instances, we maintain a first right of refusal or first right of offer to
purchase the hotel for which we have provided development loan financing at fair
market value.
ACQUISITIONS
Our
primary growth strategy is to selectively acquire high quality, upper- upscale,
upscale, mid-scale and extended-stay hotels in metropolitan markets with high
barriers-to-entry. We believe that current market conditions are creating
opportunities to acquire hotels at attractive prices. In executing our
disciplined acquisition program, we will consider acquiring hotels that meet the
following additional criteria:
In the
ordinary course of our business, we are actively considering hotel acquisition
opportunities. Since our initial public offering in 1999, we have acquired,
wholly or through joint ventures, a total of 78 hotels, including 23 hotels
acquired from entities controlled by our officers or trustees. Of the 23
acquisitions from these entities, 20 were newly-constructed or newly-renovated
by these entities prior to our acquisition. Subsequent to December, 31, 2007, we
have acquired interests in the following hotels:
DISPOSITIONS
We will
evaluate our hotels on a periodic basis to determine if these hotels continue to
satisfy our investment criteria. We may sell hotels opportunistically based upon
management’s forecast and review of the cash flow potential for the hotel and
re-deploy the proceeds into debt reduction, development loans or acquisitions of
hotels. We utilize several criteria to determine the long-term potential of our
hotels. Hotels are identified for sale based upon management’s forecast of the
strength of the hotel’s cash flows and its ability to remain accretive to our
portfolio. Our decision to sell an asset is often predicated upon the size of
the hotel, strength of the franchise, property condition and related costs to
renovate the property, strength of market demand generators, projected supply of
hotel rooms in the market, probability of increased valuation and geographic
profile of the hotel. All asset sales are comprehensively reviewed by our Board
of Trustees, including our independent trustees. A majority of the independent
trustees must approve the terms of all asset sales. Since our initial public
offering in 1999, we have sold a total of 17 hotels.
FINANCING
The
relative stability of the mid-scale and upscale segment of the limited service
lodging industry allows us to increase returns to our shareholders through the
prudent application of leverage. Our debt policy is to limit consolidated
indebtedness to less than 67% of the fair market values for the hotels in which
we invest. We may employ a higher amount of leverage at a specific hotel to
achieve a desired return when warranted by that hotel's historical operating
performance and may use modestly greater leverage across our portfolio if and
when warranted by prevailing market conditions.
PROPERTY
MANAGEMENT
We work
closely with our hotel management companies to operate our hotels and increase
same hotel performance for our portfolio. Through our TRS and our investment in
joint ventures, we have retained the following management companies to operate
our hotels, as of December 31, 2007:
Each
management agreement provides for a set term and is subject to early termination
upon the occurrence of defaults and certain other events described therein. As
required under the REIT qualification rules, all managers, including HHMLP, must
qualify as an “eligible independent contractor” during the term of the
management agreements. Under the
management agreements, the manager generally pays the operating expenses of our
hotels. All operating expenses or other expenses incurred by the manager in
performing its authorized duties are reimbursed or borne by our TRS to the
extent the operating expenses or other expenses are incurred within the limits
of the applicable approved hotel operating budget. Our managers are not
obligated to advance any of their own funds for operating expenses of a hotel or
to incur any liability in connection with operating a hotel.
For their
services, the managers receive a base management fee, and if a hotel meets and
exceeds certain thresholds, an additional incentive management fee. The base
management fee for a hotel is due monthly and is generally equal to 3% of the
gross revenues associated with that hotel for the related month.
CAPITAL
IMPROVEMENTS, RENOVATION AND REFURBISHMENT
We have
established capital reserves for our hotels to maintain the hotels in a
condition that complies with their respective franchise licenses among other
requirements. In addition, we may upgrade the hotels in order to capitalize on
opportunities to increase revenue, and, as deemed necessary by our management,
to seek to meet competitive conditions and preserve asset quality. We will also
renovate hotels when we believe the investment in renovations will provide an
attractive return to us through increased revenues and profitability and is in
the best interests of our shareholders. We maintain a capital expenditures
policy by which replacements and renovations are monitored to determine whether
they qualify as capital improvements. All items that are deemed to be repairs
and maintenance costs are expensed and recorded in Hotel Operating
Expenses.
OPERATING
PRACTICES
Our
managers utilize centralized accounting and data processing systems, which
facilitate financial statement and budget preparation, payroll management,
quality control and other support functions for the on-site hotel management
team. Our managers also provide centralized control over purchasing and project
management (which can create economies of scale in purchasing) while emphasizing
local discretion within specific guidelines.
DISTRIBUTIONS
We have
made thirty six consecutive quarterly distributions to the holders of our common
shares since our initial public offering in January 1999 and intend to continue
to make regular quarterly distributions to our shareholders.
