Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto. This section includes discussion of financial information as of and for the year ended December 31, 2021 and provides comparisons to the same information as of and for the year ended December 31, 2020. Comparisons of 2020 financial information to the same information for 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission on March 29, 2021.
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, 2021, we owned interests in 36 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles, Seattle, and Miami including 32 wholly-owned hotels, 1 hotel through our interest in a consolidated joint venture, and interests in 3 hotels owned through unconsolidated joint ventures. 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, as defined under the REIT rules, to manage the hotels. As of December 31, 2021, 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. Each TRS directly receives all revenue from, and funds all expenses relating to, hotel operations of the hotels that it leases. Each TRS is also subject to income tax on its earnings.
COVID-19
We started to realize the effects from the global economic slowdown caused by the COVID-19 pandemic in March of 2020. Due to the COVID-19 pandemic and the effects of travel restrictions both globally and in the United States, the hospitality industry has experienced drastic drops in demand. Following the government mandates and health official recommendations, and after evaluating the cost of running our respective properties at low occupancy levels versus closing the properties, we originally closed 21 hotel properties in 2020 and dramatically reduced staffing at the hotels that remained open and at the corporate level. We subsequently reopened all of our consolidated hotels by the end of the first quarter 2021, except the Duane St. hotel which we disposed of in the second quarter of 2021. The reopening of our consolidated hotels provided us the opportunity to capture incremental demand through the end of 2020 and during the early stages of an economic recovery in 2021.
The global impact of the pandemic continues to evolve, and in the United States, certain states and cities, including most of the states and cities where we own properties, have reacted by instituting various restrictive measures such as quarantines, restrictions on travel, school closings, "stay at home" rules and restrictions on types of business that may continue to operate. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material negative impact on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic. In addition to our focus on strategically reopening hotels and driving occupancy at these hotels, we have remained focused on executing expense mitigation measures and shoring up our liquidity position as we continue to face a challenging operating environment. We suspended our common and preferred dividends in 2020 and during the year ended December 31, 2021, we paid approximately $24.2 million in preferred dividend arrearage that was not paid in 2020. We also deferred certain planned capital expenditures for 2020 and continued to reduce capital expenditures in 2021. In February 2021, the Company entered into an unsecured notes facility that provided net proceeds of $144.8 million at closing. The initial net proceeds of $144.8 million provided by this facility, along with a portion of the proceeds from asset sales, were used to repay amounts outstanding under our credit agreements, allowing us to amend our credit agreements on February 17, 2021, eliminating maturities under the credit agreements until August of 2022. The credit agreement amendments also waived all financial covenants through March 31, 2022, established accommodative covenant testing methodology through December 31, 2022, and provided additional liquidity at the Company’s discretion.
The manner in which the ongoing COVID-19 pandemic will be resolved or the manner that the hospitality and tourism industries will return to historical performance norms, and whether the economy will contract or grow are not reasonably predictable. As a result, there can be no assurances that we will be able to achieve the hotel operating metrics or the results
at our properties we have forecasted. Factors that might contribute to less-than-anticipated performance include those described under the heading "Risk Factors" in this report and other documents that we may file with the SEC in the future. We will continue to cautiously monitor lodging demand and rates, our third-party hotel managers, and our performance generally.
SUMMARY OF OPERATING RESULTS
The following tables outline operating results for the Company’s portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the years ended December 31, 2021, and 2020. Common key performance metrics utilized by the lodging industry are occupancy, average daily rate ("ADR"), and revenue per available room ("RevPAR"). Occupancy is calculated as the percentage total rooms sold compared to rooms available to be sold, while ADR measures the average rate earned per occupied room, calculated as total room revenue divided by total rooms sold. RevPAR is a derivative of these two metrics which shows the total room revenue earned per room available to be sold. Management uses these metrics in comparison to other hotels in our self-defined competitive peer set within proximity to each of our hotel properties.
We define a comparable consolidated hotel as one that is currently consolidated, that we have owned in whole or in part for the entirety of the periods being presented, and is deemed fully operational as of the end of the period reported. Based on this definition, for the year ended December 31, 2021, there are 33 comparable consolidated hotels.
For the comparison of December 31, 2021 to December 31, 2020, comparable hotel operating results contain results from our consolidated hotels owned as of December 31, 2021, excluding the results of all hotels sold during the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | |
| COMPARABLE CONSOLIDATED HOTELS: | | | | | |
| (Includes 33 hotels in both years) |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 | | 2021 vs. 2020 % Variance |
| (dollars in thousands except ADR and RevPAR) |
| Occupancy | 56.3 | % | | 36.5 | % | | 1,983 bps |
| Average Daily Rate (ADR) | $ | 215.22 | | | $ | 181.36 | | | 18.7% |
| Revenue Per Available Room (RevPAR) | $ | 121.24 | | | $ | 66.20 | | | 83.1% |
| | | | | |
| Room Revenues | $ | 236,047 | | | $ | 128,757 | | | 83.3% |
| Hotel Operating Revenues | $ | 291,931 | | | $ | 159,460 | | | 83.1% |
Overall, our comparable hotel portfolio experienced meaningful recovery in 2021 from the significant disruptions in 2020 as a result of the COVID-19 pandemic. This increase in demand across the entire hotel industry resulted in 2021 operating results far above 2020. RevPAR for the year ended December 31, 2021 increased 83.1% for our comparable consolidated hotels when compared to 2020.
Comparison of the Year Ended December 31, 2021 to December 31, 2020
(dollars in thousands)
Revenue
Our total revenues for the years ended December 31, 2021 and 2020 consisted of hotel operating revenues and other revenue. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $119,423 or 67.7%, to $295,866 for the year ended December 31, 2021 compared to $176,443 for the same period in 2020. This increase is primarily attributable to an increase in demand across our portfolio in 2021 as the comparable period in 2020 was at the nadir of the reduction in operations across our portfolio due to the decrease in demand caused by the COVID-19 pandemic. The increase in demand is partially offset by a reduction in hotel operating revenue of $13,301 attributable to the sale of five hotels during the year ended December 31, 2021 and the sale of one hotel in December of 2020.
Expenses
Total hotel operating expenses were $178,156 for the year ended December 31, 2021 compared to $140,256 for the year ended December 31, 2020. The increase in hotel operating expenses is due to increased operations at our hotels for the year ended December 31, 2021 as we had temporarily closed certain of our hotels and reduced operations at the remaining hotels as a result of the decrease in demand caused by the COVID-19 pandemic during the year ended December 31, 2020. This increase in hotel operating expense is partially offset by a reduction of hotel operating expenses of $12,154 as a result of the sale of hotels noted above.
Depreciation and amortization decreased by 14.1%, or $13,649, to $83,309 for the year ended December 31, 2021 from $96,958 for the year ended December 31, 2020. We incurred a reduction in depreciation and amortization expense of $7,071 as a result of the 2020 and 2021 hotel dispositions noted above. The remaining reduction in expense is primarily attributable to assets that fully depreciated during 2020 and 2021 which were acquired as part of a 2015 or 2016 acquisition, or a large renovation project that was completed five to seven years ago.
Real estate and personal property tax and property insurance decreased $4,141, or 10.1%, for the year ended December 31, 2021 when compared to 2020. Real estate and personal property taxes decreased $4,272, which was partially offset by an increase in property insurance of approximately $131. Approximately $2,469 of the total decrease in real estate and personal property taxes is a result of the dispositions noted above, and the remaining decrease is attributable to a decrease in real estate tax assessments, specifically in the New York City, Florida and Washington D.C. markets. Our property insurance costs generally rise annually, which was partially offset in 2021 by a $538 reduction in expense as a result of the hotel dispositions noted above.
General and administrative expense increased by $2,949 to $23,027 for the year ended December 31, 2021 from $20,078 for the year ended December 31, 2020. General and administrative expense includes expenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as compensation to the Company’s trustees, executives, and employees. Expenses related to non-cash share based compensation increased $2,545 when comparing the year ended December 31, 2021 to 2020. This increase resulted primarily from an increase in the valuation of certain market based award programs and a difference in the timing of share based compensation recognition. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our stock based compensation.
Loss on Impairment of Assets
During the year ended December 31, 2020, the Company recorded an impairment charge of $1,069 related to the Duane Street Hotel, which was held for sale as of December 31, 2020. During the year ended December 31, 2020, we determined that the carrying value of the hotel exceeded the anticipated net proceeds from sale, resulting in the impairment charge. During the year ended December 31, 2021, we incurred an additional impairment charge of $222, which primarily relates to an additional impairment charge incurred prior to the disposition of the Duane Street hotel during the year ended December 31, 2021.