Our Board
of Trustees will determine the amount of our future distributions and its
decision will depend on a number of factors, including the amount of funds
from operations, our partnership’s financial condition, debt service
requirements, capital expenditure requirements for our hotels, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the trustees deem relevant. Our ability to make distributions will
depend on the profitability and cash flow available from our hotels. There can
be no assurance we will continue to pay distributions at the rates above or any
other rate. SEASONALITY
Our hotels’ operations historically
have been seasonal in nature, reflecting higher occupancy rates during the
second and third quarters. This seasonality can be expected to cause
fluctuations in our quarterly operating revenues and profitability. Hotel revenue is generally greater in the
second and third quarters than in the first and fourth quarters. To the extent
that cash flow from operating activities is insufficient to provide all of the
estimated quarterly distributions, we anticipate that we will be able to fund
any such deficit from future working capital. We expect to use excess cash flow from
the second and third quarters to fund distribution shortfalls in the first and
fourth quarters. There are no assurances we will be able to continue to make
quarterly distributions at the current rate.
COMPETITION
The
upscale and mid-scale, limited service segment of the hotel business is highly
competitive. Among many other factors, our hotels compete on the basis of
location, room rates, quality, service levels, reputation, and reservation
systems. There are many competitors in our market segments and new hotels are
always being constructed. Additions to supply create new competitors,
in some cases without corresponding increases in demand for hotel
rooms.
We also
compete for hotel acquisitions with entities that have investment objectives
similar to ours. This competition could limit the number of suitable investment
opportunities offered to us. It may also increase the bargaining power of
property owners seeking to sell to us, making it more difficult for us to
acquire new properties on attractive terms.
EMPLOYEES
As of
December 31, 2007, we had 20 employees who were principally engaged in managing
the affairs of the company unrelated to property management. Our relations with
our employees are satisfactory.
FRANCHISE
AGREEMENTS
We
believe that the public’s perception of quality associated with a franchisor is
an important feature in the operation of a hotel. Franchisors provide a variety
of benefits for franchisees, which include national advertising, publicity and
other marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards and centralized reservation
systems. Our hotels operate under franchise licenses from national hotel
franchisors, including:
We
anticipate that most of the hotels in which we invest will be operated pursuant
to franchise licenses.
The
franchise licenses generally specify certain management, operational,
record-keeping, accounting, reporting and marketing standards and procedures
with which the franchisee must comply. The franchise licenses obligate our
lessees to comply with the franchisors’ standards and requirements with respect
to training of operational personnel, safety, maintaining specified insurance,
the types of services and products ancillary to guest room services that may be
provided by our lessees, display of signage, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.
TAX
STATUS
We have
elected to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code, commencing with our taxable year ended December 31, 1999. As long
as we qualify for taxation as a REIT, we generally will not be subject to
Federal income tax on the portion of our income that is distributed to
shareholders. If we fail to qualify as a REIT in any taxable year and do not
qualify for certain statutory relief provisions, we will be subject to Federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate tax rates. Even if we qualify for taxation as a
REIT, we may be subject to certain state and local taxes on our income and
property and to Federal income and excise taxes on our undistributed
income. We may
own up to 100% of one or more taxable REIT subsidiaries (“TRS”). A TRS is a
taxable corporation that may lease hotels under certain circumstances, provide
services to us, and perform activities such as third party management,
development, and other independent business activities. Overall, no more than
20% of the value of our assets may consist of securities of one or more TRS. In
addition, no more than 25% of our revenue for any year, excluding all TRS
revenues, but including any dividends received from TRSs, may consist of
dividends from one or more TRSs.
A TRS is
permitted to lease hotels from us as long as the hotels are operated on behalf
of the TRS by a third party manager who satisfies the following
requirements:
1.
such manager is, or is
related to a person who is, actively engaged in the trade or business of
operating “qualified lodging facilities” for any person unrelated to us and the
TRS;
2.
such manager does not
own, directly or indirectly, more than 35% of our shares;
3.
no more than 35% of such
manager is owned, directly or indirectly, by one or more persons owning 35% or
more of our shares; and
4.
we do not directly or
indirectly derive any income from such manager.
The
deductibility of interest paid or accrued by a TRS to us is limited to assure
that the TRS is subject to an appropriate level of corporate taxation. A 100%
excise tax is imposed on transactions between a TRS and us or our tenants that
are not on an arm’s-length basis.
FINANCIAL
INFORMATION ABOUT SEGMENTS
We are in
the business of acquiring equity interests in hotels, and we manage our business
in one reportable segment. See Item 8 of this Annual Report on Form 10-K for
segment financial information. Item 1A. Risk
Factors
You
should carefully consider the following risks, together with the other
information included in this Annual Report on Form 10-K. If any of the following
risks actually occur, our business, financial condition or results of operations
may suffer. As a result, the trading price of our securities could decline, and
you may lose all or part of any investment you have in our
securities.
RISKS
RELATED TO THE HOTEL INDUSTRY
The
value of our hotels depends on conditions beyond our control.
Our
hotels are subject to varying degrees of risk generally incident to the
ownership of hotels. The underlying value of our hotels, our income and ability
to make distributions to our shareholders are dependent upon the operation of
the hotels in a manner sufficient to maintain or increase revenues in excess of
operating expenses. Hotel revenues may be adversely affected by adverse changes
in national economic conditions, adverse changes in local market conditions due
to changes in general or local economic conditions and neighborhood
characteristics, competition from other hotels, changes in interest rates and in
the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of terrorism, acts of
God, including earthquakes, hurricanes and other natural disasters, acts of war,
adverse changes in zoning laws, and other factors that are beyond our control.
In particular, general and local economic conditions may be adversely affected
by the previous terrorist incidents in New York and Washington, D.C. Our
management is unable to determine the long-term impact, if any, of these
incidents or of any acts of war or terrorism in the United States or worldwide,
on the U.S. economy, on us or our hotels or on the market price of our common
shares.
Our
hotels are subject to general hotel industry operating risks, which may impact
our ability to make distributions to shareholders.
Our
hotels are subject to all operating risks common to the hotel industry. The
hotel industry has experienced volatility in the past, as have our hotels, and
there can be no assurance that such volatility will not occur in the future.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry that could adversely affect hotel revenues;
increases in operating costs due to inflation and other factors, which may not
be offset by increased room rates; reduction in business and commercial travel
and tourism; strikes and other labor disturbances of hotel employees; increases
in energy costs and other expenses of travel; adverse effects of general and
local economic conditions; and adverse political conditions. These factors could
reduce revenues of the hotels and adversely affect our ability to make
distributions to our shareholders.
Our
investments are concentrated in a single segment of the hotel
industry.
Our
current business strategy is to own and acquire hotels primarily in the high
quality, upscale and mid-scale limited service and extended-stay segment of the
hotel industry. We are subject to risks inherent in concentrating investments in
a single industry and in a specific market segment within that industry. The
adverse effect on amounts available for distribution to shareholders resulting
from a downturn in the hotel industry in general or the mid-scale segment in
particular could be more pronounced than if we had diversified our investments
outside of the hotel industry or in additional hotel market
segments.
Operating
costs and capital expenditures for hotel renovation may be greater than
anticipated and may adversely impact distributions to shareholders.
Hotels
generally have an ongoing need for renovations and other capital improvements,
particularly in older structures, including periodic replacement of furniture,
fixtures and equipment. Under the terms of our management agreements with HHMLP,
we are obligated to pay the cost of expenditures for items that are classified
as capital items under GAAP that are necessary for the continued operation of
our hotels. If these expenses exceed our estimate, the additional cost could
have an adverse effect on amounts available for distribution to shareholders. In
addition, we may acquire hotels in the future that require significant
renovation. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
hotels.
Competition
for guests is highly competitive.
The hotel
industry is highly competitive. Our hotels compete with other existing and new
hotels in their geographic markets. Many of our competitors have substantially
greater marketing and financial resources than we do. If their marketing
strategies are effective, we may be unable to make distributions to our
shareholders. Risks
of operating hotels under franchise licenses, which may be terminated or not
renewed, may impact our ability to make distributions to
shareholders.
The
continuation of the franchise licenses is subject to specified operating
standards and other terms and conditions. All of the franchisors of our hotels
periodically inspect our hotels to confirm adherence to their operating
standards. The failure of our partnership or HHMLP to maintain such standards or
to adhere to such other terms and conditions could result in the loss or
cancellation of the applicable franchise license. It is possible that a
franchisor could condition the continuation of a franchise license on the
completion of capital improvements that the trustees determine are too expensive
or otherwise not economically feasible in light of general economic conditions,
the operating results or prospects of the affected hotel. In that event, the
trustees may elect to allow the franchise license to lapse or be
terminated.
There can
be no assurance that a franchisor will renew a franchise license at each option
period. If a franchisor terminates a franchise license, we, our partnership, and
HHMLP may be unable to obtain a suitable replacement franchise, or to
successfully operate the hotel independent of a franchise license. The loss of a
franchise license could have a material adverse effect upon the operations or
the underlying value of the related hotel because of the loss of associated name
recognition, marketing support and centralized reservation systems provided by
the franchisor. Our loss of a franchise license for one or more of the hotels
could have a material adverse effect on our partnership’s revenues and our
amounts available for distribution to shareholders.
The
hotel industry is seasonal in nature.
The hotel
industry is seasonal in nature. Generally, hotel revenues are greater in the
second and third quarters than in the first and fourth quarters. Our hotels’
operations historically reflect this trend. We believe that we will be able to
make distributions necessary to maintain REIT status through cash flow from
operations; but if we are unable to do so, we may not be able to make the
necessary distributions or we may have to generate cash by a sale of assets,
increasing indebtedness or sales of securities to make the distributions. Risks
of operating hotels under franchise licenses, which may be terminated or not
renewed, may impact our ability to make distributions to
shareholders.
RISKS
RELATING TO OUR BUSINESS AND OPERATIONS
We
face risks associated with the use of debt, including refinancing
risk.