Insurance Recoveries in Excess of Property Loss
During the year ended December 31, 2021, the Company recorded a gain from insurance recoveries in the amount of $711 compared to property losses in excess of recoveries of $8,960 during the comparable period in 2020. During the year ended December 31, 2020, the Company received a total of $10,749 in insurance proceeds, which was offset by a total of $1,789 in funds applied to previously recorded insurance receivables. The insurance proceeds in 2020 include a final settlement payment of $8,147 from our insurer related to the Hurricane Irma damages incurred at the Parrot Key Hotel & Villas. During the year ended December 31, 2021, we received net proceeds of $961 from COVID-19 business interruption claims, which was partially offset by a $250 deductible at our Hampton Inn Philadelphia hotel.
Operating Loss
Operating loss for the year ended December 31, 2021 was $29,592 compared to operating loss of $122,389 during the same period in 2020. Our decrease in operating loss was primarily driven by the increase in hotel operating revenues, which is the result of an increase in demand across our portfolio, while maintaining certain cost containment strategies in place due to the COVID-19 pandemic. Additionally, we had a decrease in depreciation and amortization expense during the year ended December 31, 2021 compared to 2020 primarily as a result of the hotel disposals noted above. Partially offsetting this decreased loss was a decrease in insurance recoveries.
Interest Expense
Interest expense increased $4,270 from $53,279 for the year ended December 31, 2020 to $57,549 for the year ended December 31, 2021. The balance of our borrowings, excluding discounts and deferred costs, have decreased by $71,341 in total between December 31, 2020 and December 31, 2021. However, we experienced an increase in our weighted average interest rate, driven by the unsecured junior notes payable facility we entered into in February 2021, and increased interest expense related to the amortization of additional deferred costs incurred during the year ended December 31, 2021. Proceeds from the junior notes payable were used to reduce borrowings under our secured credit facility and term loans.
Gain on Disposition of Hotel Properties
During the year ended December 31, 2021, we sold the Residence Inn Coconut Grove, the Courtyard San Diego, the Capitol Hill Hotel, the Holiday Inn Express Cambridge Hotel and the Duane Street Hotel. The sale of these hotels, excluding the Duane Street Hotel, resulted in gains totaling $48,352 for the year ended December 31, 2021. During the year ended December 31, 2020, the Company sold the Sheraton Wilmington and recorded a gain of $1,158 as a result.
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. Loss from our unconsolidated joint ventures decreased by $646 to a loss of $2,292 for the year ended December 31, 2021 compared to loss of $2,938 during the same period in 2020. This reduction in losses relates to the net operating losses of our joint venture properties for the year ended December 31, 2021 compared to 2020.
Income Tax Expense
During the year ended December 31, 2021, the Company recorded income tax expense of $838 compared to income tax expense of $11,329 for the year ended December 31, 2020. After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe that as of December 31, 2021, it is not more likely than not that we will be able to realize our net deferred tax asset and therefore, maintained the full valuation allowance that was established during the second quarter of 2020, which was the primary driver of income tax expense in 2020. As a result, the balance of our net deferred tax asset at December 31, 2021 is $0. Absent the valuation allowance, the amount of income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”).
Net Loss Applicable to Common Shareholders
Net loss applicable to common shareholders for the year ended December 31, 2021 was $64,347 compared to a net loss of $190,521 during the same period in 2020. This decrease in loss is primarily related to an increase in gain on hotel dispositions of $47,194, as well as a decrease in operating loss of $92,797.
Comprehensive Loss Income Applicable to Common Shareholders
Comprehensive loss applicable to common shareholders for the year ended December 31, 2021 was $47,819 compared to $210,806 for the same period in 2020. This change can be attributed to the items affecting Net Loss Applicable to Common Shareholders as more fully described above, as well as an increase in Other Comprehensive Income of $40,694.
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except share data)
Potential Sources of Capital
Our organizational documents do not limit the amount of indebtedness that we may incur. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage and borrowing restrictions imposed by debt covenants and existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its investments.
In addition, our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, nonrecourse financing arrangements. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. Future deterioration in market conditions could cause restrictions in our access to the cash flow of additional properties.
In addition to the incurrence of debt and the offering of equity securities, dispositions of property may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets or from sales of non-core hotels in secondary and tertiary markets. Capital from these types of transactions is intended to be redeployed into high growth acquisitions, share buybacks, or to pay down existing debt.
Junior Unsecured Notes Facility, Credit Facility and Term Loans
In February 2021, the Company entered into a junior unsecured notes facility (“Junior Notes”) that provided net proceeds of $144,750 at closing. The Junior Notes bear interest at a rate of 9.50%, of which half, or 4.75%, will be paid in cash with the remaining half added to the principal of the note through March 31, 2022. The Junior Notes mature in February of 2026 and are non-callable through February 2022. The Junior Notes are callable at 104% beginning February of 2022, 102% beginning in February 2023, and at par any time beginning in February 2024.
The net proceeds of $144,750 provided by the Junior Notes, along with a portion of the proceeds from asset sales, were used to repay amounts outstanding under the Credit Facility, the Second Term Loan, and the Third Term Loan. The Junior Notes and asset sales that closed in the first quarter of 2021 allowed the Company to execute amendments to credit agreements governing the Credit Facility, the Second Term Loan, and the Third Term Loan. These amendments eliminated term loan maturities until August of 2022, waived all financial covenants through March 31, 2022, established accommodative covenant testing methodology through December 31, 2022, enabled the Company to pay down the accrual of the Company’s preferred dividends and allow the ongoing preferred dividend accrual to be kept current, and provided additional liquidity at the Company’s discretion.
Our secured debt facilities aggregate to $747,481, which is comprised of a $442,404 senior secured credit facility and two secured term loans totaling $305,077. The secured credit facility (“Credit Facility”) contains a $192,404 secured term loan (“First Term Loan”) and a $250,000 secured revolving line of credit (“Line of Credit”), and expires on August 10, 2022. As of December 31, 2021, we had $118,684 outstanding under the Line of Credit. Our two additional secured term loans are $278,846 (“Second Term Loan”) and $26,231 (“Third Term Loan”), which mature on September 10, 2024 and August 10, 2022, respectively.
We will continue to monitor our debt maturities to manage our liquidity needs. As noted above, the Credit Facility and Third Term Loan totaling $337,319, including the $118,684 drawn on the Line of Credit as of December 31, 2021, will mature in August of 2022. Management intends to explore options including, but not limited to, additional asset sales, the refinancing of debt and the offering of equity or equity-linked securities prior to the maturity of the Credit Facility and the Third Term Loan in August of 2022. However, no assurances can be given that we will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms.
Common Share Repurchase Plan
There was no share repurchase program for the year-ended December 31, 2021.
Acquisitions
During the year ended December 31, 2021, we acquired no hotel properties. We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in hotels will depend upon and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common or preferred shares, proceeds from the sale of assets, issuances of Common Units, issuances of preferred units or other securities or borrowings secured by hotel assets and under our Line of Credit.
Dispositions
During the year ended December 31, 2021, we disposed of five hotel properties for an aggregate sales price of $196,500 resulting in gain on dispositions of $48,352. The net proceeds were used to repay existing debt.
Operating Liquidity and Capital Expenditures
Our short-term liquidity requirements generally consist of funds necessary to pay our scheduled debt service and operating expenses and capital expenditures directly associated with our hotels. We expect to meet our short-term liquidity requirements, other than the Credit Facility and Third Term Loan maturities noted above, generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under the Line of Credit.
To qualify as a REIT, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and requires us to raise additional capital in order to grow our business and acquire additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we cannot guarantee that we will be able to make distributions to our shareholders.
We will seek to satisfy our 2022 debt maturities and long-term liquidity requirements through the refinancing of debt as well as various sources of capital, including borrowings under the Line of Credit and through secured, non-recourse mortgage financings with respect to our unencumbered hotel properties. In addition, we may seek to raise capital through public or private offerings of our securities. Currently the markets for financing and refinancing similar loans are open and absent an event that would impact the markets broadly, the Company believes that we will be able to refinance this debt. However, given the unpredictable nature of the recovery from the impact of COVID-19, certain factors may have a material adverse effect on our ability to refinance debt with current or new lenders and access capital sources, including our degree of leverage, the value of our unencumbered hotel properties and borrowing restrictions imposed by lenders or franchisors. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all. The failure to obtain a waiver or amendment, or otherwise repay the debt, could lead to an event of default, which would have a material adverse effect on our financial condition, which gives rise to substantial doubt about our ability to continue as a going concern.
At December 31, 2021, one of our mortgage borrowings failed its debt service coverage ratio ("DSCR") requirement. The lender for this mortgage has elected its right to escrow property level cash flow for the purpose of meeting future payment obligations. After considering the effect of the COVID-19 pandemic on our consolidated operations, it is possible that we could fail certain financial covenants within certain property-level mortgage borrowings. We have received financial covenant waivers from certain of our mortgage lenders, which provided us relief from financial covenants for a period of time and established accomodative covenant testing in 2022. For mortgages with financial covenants, the lenders' remedy of a covenant failure would be a requirement to escrow funds for the purpose of meeting our future debt payment obligations.
Spending on capital improvements during the year ended December 31, 2021 decreased when compared to spending on capital improvements during the year ended December 31, 2020. During the year ended December 31, 2021, we spent $10,873 on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $26,340 during the same period in 2020. These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will generate a return on investment. We may spend additional amounts, if necessary, to comply with the requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be prudent. We are also obligated to fund the cost of certain capital improvements to our hotels.
We expect to use operating cash flow, and if necessary, borrowings under the Line of Credit, proceeds from issuances of our securities and hotel dispositions, to pay for the cost of capital improvements and furniture, fixture and equipment requirements.
CASH FLOW ANALYSIS
(dollars in thousands)
Comparison of the Years Ended December 31, 2021 and December 31, 2020
Net cash provided by and used in operating activities increased by $73,697 from net cash used in operating activities of $57,465 for the year ended December 31, 2020 to net cash provided by operating activities of $16,232 for the year ended December 31, 2021. The increase in cash flow is primarily attributable to an increase in hotel property cash flow as a result of an increase in demand since the onset of the COVID-19 pandemic.
Net cash provided by investing activities for the year ended December 31, 2021 was $151,471 compared to net cash used in investing activities of $1,515 for the year ended December 31, 2020. The following items are the major contributing factors for the change in investing cash flows:
•An increase in comparative cash flows of $15,467 related to a decrease in spending on capital expenditures and planned property repositioning for the year ended December 31, 2021 compared to 2020. We continue to be extremely selective with capital expenditures in an effort to preserve liquidity;
•An increase in comparative cash flows of $143,992 from the sale of the Courtyard San Diego, the Capitol Hill Hotel, the Holiday Inn Express Cambridge, the Residence Inn Coconut Grove, and the Duane Street Hotel during the year ended December 31, 2021 compared to the sale of one hotel property sale, the Sheraton Wilmington, for the year ended December 31, 2020;
•A decrease in comparative cash flows from the receipt of $6,338 in insurance proceeds during the year ended December 31, 2020 related to claims for property losses, and no comparable insurance proceeds during the year ended December 31, 2021;
•During the year ended December 31, 2021, we made contributions to our SB Partners, and Hiren Boston joint ventures totaling $1,489 compared to contributions to our SB Partners and Hiren Boston joint ventures totaling $1,125 during the year ended December 31, 2020. Partially offseting our 2021 contributions to our joint ventures was a $250 distribution from our SB Partners Three joint venture.
Net cash used in financing activities for the year ended December 31, 2021 was $106,365 compared to net cash provided by financing activities for the year ended December 31, 2020 of $45,602. The following items are the major contributing factors for the change in financing cash flow:
•The primary use of cash in 2021 was the payment of $187,024 of outstanding borrowings under the Term Loan agreements. We received net proceeds of $144,750 from the issuance of the Junior Notes, a portion of which, in addition to the proceeds received from the hotel dispositions noted above, were used to pay down the Term Loans;
•Payment of $6,231 of deferred financing costs for the year ended December 31, 2021 which primarily relate to the Junior Notes issuance noted above, as compared to the payment of $3,188 during the year ended December 31, 2020;
•A decrease in comparative cash flows as we had net draws of $85,053 on our Line of Credit during the year ended December 31, 2020, compared to net repayments of $14,369 during the same period in 2021;
•An increase in cash payments of $24,254 related to dividends paid. During the year ended December 31, 2021, our executed amendments to the Credit Agreements allowed for the payment of the total arrearage of unpaid cash dividends due on each of our 6.875% Series C Cumulative Redeemable Preferred Shares, 6.50% Series D Cumulative Redeemable Preferred Shares and 6.50% Series E Cumulative Redeemable Preferred Shares of approximately $24,173, which was paid on March 26, 2021, as well as dividends of $6,044 on these preferred shares in April 2021, July 2021, and October 2021. During the year ended December 31, 2020 we paid dividends of $6,044 on these preferred shares and $12,007 on our Common Shares, Common Units and LTIP Units.
FUNDS FROM OPERATIONS
(in thousands, except share data)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Common Units in accordance with the December 2018 Financial Standards White Paper of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Our interpretation of the NAREIT definition is that noncontrolling interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shareholders, includes loss from the impairment of certain depreciable assets, our investment in unconsolidated joint ventures and land, depreciation and amortization expenses, gains or losses on property sales, noncontrolling interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Common Units because our Common Units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Common Units.
The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods (dollars in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| | | | | |
| Net loss applicable to common shareholders | $ | (64,347) | | | $ | (190,521) | | | $ | (27,843) | |
| Loss allocated to noncontrolling interests | (4,672) | | | (22,915) | | | (2,178) | |
| Loss (income) from unconsolidated joint ventures | 2,292 | | | 2,938 | | | (691) | |
| Gain on disposition of hotel properties | (48,352) | | | (1,158) | | | — | |
| Loss from impairment of depreciable assets | 222 | | | 1,069 | | | — | |
| Depreciation and amortization | 83,309 | | | 96,958 | | | 96,529 | |
Funds from consolidated hotel operations applicable to common shareholders and Partnership units | (31,548) | | | (113,629) | | | 65,817 | |
| | | | | |
| (Loss) income from Unconsolidated Joint Ventures | (2,292) | | | (2,938) | | | 691 | |
| | | | | |
Unrecognized pro rata interest in loss (1) | (1,053) | | | (1,417) | | | (4,247) | |
Depreciation and amortization of difference between purchase price and historical cost (2) | 94 | | | 83 | | | 96 | |
Interest in depreciation and amortization of unconsolidated joint ventures (3) | 2,508 | | | 1,828 | | | 5,234 | |
Funds from unconsolidated joint ventures operations applicable to common shareholders and Partnership units | (743) | | | (2,444) | | | 1,774 | |
| | | | | |
Funds from Operations
applicable to common shareholders and Partnership units | $ | (32,291) | | | $ | (116,073) | | | $ | 67,591 | |
| | | | | |
| Weighted Average Common Shares and Units Outstanding | | | | | |
| Basic | 39,089,987 | | | 38,613,563 | | | 38,907,894 | |
| Diluted | 44,172,521 | | | 44,066,289 | | | 43,390,093 | |
(1) For U.S. GAAP reporting purposes, our interest in the joint venture's loss is not recognized since our U.S. GAAP basis in the joint venture has been reduced to $0. Our interest in EBITDA from the joint venture equals our percentage ownership in the venture.
(2) Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint venture at the time of our investment.
(3) Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint ventures. Allocation of depreciation and amortization is consistent with allocation of income and loss.
INFLATION
Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates. The Company’s largest expenses are labor related costs. Wage and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. There can be no guarantee we will not experience increases in the cost of labor, as the need for hospitality employees is expected to grow. In addition, suppliers pass along rising costs to us in the form of higher prices. We have the ability to pass on these increased costs associated with providing services by adjusting room rates.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain, especially in light of the current economic environment due to the COVID-19 pandemic. The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2021 and 2020 and none of the estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods.
Investment in Hotel Properties
We review our portfolio on an on-going basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate
of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition.
Our impairment evaluation contains uncertainties because it requires management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include expected future operating income, as well as the holding period and the expected terminal capitalization rate. Estimates of revenue growth and operating expenses are based on third-party market data, where available and applicable to the hotel evaluated, and internal projections which consider the hotel’s historical performance, hotel demand, competition and other factors that impact the hotel’s performance. The terminal capitalization rate is selected based on third-party market data, recent dispositions, and what we believe a buyer would assume when determining a purchase price for the hotel. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.