At
December 31, 2007, we had long-term debt, excluding capital leases, outstanding
of $619.3 million. We may borrow additional amounts from the same or other
lenders in the future. Some of these additional borrowings may be secured by our
hotels. Our strategy is to maintain target debt levels of approximately 60% of
the total purchase price of our hotels both on an individual and aggregate
basis, and our Board of Trustees’ policy is to limit indebtedness to no more
than 67% of the fair market value of the hotels in which we have invested.
However, our declaration of trust (as amended and restated, our “Declaration of
Trust”) does not limit the amount of indebtedness we may incur. We cannot assure
you that we will be able to meet our debt service obligations and, to the extent
that we cannot, we risk the loss of some or all of our hotels to foreclosure.
There is also a risk that we may not be able to refinance existing debt or that
the terms of any refinancing will not be as favorable as the terms of the
existing debt. If principal payments due at maturity cannot be refinanced,
extended or repaid with proceeds from other sources, such as new equity capital
or sales of properties, our cash flow may not be sufficient to repay all
maturing debt in years when significant “balloon” payments come
due.
If
we cannot access the capital markets, we may not be able to grow the Company at
our historical growth rates.
We may
not be able to access the capital markets to obtain capital to fund future
acquisitions and investments. The market for real estate related debt and equity
capital could endure a prolonged period of volatility which may limit our
ability to access new capital for acquisitions, investments and joint ventures.
If we lack the capital to make future acquisitions or investments, we may not be
able to continue to grow at historical rates.
We
face high levels of competition for the acquisition of hotel properties and
other assets, which may impede our ability to make future acquisitions or may
increase the cost of these acquisitions.
We face
competition for investment opportunities in high quality, upscale and mid-scale
limited service and extended-stay hotels from entities organized for purposes
substantially similar to our objectives, as well as other purchasers of hotels.
We compete for such investment opportunities with entities that have
substantially greater financial resources than we do, including access to
capital or better relationships with franchisors, sellers or lenders. Our
competitors may generally be able to accept more risk than we can manage
prudently and may be able to borrow the funds needed to acquire hotels.
Competition may generally reduce the number of suitable investment opportunities
offered to us and increase the bargaining power of property owners seeking to
sell. We
do not operate our hotels and, as a result, we do not have complete control over
implementation of our strategic decisions.
In order
for us to satisfy certain REIT qualification rules, we cannot directly operate
any of our hotels. Instead, we must engage an independent management
company to operate our hotels. As of December 31, 2007, our TRSs and
our joint venture partnerships have engaged independent management companies as
the property managers for all of our wholly owned hotels leased to our TRSs and
the respective hotels for the joint ventures, as required by the REIT
qualification rules. The management companies operating the hotels
make and implement strategic business decisions with respect to these hotels,
such as decisions with respect to the repositioning of a franchise or food and
beverage operations and other similar decisions. Decisions made by
the management companies operating the hotels may not be in the best interests
of a particular hotel or of our company. Accordingly, we cannot
assure you that the management companies will operate our hotels in a manner
that is in our best interests.
Our
acquisitions may not achieve expected performance, which may harm our financial
condition and operating results.
We
anticipate that acquisitions will largely be financed with the net proceeds of
securities offerings and through externally generated funds such as borrowings
under credit facilities and other secured and unsecured debt financing.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that estimates of the cost of improvements necessary to
acquire and market properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. Because we must
distribute annually at least 90% of our taxable income to maintain our
qualification as a REIT, our ability to rely upon income or cash flow from
operations to finance our growth and acquisition activities will be limited.
Accordingly, were we unable to obtain funds from borrowings or the capital
markets to finance our growth and acquisition activities, our ability to grow
could be curtailed, amounts available for distribution to shareholders could be
adversely affected and we could be required to reduce
distributions.
We
depend on key personnel.
We depend
on the services of our existing senior management team, including
Jay H. Shah, Neil H. Shah, Ashish R. Parikh and
Michael R. Gillespie, to carry out our business and investment
strategies. As we expand, we will continue to need to attract and retain
qualified additional senior management. We have employment contracts with
certain of our senior management; however, the employment agreements may be
terminated under certain circumstances. The termination of an employment
agreement and the loss of the services of any of our key management personnel,
or our inability to recruit and retain qualified personnel in the future, could
have an adverse effect on our business and financial results.
Acquisition
of hotels with limited operating history may not achieve desired
results.
Many of
our recent acquisitions are newly-developed hotels. Newly-developed or
newly-renovated hotels do not have the operating history that would allow our
management to make pricing decisions in acquiring these hotels based on
historical performance. The purchase prices of these hotels are based upon
management’s expectations as to the operating results of such hotels, subjecting
us to risks that such hotels may not achieve anticipated operating results or
may not achieve these results within anticipated time frames. As a result, we
may not be able to generate enough cash flow from these hotels to make debt
payments or pay operating expenses. In addition, room revenues may be less than
that required to provide us with our anticipated return on investment. In either
case, the amounts available for distribution to our shareholders could be
reduced.