If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. As of December 31, 2021, we have determined that the estimated future cash flow of each of the properties in our portfolio is sufficient to recover its carrying value. Asset impairment charges are discussed in Note 2, Investment in Hotel Properties, to the consolidated financial statements included in Item 8 of Part II of this 10-K.
RELATED PARTY TRANSACTIONS
We have entered into a number of transactions and arrangements that involve related parties. For a description of the transactions and arrangements, please see Note 7, “Commitments and Contingencies and Related Party Transactions,” to the consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (in thousands, except per share data)
Our primary market risk exposure is to changes in interest rates on our variable rate debt which has not been effectively hedged with interest swaps or interest rate caps. As of December 31, 2021, we are exposed to interest rate risk with respect to variable rate borrowings under our Credit Facility, Second Term and Third Term Loans and certain variable rate mortgages and notes payable. As of December 31, 2021, we had total variable rate debt outstanding of $281,841 with a weighted average interest rate of 2.96%. The effect of a 100 basis point increase or decrease in the interest rate on our variable rate debt outstanding as of December 31, 2021 would be an increase or decrease in our interest expense for the twelve months ended December 31, 2021 of $2,978.
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates for a portion of our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. We have also entered into derivative financial instruments such as interest rate swaps or caps, and in the future may enter into treasury options or locks, to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. As of December 31, 2021, we have an interest rate cap related to debt on Courtyard, LA Westside, Culver City, CA, and we have seven interest rate swaps related to debt on Hilton Garden Inn, 52nd Street, New York, NY; Hyatt Union Square, New York, NY; Hilton Garden Inn Tribeca, New York, NY; and our Credit Agreements. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
As of December 31, 2021, approximately 78% of our outstanding consolidated long-term indebtedness is subject to fixed rates or effectively capped, while 22% of our outstanding long term indebtedness is subject to floating rates, including borrowings under our Line of Credit. The majority of our floating rate debt and any corresponding derivative instruments are indexed to various tenors of LIBOR.
On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banks discontinued new LIBOR debt issuances by December 31, 2021. However, the ICE Benchmark Administration, in its capacity as administrator of LIBOR, has announced that it intends to extend publication of LIBOR (other than one-week and two-month tenors) by 18 months to June 2023.
Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
Changes in market interest rates on our fixed-rate debt impact the fair value of the debt, but such changes have no impact on interest expense incurred. If interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2021 levels, with all other variables held constant. A 100 basis point increase in market interest rates would cause the fair value of our fixed-rate debt outstanding at December 31, 2021 to be approximately $1,126,005 and a 100 basis point decrease in market interest rates would cause the fair value of our fixed-rate debt outstanding at December 31, 2021 to be approximately $1,168,069.
We regularly review interest rate exposure on our outstanding borrowings in an effort to minimize the risk of interest rate fluctuations. For debt obligations outstanding as of December 31, 2021, the following table presents expected principal repayments and related weighted average interest rates by expected maturity dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 1 Year | | 1 - 3 Years | | 4 - 5 Years | | After 5 Years | | Total |
| | | | | | | | | |
| Fixed Rate Debt | $ | 240,136 | | | $ | 420,040 | | | $ | 188,014 | | | $ | — | | | $ | 848,190 | |
| Weighted Average Interest Rate | 5.25 | % | | 6.21 | % | | 9.50 | % | | N/A | | 5.24 | % |
| | | | | | | | | |
| Floating Rate Debt | $ | 26,846 | | | $ | 84,762 | | | $ | — | | | $ | 51,548 | | | $ | 163,156 | |
| Weighted Average Interest Rate | 3.46 | % | | 3.24 | % | | N/A | | 3.10 | % | | 3.23 | % |
| | | | | | | | | |
| $ | 266,982 | | | $ | 504,802 | | | $ | 188,014 | | | $ | 51,548 | | | $ | 1,011,346 | |
| | | | | | | | | |
| Line of Credit | $ | 118,684 | | | $ | — | | | $ | — | | | $ | — | | | $ | 118,684 | |
| Weighted Average Interest Rate | 2.50 | % | | N/A | | N/A | | N/A | | 2.50 | % |
| $ | 385,666 | | | $ | 504,802 | | | $ | 188,014 | | | $ | 51,548 | | | $ | 1,130,030 | |
The table incorporates only those exposures that existed as of December 31, 2021, and does not consider exposure or positions that could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the future period, prevailing interest rates, and our hedging strategies at that time.
Item 8. Financial Statements and Supplementary Data | | | | | |
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
Hersha Hospitality Trust:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Hersha Hospitality Trust and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has significant debt maturities in August 2022 for which the Company does not have committed funding sources, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
The assessment of consolidated hotel properties for potential impairment
As discussed in Note 1 to the consolidated financial statements, the Company tests its hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of any of the hotel properties may not be recoverable. For hotel properties that have an indication that its carrying value may not be recoverable, an undiscounted cash flow analysis is prepared using various inputs and assumptions, including estimated holding period, and expected terminal capitalization rate. The novel coronavirus (COVID-19) has reduced travel significantly and adversely affected the hospitality industry and resulted in recoverability analyses being performed on all of the Company’s consolidated hotel properties, and COVID-19 has had a significant impact on the Company’s ability to project future cash flows from operations and estimated holding period. Investment in hotel properties, net of accumulated depreciation, was $1.7 billion, or 91% of total assets at December 31, 2021.
We identified the assessment of consolidated hotel properties for potential impairment as a critical audit matter. Significant auditor judgment was required to evaluate certain key assumptions, specifically, the judgments related to the Company’s estimated holding period, expected terminal capitalization rate, and projected undiscounted cash flows from operations, including the effects of COVID-19 and the resulting duration of the economic effects on its properties. Changes in the key assumptions could have a significant impact on the determination of recoverability of the carrying value of the Company’s investments in hotel properties.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process over the determination of the estimated holding period, expected terminal capitalization rate and projected undiscounted cash flows from operations. We inquired of Company officials and inspected documents such as meeting minutes of the board of trustees to evaluate the likelihood that it was more-likely-than not that a property will be sold significantly before the end of its previously estimated useful life. We also read publicly available information in order to identify information regarding potential sales of the Company’s properties. For certain of the properties, we also performed sensitivity analyses over the estimated holding period by changing the Company’s estimates to assess the impact on the analysis. We evaluated the Company’s expected terminal capitalization rates by comparing to published third party industry reports as well as certain of the Company’s historical hotel property sales. For certain of the hotel properties, we performed sensitivity analyses over the estimated terminal capitalization rate by considering points within the ranges we obtained from published third party industry reports. We evaluated the Company’s projected undiscounted cash flows from operations by comparing to published third-party industry reports evaluating the impact of COVID-19 on the hotel industry. We inquired and obtained representations from the Company regarding the status and evaluation of any potential disposal of properties and read minutes of the board of trustees. We corroborated that information with others in the organization who are responsible for, and have authority over, disposition activities.
/s/ KPMG LLP
We have served as the Company’s auditor since 2004.
Philadelphia, Pennsylvania
February 23, 2022
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
[IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS]
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Assets: | | | |
| Investment in Hotel Properties, Net of Accumulated Depreciation | $ | 1,665,097 | | | $ | 1,784,838 | |
| Investment in Unconsolidated Joint Ventures | 5,580 | | | 6,633 | |
| Cash and Cash Equivalents | 72,238 | | | 16,637 | |
| Escrow Deposits | 12,707 | | | 6,970 | |
| Hotel Accounts Receivable | 8,491 | | | 5,690 | |
| Due from Related Parties | 2,495 | | | 2,641 | |
Intangible Assets, Net of Accumulated Amortization of $6,944 and $6,840 | 1,335 | | | 1,739 | |
| Right of Use Assets | 43,442 | | | 44,126 | |
| Other Assets | 21,759 | | | 15,494 | |
| Hotel Assets Held for Sale | — | | | 96,220 | |
| Total Assets | $ | 1,833,144 | | | $ | 1,980,988 | |
| | | |
| Liabilities and Equity: | | | |
| Line of Credit | $ | 118,684 | | | $ | 133,053 | |
| Secured Term Loans, Net of Unamortized Deferred Financing Costs (Note 5) | 496,085 | | | 681,744 | |
| Unsecured Notes Payable, Net of Unamortized Deferred Financing Costs (Note 5) | 198,490 | | | 50,789 | |
| Mortgages Payable, Net of Unamortized Premium and Unamortized Deferred Financing Costs | 304,614 | | | 330,848 | |
| Lease Liabilities | 53,691 | | | 53,852 | |
| Accounts Payable, Accrued Expenses and Other Liabilities | 43,207 | | | 58,453 | |
| Dividends and Distributions Payable | 6,044 | | | — | |
| Due to Related Parties | 1,723 | | | — | |
| | | |
| Total Liabilities | $ | 1,222,538 | | | $ | 1,308,739 | |
| | | |
| Redeemable Noncontrolling Interests - Consolidated Joint Venture (Note 12) | 2,310 | | | — | |
| | | |
| Equity: | | | |
| Shareholders' Equity: | | | |
Preferred Shares: $.01 Par Value, 29,000,000 Shares Authorized, 3,000,000 Series C, 7,701,700 Series D and 4,001,514 Series E Shares Issued and Outstanding at December 31, 2021 and December 31, 2020, with Liquidation Preferences of $25 Per Share (Note 1) | $ | 147 | | | $ | 147 | |
Common Shares: Class A, $.01 Par Value, 104,000,000 Shares Authorized at December 31, 2021 and December 31, 2020; 39,325,025, and 38,843,482 Shares Issued and Outstanding at December 31, 2021 and December 31, 2020, respectively | 394 | | | 389 | |
Common Shares: Class B, $.01 Par Value, 1,000,000 Shares Authorized, None Issued and Outstanding at December 31, 2021 and December 31, 2020 | — | | | — | |
| Accumulated Other Comprehensive Loss | (2,747) | | | (19,275) | |
| Additional Paid-in Capital | 1,155,034 | | | 1,150,985 | |
| Distributions in Excess of Net Income | (595,454) | | | (509,243) | |
| Total Shareholders' Equity | 557,374 | | | 623,003 | |
| | | |
| Noncontrolling Interests (Note 1): | 50,922 | | | 49,246 | |
| | | |
| Total Equity | 608,296 | | | 672,249 | |
| | | |
| Total Liabilities, Redeemable Noncontrolling Interests, and Equity | $ | 1,833,144 | | | $ | 1,980,988 | |
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS] | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Revenue: | | | | | |
| Hotel Operating Revenues: | | | | | |
| Room | $ | 237,988 | | | $ | 142,260 | | | $ | 424,698 | |
| Food & Beverage | 31,778 | | | 15,418 | | | 65,379 | |
| Other Operating Revenues | 26,100 | | | 18,765 | | | 39,591 | |
| Other Revenues | 123 | | | 217 | | | 292 | |
| Total Revenues | 295,989 | | | 176,660 | | | 529,960 | |
| | | | | |
| Operating Expenses: | | | | | |
| Hotel Operating Expenses: | | | | | |
| Room | 51,885 | | | 38,787 | | | 93,488 | |
| Food & Beverage | 24,756 | | | 16,199 | | | 52,820 | |
| Other Operating Expenses | 101,515 | | | 85,270 | | | 171,128 | |
| Hotel Ground Rent | 4,400 | | | 4,301 | | | 4,581 | |
| Real Estate and Personal Property Taxes and Property Insurance | 36,787 | | | 40,928 | | | 38,601 | |
General and Administrative (including Share Based Payments of $12,033, $9,488, and $10,803 for the years ended December 31, 2021, 2020, and 2019, respectively) | 23,027 | | | 20,078 | | | 26,431 | |
| Acquisition and Terminated Transaction Costs | 391 | | | 4,419 | | | — | |
| Loss on Impairment of Assets | 222 | | | 1,069 | | | — | |
| Depreciation and Amortization | 83,309 | | | 96,958 | | | 96,529 | |
| Insurance Recoveries in Excess of Property Loss | (711) | | | (8,960) | | | 12 | |
| Total Operating Expenses | 325,581 | | | 299,049 | | | 483,590 | |
| | | | | |
| Operating (Loss) Income | (29,592) | | | (122,389) | | | 46,370 | |
| | | | | |
| Interest Income | 15 | | | 39 | | | 253 | |
| Interest Expense | (57,549) | | | (53,279) | | | (52,205) | |
| Other Income (Expense) | 128 | | | (522) | | | (584) | |
| Gain on Disposition of Hotel Properties | 48,352 | | | 1,158 | | | — | |
| | | | | |
| Loss on Debt Extinguishment | (3,069) | | | — | | | (280) | |
| Loss Before Results from Unconsolidated Joint Venture Investments and Income Taxes | (41,715) | | | (174,993) | | | (6,446) | |
| | | | | |
| | | | | |
| | | | | |
| (Loss) Income from Unconsolidated Joint Venture Investments | (2,292) | | | (2,938) | | | 691 | |
| | | | | |
| Loss Before Income Taxes | (44,007) | | | (177,931) | | | (5,755) | |
| | | | | |
| Income Tax Expense | (838) | | | (11,329) | | | (92) | |
| | | | | |
| Net Loss | (44,845) | | | (189,260) | | | (5,847) | |
| | | | | |
| Loss Allocated to Noncontrolling Interests - Common Units | 6,824 | | | 19,698 | | | 2,366 | |
| (Income) Loss Allocated to Noncontrolling Interests - Consolidated Joint Venture | (2,152) | | | 3,217 | | | (188) | |
| Preferred Distributions | (24,174) | | | (24,176) | | | (24,174) | |
| | | | | |
| | | | | |
| Net Loss Applicable to Common Shareholders | $ | (64,347) | | | $ | (190,521) | | | $ | (27,843) | |
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS] | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Earnings Per Share: | | | | | |
| BASIC | | | | | |
| Loss from Continuing Operations Applicable to Common Shareholders | $ | (1.65) | | | $ | (4.93) | | | $ | (0.74) | |
| | | | | |
| DILUTED | | | | | |
| Loss from Continuing Operations Applicable to Common Shareholders | $ | (1.65) | | | $ | (4.93) | | | $ | (0.74) | |
| | | | | |
| Weighted Average Common Shares Outstanding: | | | | | |
| Basic | 39,089,987 | | | 38,613,563 | | | 38,907,894 | |
| Diluted* | 39,089,987 | | | 38,613,563 | | | 38,907,894 | |
* Income allocated to noncontrolling interest in Hersha Hospitality Limited Partnership (the “Operating Partnership” or “HHLP”) has been excluded from the numerator and the Class A common shares issuable upon any redemption of the Operating Partnership’s common units of limited partnership interest (“Common Units”) and the Operating Partnership’s vested LTIP units (“Vested LTIP Units”) have been omitted from the denominator for the purpose of computing diluted earnings per share because the effect of including these shares and units in the numerator and denominator would have no impact. In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income applicable to common shareholders.