We
may be unable to integrate acquired hotels into our operations or otherwise
manage our planned growth, which may adversely affect our operating
results.
We have
recently acquired a substantial number of hotels. We cannot assure you that we
or HHMLP will be able to adapt our management, administrative, accounting and
operational systems and arrangements, or hire and retain sufficient operational
staff to successfully integrate these investments into our portfolio and manage
any future acquisitions of additional assets without operational disruptions or
unanticipated costs. Acquisition of hotels generates additional operating
expenses that we will be required to pay. As we acquire additional hotels, we
will be subject to the operational risks associated with owning new lodging
properties. Our failure to integrate successfully any future acquisitions into
our portfolio could have a material adverse effect on our results of operations
and financial condition and our ability to pay dividends to shareholders or make
other payments in respect of securities issued by us.
Most
of our hotels are located in the Eastern United States and many are located in
the area from Pennsylvania to Connecticut, which may increase the effect of any
regional or local economic conditions.
Most of
our hotels are located in the Eastern United States. Thirty-two of our wholly
owned hotels and twelve of our joint venture hotels are located in the states of
Pennsylvania, New Jersey, New York and Connecticut. As a result, regional or
localized adverse events or conditions, such as an economic recession around
these hotels, could have a significant adverse effect on our operations, and
ultimately on the amounts available for distribution to
shareholders. Downward
adjustments, or “mark-to-market losses,” would reduce our shareholders’
equity.
Hedging
involves risk and typically involves costs, including transaction costs, which
may reduce returns on our investments. These costs increase as the period
covered by the hedging increases and during periods of rising and volatile
interest rates. These costs will also limit the amount of cash available for
distribution to shareholders. The REIT qualification rules may also limit our
ability to enter into hedging transactions. We generally intend to hedge as much
of our interest rate risk as our management determines is in our best interests
given the cost of such hedging transactions and the requirements applicable to
REITs. If we are unable to hedge effectively because of the cost of such hedging
transactions or the limitations imposed by the REIT rules, we will face greater
interest risk exposure than may be commercially prudent.
We
own a limited number of hotels and significant adverse changes at one hotel may
impact our ability to make distributions to shareholders.
As of
December 31, 2007, our portfolio consisted of 53 wholly-owned limited and full
service properties and joint venture investments in 18 hotels with a total of
9,129 rooms. Significant adverse changes in the operations of any one hotel
could have a material adverse effect on our financial performance and,
accordingly, on our ability to make expected distributions to our
shareholders.
We
focus on acquiring hotels operating under a limited number of franchise brands,
which creates greater risk as the investments are more
concentrated.
We place
particular emphasis in our acquisition strategy on hotels similar to our current
hotels. We invest in hotels operating under a few select franchises and
therefore will be subject to risks inherent in concentrating investments in a
particular franchise brand, which could have an adverse effect on amounts
available for distribution to shareholders. These risks include, among others,
the risk of a reduction in hotel revenues following any adverse publicity
related to a specific franchise brand.
We
may engage in hedging transactions, which can limit our gains and increase
exposure to losses.
We may
enter into hedging transactions to protect us from the effects of interest rate
fluctuations on floating rate debt and also to protect our portfolio of mortgage
assets from interest rate and prepayment rate fluctuations. Our hedging
transactions may include entering into interest rate swaps, caps, and floors,
options to purchase such items, and futures and forward contracts. Hedging
activities may not have the desired beneficial impact on our results of
operations or financial condition. No hedging activity can completely insulate
us from the risks associated with changes in interest rates and prepayment
rates. Moreover, interest rate hedging could fail to protect us or could
adversely affect us because, among other things:
RISKS
RELATING TO CONFLICTS OF INTEREST
Due
to conflicts of interest, many of our existing agreements may not have been
negotiated on an arm’s-length basis and may not be in our best
interest.
Some of
our officers and trustees have ownership interests in HHMLP and in entities with
which we have entered into transactions, including hotel acquisitions and
dispositions and certain financings. Consequently, the terms of our agreements
with those entities, including hotel contribution or purchase agreements, the
Option Agreement between the operating partnership and some of the trustees and
officers and our property management agreements with HHMLP may not have been
negotiated on an arm’s-length basis and may not be in the best interest of all
our shareholders.
Conflicts
of interest with other entities may result in decisions that do not reflect our
best interests.
The
following officers and trustees own collectively approximately 70% of HHMLP:
Hasu P. Shah, Jay H. Shah, Neil H. Shah,
David L. Desfor and Kiran P. Patel. Conflicts of
interest may arise in respect to the ongoing acquisition, disposition and
operation of our hotels including, but not limited to, the enforcement of the
contribution and purchase agreements, the Option Agreement and our property
management agreements with HHMLP. Consequently, the interests of
shareholders may not be fully represented in all decisions made or actions taken
by our officers and trustees. Conflicts
of interest relating to sales or refinancing of hotels acquired from some of our
trustees and officers may lead to decisions that are not in our best
interest.