The following table summarizes potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Common Units and Vested LTIP Units | 4,298,045 | | | 3,926,767 | | | 3,363,169 | |
| Unvested Stock Awards and LTIP Units Outstanding | 395,446 | | | 971,287 | | | 651,093 | |
| Contingently Issuable Share Awards | 389,043 | | | 554,672 | | | 467,937 | |
| Total Potentially Dilutive Securities Excluded from the Denominator | 5,082,534 | | | 5,452,726 | | | 4,482,199 | |
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS]
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net Loss | $ | (44,845) | | | $ | (189,260) | | | $ | (5,847) | |
| | | | | |
| Change in Fair Value of Derivative Instruments | 17,980 | | | (26,431) | | | (4,502) | |
| Less: Reclassification Adjustment for Change in Fair Value of Derivative Instruments Included in Net Income | 366 | | | 4,083 | | | 1,007 | |
| Total Other Comprehensive Income (Loss) | $ | 18,346 | | | $ | (22,348) | | | $ | (3,495) | |
| | | | | |
| Comprehensive Loss | (26,499) | | | (211,608) | | | (9,342) | |
| Less: Comprehensive Loss Applicable to Noncontrolling Interests - Common Units | 5,006 | | | 21,761 | | | 2,644 | |
| Less: Comprehensive (Income) Loss Applicable to Noncontrolling Interests - Consolidated Joint Venture | (2,152) | | | 3,217 | | | (188) | |
| Less: Preferred Distributions | (24,174) | | | (24,176) | | | (24,174) | |
| | | | | |
| Comprehensive Loss Applicable to Common Shareholders | $ | (47,819) | | | $ | (210,806) | | | $ | (31,060) | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS]
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Redeemable Noncontrolling Interests | | Shareholders' Equity | | Noncontrolling Interests | |
| Consolidated Joint Venture ($) | Common Shares | Class A Common Shares ($) | Class B Common Shares ($) | Preferred Shares | Preferred Shares ($) | Additional Paid-In Capital ($) | Accumulated Other Comprehensive Loss ($) | Distributions in Excess of Net Income ($) | Total Shareholders' Equity ($) | | Common Units and LTIP Units | Common Units and LTIP Units ($) | Total Equity ($) |
| Balance at December 31, 2020 | — | | 38,843,482 | | 389 | | — | | 14,703,214 | | 147 | | 1,150,985 | | (19,275) | | (509,243) | | 623,003 | | | 5,392,808 | | 49,246 | | 672,249 | |
| Unit Conversion | — | | 241,545 | | 2 | | — | | — | | — | | 3,024 | | — | | — | | 3,026 | | | (241,545) | | (3,026) | | — | |
| | | | | | | | | | | | | | |
| Dividends and Distributions declared: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Preferred Shares | — | | — | | — | | — | | — | | — | | — | | — | | (48,348) | | (48,348) | | | — | | — | | (48,348) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Share Based Compensation: | | | | | | | | | | | | | | |
| Grants | — | | 239,998 | | 3 | | — | | — | | — | | 355 | | — | | — | | 358 | | | 1,774,990 | | — | | 358 | |
| Amortization | — | | — | | — | | — | | — | | — | | 2,980 | | — | | — | | 2,980 | | | — | | 9,708 | | 12,688 | |
| Change in Fair Value of Derivative Instruments | — | | — | | — | | — | | — | | — | | — | | 16,528 | | — | | 16,528 | | | — | | 1,818 | | 18,346 | |
| Equity Contribution to Consolidated Joint Venture | 158 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | — | | — | |
| Adjustment to Record Noncontrolling Interest at Redemption Value | 2,310 | | — | | — | | — | | — | | — | | (2,310) | | — | | — | | (2,310) | | | — | | — | | (2,310) | |
| Net Loss | (158) | | — | | — | | — | | — | | — | | — | | — | | (37,863) | | (37,863) | | | — | | (6,824) | | (44,687) | |
| Balance at December 31, 2021 | 2,310 | | 39,325,025 | | 394 | | — | | 14,703,214 | | 147 | | 1,155,034 | | (2,747) | | (595,454) | | 557,374 | | | 6,926,253 | | 50,922 | | 608,296 | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS] | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Redeemable Noncontrolling Interests | Shareholders' Equity | | Noncontrolling Interests | |
| Consolidated Joint Venture ($) | Common Shares | Class A Common Shares ($) | Class B Common Shares ($) | Preferred Shares | Preferred Shares ($) | Additional Paid-In Capital ($) | Accumulated Other Comprehensive Income ($) | Distributions in Excess of Net Income ($) | Total Shareholders' Equity ($) | | Common Units and LTIP Units | Common Units and LTIP Units ($) | Total Equity ($) |
| Balance at December 31, 2019 | 3,196 | | 38,652,650 | | 387 | | — | | 14,703,214 | | 147 | | 1,144,808 | | 1,010 | | (338,695) | | 807,657 | | | 4,279,946 | | 64,144 | | 871,801 | |
| | | | | | | | | | | | | | |
| Issuance Costs | — | | — | | — | | — | | — | | — | | (137) | | — | | — | | (137) | | | — | | — | | (137) | |
| Dividends and Distributions declared: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Preferred Shares | — | | — | | — | | — | | — | | — | | — | | — | | (1,007) | | (1,007) | | | — | | — | | (1,007) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Dividend Reinvestment Plan | — | | 1,094 | | — | | — | | — | | — | | 14 | | — | | — | | 14 | | | — | | — | | 14 | |
| Share Based Compensation: | | | | | | | | | | | | | | |
| Grants | — | | 189,738 | | 2 | | — | | — | | — | | (2) | | — | | — | | — | | | 1,112,862 | | — | | — | |
| Amortization | — | | — | | — | | — | | — | | — | | 3,106 | | — | | — | | 3,106 | | | — | | 6,863 | | 9,969 | |
| Equity Contribution to Consolidated Joint Venture | 21 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | — | | — | |
| Change in Fair Value of Derivative Instruments | — | | — | | — | | — | | — | | — | | — | | (20,285) | | — | | (20,285) | | | — | | (2,063) | | (22,348) | |
| Adjustment to Record Noncontrolling Interest at Redemption Value | (3,196) | | — | | — | | — | | — | | — | | 3,196 | | — | | — | | 3,196 | | | — | | — | | 3,196 | |
| Net Loss | (21) | | — | | — | | — | | — | | — | | — | | — | | (169,541) | | (169,541) | | | — | | (19,698) | | (189,239) | |
| Balance at December 31, 2020 | — | | 38,843,482 | | 389 | | — | | 14,703,214 | | 147 | | 1,150,985 | | (19,275) | | (509,243) | | 623,003 | | | 5,392,808 | | 49,246 | | 672,249 | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS] | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Noncontrolling Interests | Shareholders' Equity | | Noncontrolling Interests | |
| Consolidated Joint Venture ($) | Common Shares | Class A Common Shares ($) | Class B Common Shares ($) | Preferred Shares | Preferred Shares ($) | Additional Paid-In Capital ($) | Accumulated Other Comprehensive Income ($) | Distributions in Excess of Net Income ($) | Total Shareholders' Equity ($) | | Common Units and LTIP Units | Common Units and LTIP Units ($) | Total Equity ($) |
| Balance at December 31, 2018 | 2,708 | | 39,458,626 | | 395 | | — | | 14,703,214 | | 147 | | 1,155,776 | | 4,227 | | (267,740) | | 892,805 | | | 3,749,665 | | 62,010 | | 954,815 | |
| | | | | | | | | | | | | | |
| Repurchase of Common Shares | — | | (933,436) | | (9) | | — | | — | | — | | (14,277) | | — | | — | | (14,286) | | | — | | — | | (14,286) | |
| | | | | | | | | | | | | | |
| Dividends and Distributions declared: | | | | | | | | | | | | | | |
Common Shares ($1.12 per share) | — | | — | | — | | — | | — | | — | | — | | — | | (43,600) | | (43,600) | | | — | | — | | (43,600) | |
| Preferred Shares | — | | — | | — | | — | | — | | — | | — | | — | | (24,174) | | (24,174) | | | — | | — | | (24,174) | |
Common Units ($1.12 per share) | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | (2,314) | | (2,314) | |
LTIP Units ($1.12 per share) | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | (2,601) | | (2,601) | |
| Dividend Reinvestment Plan | — | | 3,760 | | — | | — | | — | | — | | 60 | | — | | — | | 60 | | | — | | — | | 60 | |
| Share Based Compensation: | | | | | | | | | | | | | | |
| Grants | — | | 123,700 | | 1 | | — | | — | | — | | 675 | | — | | — | | 676 | | | 530,281 | | — | | 676 | |
| Amortization | — | | — | | — | | — | | — | | — | | 3,062 | | — | | — | | 3,062 | | | — | | 9,693 | | 12,755 | |
| Equity Contribution to Consolidated Joint Venture | 300 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | — | | — | |
| Change in Fair Value of Derivative Instruments | — | | — | | — | | — | | — | | — | | — | | (3,217) | | — | | (3,217) | | | — | | (278) | | (3,495) | |
| Adjustment to Record Noncontrolling Interest at Redemption Value | 488 | | — | | — | | — | | — | | — | | (488) | | — | | — | | (488) | | | — | | — | | (488) | |
| Net Income (Loss) | (300) | | — | | — | | — | | — | | — | | — | | — | | (3,181) | | (3,181) | | | — | | (2,366) | | (5,547) | |
| Balance at December 31, 2019 | 3,196 | | 38,652,650 | | 387 | | — | | 14,703,214 | | 147 | | 1,144,808 | | 1,010 | | (338,695) | | 807,657 | | | 4,279,946 | | 64,144 | | 871,801 | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statement
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS]
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Operating Activities: | | | | | |