Some of
our trustees and officers have unrealized gains associated with their interests
in the hotels we have acquired from them and, as a result, any sale of these
hotels or refinancing or prepayment of principal on the indebtedness assumed by
us in purchasing these hotels may cause adverse tax consequences to such of our
trustees and officers. Therefore, our interests and the interests of these
individuals may be different in connection with the disposition or refinancing
of these hotels.
Agreements
to provide financing of hotel development projects owned by some of our trustees
and officers may not have been negotiated on an arm’s-length basis and may not
be in our best interest.
Some of
our officers and trustees have ownership interests in projects to develop hotel
properties with which we have entered into agreements to provide financing.
Consequently, the terms of our agreements with those entities, including
interest rates and other key terms, may not have been negotiated on an
arm’s-length basis and may not be in the best interest of all our
shareholders.
Competing
hotels owned or acquired by some of our trustees and officers may hinder these
individuals from spending adequate time on our business.
Some of
our trustees and officers own hotels and may develop or acquire new hotels,
subject to certain limitations. Such ownership, development or acquisition
activities may materially affect the amount of time these officers and trustees
devote to our affairs. Some of our trustees and officers operate hotels that are
not owned by us, which may materially affect the amount of time that they devote
to managing our hotels. Pursuant to the Option Agreement, as amended, we have an
option to acquire any hotels developed by our officers and
trustees.
Need
for certain consents from the limited partners may not result in decisions
advantageous to shareholders.
Under our
operating partnership’s amended and restated partnership agreement, the holders
of at least two-thirds of the interests in the partnership must approve a sale
of all or substantially all of the assets of the partnership or a merger or
consolidation of the partnership. Some of our officers and trustees will own an
approximately 6.8% interest in the operating partnership on a fully-diluted
basis. Their large ownership percentage may make it less likely that a merger or
sale of our company that would be in the best interests of our shareholders will
be approved.
RISKS
RELATING TO OUR CORPORATE STRUCTURE
There
are no assurances of our ability to make distributions in the
future.
We intend
to pay quarterly dividends and to make distributions to our shareholders in
amounts such that all or substantially all of our taxable income in each year,
subject to certain adjustments, is distributed. However, our ability to pay
dividends may be adversely affected by the risk factors described in this annual
report. All distributions will be made at the discretion of our Board of
Trustees and will depend upon our earnings, our financial condition, maintenance
of our REIT status and such other factors as our board may deem relevant from
time to time. There are no assurances of our ability to pay dividends in the
future. In addition, some of our distributions may include a return of
capital.
An
increase in market interest rates may have an adverse effect on the market price
of our securities.
One of
the factors that investors may consider in deciding whether to buy or sell our
securities is our dividend rate as a percentage of our share or unit price,
relative to market interest rates. If market interest rates increase,
prospective investors may desire a higher dividend or interest rate on our
securities or seek securities paying higher dividends or interest. The market
price of our common shares likely will be based primarily on the earnings and
return that we derive from our investments and income with respect to our
properties and our related distributions to shareholders, and not from the
market value or underlying appraised value of the properties or investments
themselves. As a result, interest rate fluctuations and capital market
conditions can affect the market price of our common shares. For instance, if
interest rates rise without an increase in our dividend rate, the market price
of our common shares could decrease because potential investors may require a
higher dividend yield on our common shares as market rates on interest-bearing
securities, such as bonds, rise. In addition, rising interest rates would result
in increased interest expense on our variable rate debt, thereby adversely
affecting cash flow and our ability to service our indebtedness and pay
dividends. Holders
of our outstanding Series A preferred shares have dividend, liquidation and
other rights that are senior to the rights of the holders of our common
shares.
Our Board
of Trustees has the authority to designate and issue preferred shares with
liquidation, dividend and other rights that are senior to those of our common
shares. As of December 31, 2007, 2,400,000 shares of our Series A preferred
shares were issued and outstanding. The aggregate liquidation preference with
respect to the outstanding preferred shares is approximately $60.0 million, and
annual dividends on our outstanding preferred shares are approximately $4.8
million. Holders of our Series A preferred shares are entitled to cumulative
dividends before any dividends may be declared or set aside on our common
shares. Upon our voluntary or involuntary liquidation, dissolution or winding
up, before any payment is made to holders of our common shares, holders of our
Series A preferred shares are entitled to receive a liquidation preference of
$25.00 per share plus any accrued and unpaid distributions. This will reduce the
remaining amount of our assets, if any, available to distribute to holders of
our common shares. In addition, holders of our Series A preferred shares have
the right to elect two additional trustees to our Board of Trustees whenever
dividends are in arrears in an aggregate amount equivalent to six or more
quarterly dividends, whether or not consecutive.
Future
offerings of equity securities, which would dilute our existing shareholders and
may be senior to our common shares for the purposes of dividend distributions,
may adversely affect the market price of our common shares.
In the
future, we may attempt to increase our capital resources by making additional
offerings of equity securities, including classes of preferred or common shares.