| Net Loss | $ | (44,845) | | | $ | (189,260) | | | $ | (5,847) | |
| Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: | | | | | |
| Gain on Disposition of Hotel Properties | (48,352) | | | (1,158) | | | — | |
| | | | | |
| Loss on Impairment of Assets | 222 | | | 5,488 | | | — | |
| Insurance Recoveries in Excess of Property Loss | (711) | | | (8,960) | | | 12 | |
| Junior Note PIK Interest Added to Principal | 6,239 | | | — | | | — | |
| Deferred Taxes | — | | | 11,290 | | | (312) | |
| Depreciation | 82,973 | | | 96,527 | | | 95,982 | |
| Amortization | 5,314 | | | 3,540 | | | 2,137 | |
| Loss on Debt Extinguishment | 634 | | | — | | | 280 | |
| Equity in Loss (Income) of Unconsolidated Joint Ventures | 2,292 | | | 2,938 | | | (691) | |
| Loss Recognized on Change in Fair Value of Derivative Instrument | 366 | | | 4,084 | | | 1,007 | |
| Share Based Compensation Expense | 12,033 | | | 9,488 | | | 10,803 | |
| Distributions from Unconsolidated Joint Ventures | — | | | — | | | 728 | |
| Proceeds Received for Business Interruption Insurance Claims, net | — | | | 4,411 | | | — | |
| Change in Assets and Liabilities: | | | | | |
| (Increase) Decrease in: | | | | | |
| Hotel Accounts Receivable | (2,801) | | | 3,523 | | | 1,028 | |
| Other Assets | (6,781) | | | 7,738 | | | (1,476) | |
| Due from Related Parties | 146 | | | 3,472 | | | (2,819) | |
| (Decrease) Increase in: | | | | | |
| Due to Related Parties | 1,723 | | | — | | | — | |
| Accounts Payable, Accrued Expenses and Other Liabilities | 7,780 | | | (10,586) | | | 2,280 | |
| Net Cash Provided by (Used in) Operating Activities | $ | 16,232 | | | $ | (57,465) | | | $ | 103,112 | |
| | | | | |
| Investing Activities: | | | | | |
| | | | | |
| | | | | |
| Capital Expenditures | (10,873) | | | (26,340) | | | (48,936) | |
| Cash Paid for Hotel Development Projects | — | | | 21 | | | (152) | |
| Proceeds from Disposition of Hotel Properties | 163,583 | | | 19,591 | | | — | |
| Contributions to Unconsolidated Joint Ventures | (1,489) | | | (1,125) | | | (6,100) | |
| Proceeds from Insurance Claims | — | | | 6,338 | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Distributions from Unconsolidated Joint Ventures | 250 | | | — | | | 1,622 | |
| Net Cash Provided by (Used in) Investing Activities | $ | 151,471 | | | $ | (1,515) | | | $ | (53,566) | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS] | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Financing Activities: | | | | | |
| Borrowings on Line of Credit | $ | 13,500 | | | $ | 88,000 | | | $ | 38,000 | |
| Repayment of Borrowings Under Line of Credit | (27,869) | | | (2,947) | | | — | |
| Payments on Term Loans | (187,024) | | | (16,395) | | | — | |
| Principal Repayment of Mortgages | (24,186) | | | (1,684) | | | (57,418) | |
| Proceeds from Mortgages and Notes Payable | 167,750 | | | — | | | 56,469 | |
| Deferred Financing Costs | (6,231) | | | (3,188) | | | (3,198) | |
| Cash Paid for Debt Extinguishment | — | | | — | | | (210) | |
| | | | | |
| | | | | |
| Repurchase of Common Shares | — | | | — | | | (14,195) | |
| | | | | |
| Dividends Paid on Common Shares | — | | | (10,809) | | | (43,760) | |
| Dividends Paid on Preferred Shares | (42,305) | | | (6,044) | | | (24,173) | |
| Distributions Paid on Common Units and LTIP Units | — | | | (1,198) | | | (4,768) | |
| Other Financing Activities | — | | | (133) | | | (91) | |
| Net Cash (Used in) Provided by Financing Activities | $ | (106,365) | | | $ | 45,602 | | | $ | (53,344) | |
| | | | | |
| Net Increase (Decrease) in Cash and Cash Equivalents | $ | 61,338 | | | $ | (13,378) | | | $ | (3,798) | |
| Cash, Cash Equivalents, and Restricted Cash - Beginning of Period | 23,607 | | | 36,985 | | | 40,783 | |
| | | | | |
| Cash, Cash Equivalents, and Restricted Cash - End of Period | $ | 84,945 | | | $ | 23,607 | | | $ | 36,985 | |
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hersha Hospitality Trust (“we” or the “Company”) was formed in May 1998 as a self-administered, Maryland real estate investment trust. We have elected to be taxed and expect to continue to elect to be taxed as a real estate investment trust, or REIT, for federal income tax purposes.
The Company owns a controlling general partnership interest in Hersha Hospitality Limited Partnership (“HHLP” or the “Partnership”), which owns a 99% limited partnership interest in various subsidiary partnerships. Hersha Hospitality, LLC (“HHLLC”), a Virginia limited liability company, owns a 1% general partnership interest in the subsidiary partnerships and the Partnership is the sole member of HHLLC.
The Partnership owns a taxable REIT subsidiary (“TRS”), 44 New England Management Company (“44 New England” or “TRS Lessee”), which leases certain of the Company’s hotels.
Hersha’s common shares of beneficial interest trade on the New York Stock Exchange (“the NYSE”) under the ticker symbol "HT," its 6.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest trade on the NYSE under the ticker symbol “HT PRC,” its 6.500% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest trade on the NYSE under the ticker symbol “HT PRD,” and it’s 6.500% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest trade on the NYSE under the ticker symbol “HT PRE.”
As of December 31, 2021, the Company, through the Partnership and subsidiary partnerships, wholly owned 32 limited and full service hotels. All of the wholly owned hotel facilities are leased to the Company’s TRS, 44 New England.
In addition to the wholly owned hotel properties, as of December 31, 2021, the Company owned a consolidated joint venture interest in one property and an unconsolidated joint venture interest in three properties. The properties owned by the joint ventures are leased to a TRS owned by the joint venture or to an entity owned by the joint venture partners and 44 New England. The following table lists the properties owned by these joint ventures:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Joint Venture | | Ownership Interest | | Property | | Location | | Lessee/Sublessee |
| Consolidated Joint Ventures | | | | | | | | |
| Hersha Holding RC Owner, LLC | | 85% | | Ritz-Carlton | | Coconut Grove, FL | | Hersha Holding RC Lessee, LLC |
| Unconsolidated Joint Ventures | | | | | | | | |
| SB Partners, LLC | | 50% | | Holiday Inn Express | | South Boston, MA | | South Bay Sandeep, LLC |
| Hiren Boston, LLC | | 50% | | Courtyard | | South Boston, MA | | South Bay Boston, LLC |
| SB Partners Three, LLC | | 50% | | Home2 Suites | | South Boston, MA | | SB Partners Three Lessee, LLC |
Our properties are managed by eligible independent management companies, including Hersha Hospitality Management, LP (“HHMLP”). HHMLP is owned in part by certain of our trustees and executive officers and other unaffiliated third party investors as defined by the Internal Revenue Code.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and include all of our accounts as well as accounts of the Partnership, subsidiary partnerships and our wholly owned TRS Lessee. All significant inter-company amounts have been eliminated.
Consolidated properties are either wholly owned or owned less than 100% by the Partnership and are controlled by the Company as general partner of the Partnership. Properties owned in joint ventures are also evaluated for consolidation. Entities are consolidated if the determination is made that we are the primary beneficiary in a variable interest entity ("VIE") or we maintain control of the asset through our voting interest or other rights in the operation of the entity. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have a controlling financial interest in that VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE. Control can also be demonstrated by the ability of a member to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the other member and the inability of the members to replace the managing member. Based on our examination, the following entities were determined to be VIE’s: HHLP; South Bay Boston, LLC; SB Partners Three Lessee, LLC; Hersha Holding RC Owner, LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II. The Company’s most significant asset is its investment in HHLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of HHLP. South Bay Boston, LLC and SB Partners Three Lessee, LLC, are consolidated by the respective lessors, the primary beneficiaries. Hersha Holding RC Owner, LLC is the owner entity of the Ritz Carlton Coconut Grove and is a VIE. HHLP is considered the primary beneficiary of the VIE and consolidates the joint venture with the minority owner interest presented as part of redeemable noncontrolling interest within the Consolidated Balance Sheets. Hersha Statutory Trust I and Hersha Statutory Trust II are VIEs but HHLP is not the primary beneficiary in these entities. Accordingly, the accounts of Hersha Statutory Trust I and Hersha Statutory Trust II are not consolidated.