Upon liquidation, holders of our preferred shares and lenders with respect to
other borrowings will receive a distribution of our available assets prior to
the holders of our common shares. Additional equity offerings may dilute the
holdings of our existing shareholders or reduce the market price of our common
shares, or both. Our preferred shares, if issued, could have a preference on
liquidating distributions or a preference on dividend payments that could limit
our ability to make a dividend distribution to the holders of our common shares.
Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, our
shareholders bear the risk of our future offerings reducing the market price of
our common shares and diluting their share holdings in us.
Our
Board of Trustees may issue additional shares that may cause dilution or prevent
a transaction that is in the best interests of our shareholders.
Our
Declaration of Trust authorizes the Board of Trustees, without shareholder
approval, to:
Any one
of these events could cause dilution to our common shareholders, delay, deter or
prevent a transaction or a change in control that might involve a premium price
for the common shares or otherwise not be in the best interest of holders of
common shares.
Our
ownership limitation may restrict business combination
opportunities.
To
qualify as a REIT under the Code, no more than 50% of the value of our
outstanding shares of beneficial interest may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue Code to include
certain entities) during the last half of each taxable year. To preserve our
REIT qualification, our Declaration of Trust generally prohibits direct or
indirect ownership of more than 9.9% of (i) the number of outstanding common
shares of any class or series of common shares or (ii) the number of outstanding
preferred shares of any class or series of preferred shares. Generally, shares
owned by affiliated owners will be aggregated for purposes of the ownership
limitation. The ownership limitation could have the effect of delaying,
deterring or preventing a change in control or other transaction in which
holders of shares might receive a premium for their shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests.
The
Declaration of Trust contains a provision that creates staggered terms for our
Board of Trustees.
Our Board
of Trustees is divided into two classes. The terms of the first and second
classes expire in 2008 and 2009, respectively. Trustees of each class are
elected for two-year terms upon the expiration of their current terms and each
year one class of trustees will be elected by the shareholders. The staggered
terms of trustees may delay, deter or prevent a tender offer, a change in
control of us or other transaction, even though such a transaction might be in
the best interest of the shareholders. Maryland
Business Combination Law may discourage a third party from acquiring
us.
Under the
Maryland General Corporation Law, as amended (MGCL), as applicable to REITs,
certain “business combinations” (including certain issuances of equity
securities) between a Maryland REIT and any person who beneficially owns ten
percent or more of the voting power of the trust’s shares, or an affiliate
thereof, are prohibited for five years after the most recent date on which this
shareholder acquired at least ten percent of the voting power of the trust’s
shares. Thereafter, any such business combination must be approved by two
super-majority shareholder votes unless, among other conditions, the trust’s
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its common shares. These
provisions could delay, deter or prevent a change of control or other
transaction in which holders of our equity securities might receive a premium
for their shares above then-current market prices or which such shareholders
otherwise might believe to be in their best interests.
Our
Board of Trustees may change our investment and operational policies without a
vote of the common shareholders.
Our major
policies, including our policies with respect to acquisitions, financing,
growth, operations, debt limitation and distributions, are determined by our
Board of Trustees. The Trustees may amend or revise these and other policies
from time to time without a vote of the holders of the common
shares.
Our
Board of Trustees and management make decisions on our behalf, and shareholders
have limited management rights.
Our
shareholders have no right or power to take part in our management except
through the exercise of voting rights on certain specified matters. The board of
trustees is responsible for our management and strategic business direction, and
our management is responsible for our day-to-day operations. Certain policies of
our board of trustees may not be consistent with the immediate best interests of
our securityholders.
RISKS
RELATED TO OUR TAX STATUS
If
we fail to qualify as a REIT, our dividends will not be deductible to us, and
our income will be subject to taxation.
We have
operated and intend to continue to operate so as to qualify as a REIT for
federal income tax purposes. Our continued qualification as a REIT will depend
on our continuing ability to meet various requirements concerning, among other
things, the ownership of our outstanding shares of beneficial interest, the
nature of our assets, the sources of our income, and the amount of our
distributions to our shareholders. If we were to fail to qualify as a REIT in
any taxable year and do not qualify for certain statutory relief provisions, we
would not be allowed a deduction for distributions to our shareholders in
computing our taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Unless entitled to relief under certain Internal
Revenue Code provisions, we also would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification was
lost. As a result, amounts available for distribution to shareholders would be
reduced for each of the years involved. Although we currently intend to operate
in a manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the trustees, with the
consent of holders of two-thirds of the outstanding shares, to revoke the REIT
election.
Failure
to make required distributions would subject us to tax.
In order
to qualify as a REIT, each year we must distribute to our shareholders at least
90% of our REIT taxable income, other than any net capital gain. To the extent
that we satisfy the distribution requirement, but distribute less than 100% of
our taxable income, we will be subject to federal corporate income tax on our
undistributed income. In addition, we will incur a 4% nondeductible excise tax
on the amount, if any, by which our distributions in any year are less than the
sum of:
We have
paid out, and intend to continue to pay out, our income to our shareholders in a
manner intended to satisfy the distribution requirement and to avoid corporate
income tax and the 4% nondeductible excise tax. Differences in timing between
the recognition of income and the related cash receipts or the effect of
required debt amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in a particular year. In the past we have borrowed, and in the future we may
borrow, to pay distributions to our shareholders and the limited partners of our
operating partnership. Such borrowings subject us to risks from borrowing as
described herein. The
taxation of corporate dividends may adversely affect the value of our common
shares.
Legislation
enacted in 2003 and 2006, among other things, generally reduced to 15% the
maximum marginal rate of tax payable by domestic noncorporate taxpayers on
dividends received from a regular C corporation through 2010. This reduced tax
rate, however, does not apply to dividends paid by a REIT to domestic
noncorporate taxpayers, except for certain limited amounts. Although the
earnings of a REIT that are distributed to its shareholders are still generally
subject to less federal income taxation than earnings of a non-REIT C
corporation that are distributed to its shareholders net of corporate-level
income tax, this legislation could cause domestic noncorporate investors to view
the shares of regular C corporations as more attractive relative to the shares
of a REIT than was the case prior to the enactment of the legislation, because
the dividends from regular C corporations are generally taxed at a lower rate
while dividends from REITs are generally taxed at the same rate as the
individual’s other ordinary income. We cannot predict what effect, if any, the
enactment of this legislation may have on the value of the shares of REITs in
general or on our shares in particular, either in terms of price or relative to
other investments.
The
U.S. federal income tax laws governing REITs are complex.
We intend
to continue to operate in a manner that will qualify us as a real estate
investment trust, or REIT, under the U.S. federal income tax laws. The REIT
qualification requirements are extremely complex, however, and interpretations
of the U.S. federal income tax laws governing qualification as a REIT are
limited. Accordingly, we cannot be certain that we will be successful in
operating so we can continue to qualify as a REIT. At any time, new laws,
interpretations, or court decisions may change the federal tax laws or the U.S.
federal income tax consequences of our qualification as a REIT.
RISKS
RELATED TO REAL ESTATE INVESTMENT GENERALLY
Illiquidity
of real estate investments could significantly impede our ability to respond to
adverse changes in the performance of our properties and harm our financial
condition.
Real
estate investments are relatively illiquid. Our ability to vary our portfolio in
response to changes in operating, economic and other conditions will be limited.
No assurances can be given that the fair market value of any of our hotels will
not decrease in the future.
If
we suffer losses that are not covered by insurance or that are in excess of our
insurance coverage limits, we could lose investment capital and anticipated
profits.
We
require comprehensive insurance to be maintained on each of the our hotels,
including liability and fire and extended coverage in amounts sufficient to
permit the replacement of the hotel in the event of a total loss, subject to
applicable deductibles. However, there are certain types of losses, generally of
a catastrophic nature, such as earthquakes, floods, hurricanes and acts of
terrorism, that may be uninsurable or not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make it impracticable to use insurance proceeds to replace
the applicable hotel after such applicable hotel has been damaged or destroyed.
Under such circumstances, the insurance proceeds received by us might not be
adequate to restore our economic position with respect to the applicable hotel.
If any of these or similar events occur, it may reduce the return from the
attached property and the value of our investment.
REITs
are subject to property taxes.
Each
hotel is subject to real and personal property taxes. The real and personal
property taxes on hotel properties in which we invest may increase as property
tax rates change and as the properties are assessed or reassessed by taxing
authorities. Many state and local governments are facing budget deficits which
has led many of them, and may in the future lead others to, increase assessments
and/or taxes. If property taxes increase, our ability to make expected
distributions to our shareholders could be adversely affected.
Environmental
matters could adversely affect our results.
Operating
costs may be affected by the obligation to pay for the cost of complying with
existing environmental laws, ordinances and regulations, as well as the cost of
future legislation. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. The cost of complying with
environmental laws could materially adversely affect amounts available for
distribution to shareholders. Phase I environmental assessments have been
obtained on all of our hotels. Nevertheless, it is possible that these reports
do not reveal all environmental liabilities or that there are material
environmental liabilities of which we are unaware. Costs
associated with complying with the Americans with Disabilities Act may adversely
affect our financial condition and operating results.
Under the
Americans with Disabilities Act of 1993 (ADA), all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. While we believe that our hotels are substantially in
compliance with these requirements, a determination that we are not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels, including changes to building codes and fire and life-safety codes, may
occur. If we were required to make substantial modifications at the hotels to
comply with the ADA or other changes in governmental rules and regulations, our
ability to make expected distributions to our shareholders could be adversely
affected.
Item 1B. Unresolved Staff
Comments
None. Item
2.
Properties
The
following table sets forth certain information with respect to the hotels we
wholly owned as of December 31, 2007.
The
following table sets forth certain information with respect to the hotels we
owned through joint ventures with third parties as of December 31,
2007.
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