Segment Reporting
We allocate resources and assess operating performance based on individual hotels and consider each one of our hotels to be an operating segment. No operating segment, individually, meets the threshold for a reportable segment as defined within ASC Topic 280 – Segment Reporting, nor do they fully satisfy the requisite aggregation criteria therein. As a result, the Company does not present separate operating segment information within the Notes to the Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Although we believe the assumptions and estimates we made are reasonable and appropriate, as discussed in the applicable sections throughout these Consolidated Financial Statements, different assumptions and estimates could materially impact our reported results.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Hotel Properties
Investment purchases of hotel properties and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired assets. Property and equipment purchased after the hotel acquisition date is recorded at cost. The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the following estimated useful lives:
| | | | | | | | |
| Building and Improvements | | 7 to 40 years |
| Furniture, Fixtures and Equipment | | 2 to 7 years |
Based on the occurrence of certain events or changes in circumstances, we review the recoverability of each hotel property's carrying value. Such events or changes in circumstances include the following:
•a significant decrease in the market price of a long-lived asset;
•a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
•a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;
•an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset;
•a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and
•a current expectation that, it is more likely than not that, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
We review our portfolio on an ongoing basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of hotel demand, competition and other factors. Other assumptions used in the review of recoverability include the holding period and expected terminal capitalization rate. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in hotel properties.
We consider a hotel to be held for sale when management and our independent trustees commit to a plan to sell the property, the property is available for sale, management engages in an active program to locate a buyer for the property and it is probable the sale will be completed within a year of the initiation of the plan to sell.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Unconsolidated Joint Ventures
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or our voting interest in a voting interest entity, and we have the ability to exercise significant influence over the operating and financial policies of the joint venture, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliates as they occur, limited to the extent of our investment in, advances to and commitments for the investee. Pursuant to our joint venture agreements, allocations of profits and losses of some of our investments in unconsolidated joint ventures may be allocated disproportionately as compared to nominal ownership percentages due to specified preferred return rate thresholds. See Note 3 – Investment in Unconsolidated Joint Ventures for a more detailed explanation of the methodology used in determining the allocation of profits and losses within our joint ventures.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if circumstances indicate impairment to the carrying value of the investment that is other than temporary. When an impairment indicator is present, we will estimate the fair value of the investment. Our estimate of fair value takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. This determination requires significant estimates by management, including the expected cash flows to be generated by the assets owned and operated by the joint venture. To the extent impairment has occurred and the impairment is considered other than temporary, the loss will be measured as the excess of the carrying amount over the fair value of our investment in the unconsolidated joint venture.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand and in banks plus short-term investments with an initial maturity of three months or less when purchased.
Escrow Deposits
Escrow deposits include reserves for debt service, working capital, real estate taxes, and insurance and reserves for furniture, fixtures, and equipment replacements, as required by certain mortgage debt agreement restrictions and provisions.
Hotel Accounts Receivable
Hotel accounts receivable consists primarily of meeting and banquet room rental and hotel guest receivables. The Company generally does not require collateral. Ongoing credit evaluations are performed and potential losses from uncollectible accounts are written off against revenue when they are estimated to be uncollectible.
Deferred Financing Costs
Deferred financing costs are recorded at cost and amortized over the terms of the related indebtedness using the effective interest method. Deferred financing costs associated with our line of credit are recorded within the Other Assets line item in our Consolidated Balance Sheets. Deferred financing costs associated with our term loans, mortgage debt, and unsecured notes are recorded as contra-liabilities within each respective line item on our Consolidated Balance Sheets. All amortization of deferred financing costs is presented within the Interest Expense line on our Consolidated Statements of Operations.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Due from/to Related Parties
Due from/to Related Parties represents current receivables and payables resulting from transactions related to hotel management and project management with affiliated entities. Amounts due from related parties result primarily from advances of shared costs incurred. Amounts due to related parties result primarily from hotel management and project management fees incurred. Both due to and due from related parties are generally settled within a period not to exceed one year.
Intangible Assets and Liabilities
Intangible assets primarily consist of leasehold intangibles for in-place leases at the time of hotel acquisition and deferred franchise fees. The leasehold intangibles are amortized over the remaining lease term. Deferred franchise fees are amortized using the straight-line method over the life of the franchise agreement.
Intangible liabilities consist of leasehold intangibles for in-place leases at the time of hotel acquisition. The leasehold intangibles are amortized over the remaining lease term. Intangible liabilities are included in the accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets.
Development Project Capitalization
We have opportunistically engaged in the development and re-development of hotel assets. We capitalize expenditures related to hotel development projects and renovations, including indirect costs such as interest expense, real estate taxes and utilities related to hotel development projects and renovations.
Preferred Shares
The Declaration of Trust authorizes our Board of Trustees to classify any unissued preferred shares and to reclassify any previously classified but unissued preferred shares of any series from time to time in one or more series, as authorized by the Board of Trustees. Prior to issuance of shares of each series, the Board of Trustees is required by Maryland REIT Law and our Declaration of Trust to set for each such series, subject to the provisions of our Declaration of Trust regarding the restriction on transfer of shares of beneficial interest, the terms, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Thus, our Board of Trustees could authorize the issuance of additional preferred shares with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control in us that might involve a premium price for holders of common shares or otherwise be in their best interest.
Noncontrolling Interest
We define a noncontrolling interest as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interests are reported on the consolidated balance sheets within equity, but separately from the shareholders’ equity. Revenues, expenses and net income or loss attributable to both the Company and noncontrolling interests are reported on the consolidated statements of operations.
Noncontrolling interest in the Partnership represents the limited partner’s proportionate share of the equity of the Partnership. Income (loss) is allocated to noncontrolling interest in accordance with the weighted average percentage ownership of the Partnership during the period. At the end of each reporting period the appropriate adjustments to the income (loss) are made based upon the weighted average percentage ownership of the Partnership during the period. Our ownership interest in the Partnership as of December 31, 2021, 2020 and 2019 was 85.0%, 87.8%, and 90.0%, respectively.
Securities that are redeemable for cash or other assets at the option of the holder, or not solely within the control of the issuer, are classified outside of permanent equity in the consolidated balance sheet and have been adjusted to their approximate redemption values, after the attribution of net income or loss. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company considers the guidance in US GAAP to evaluate whether the Company controls the actions or events necessary to issue the maximum number of common shares that could be required to be delivered at the time of settlement of the contract.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We classify the noncontrolling interests of our common units of limited partnership interest in HHLP ("Common Units"), and Long Term Incentive Plan Units ("LTIP Units") as equity. LTIP Units are a separate class of limited partnership interest in the Operating Partnership that are convertible into Common Units under certain circumstances. In accordance with the partnership agreement of the Partnership, holders of these units may redeem them for cash unless we, in our sole and absolute discretion, elect to issue common shares on a one-for-one basis in lieu of paying cash.
Net income or loss attributed to Common Units and LTIP Units, as well as the net income or loss related to the noncontrolling interests of our consolidated variable interest entity, is included in net income or loss in the consolidated statements of operations. Net income or loss attributed to the Common Units, LTIP Units, and the noncontrolling interests of our consolidated joint ventures is excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.
Stock Based Compensation
We measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost is amortized on a straight line basis over the period during which an employee is required to provide service in exchange for the award. The compensation cost related to performance awards that are contingent upon market-based criteria being met is recorded at the fair value of the award on the date of the grant and amortized over the performance period.
Derivatives and Hedging
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to increases in variable interest rates.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liquidity and Management's Plan
Due to the COVID-19 pandemic and the effects of travel restrictions both globally and in the United States, the hospitality industry has experienced drastic drops in demand as a result of government mandates, health official recommendations, corporate policy changes and individual responses. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have a material negative impact on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic.
In February of 2021, we entered into an unsecured notes facility that provided net proceeds of $144,750. The proceeds, along with a portion of the proceeds from asset sales, were used to repay amounts outstanding under our senior secured credit facility and our secured term loans and allowed us to negotiate amendments to this senior facility. The amendments to the senior secured credit facility and secured term loans eliminated term loan maturities until August of 2022, waived all financial covenants through March 31, 2022, established accommodative covenant testing methodology through December 31, 2022, enabled the Company to pay down the accrual of the Company's preferred dividends, allow the ongoing preferred dividend accrual to be kept current, and provided additional liquidity to be used at the Company's discretion.
Two of our secured term loans totaling $218,635, as well as our Line of Credit, which has $118,684 drawn as of December 31, 2021, will mature in August of 2022. In addition, it is possible that we could breach certain of our Credit Agreement covenants in 2022, which could lead to potential acceleration of amounts due under our Credit Agreements. Management intends to explore options including, but not limited to, additional asset sales, the refinancing of debt and the offering of equity or equity-linked securities prior to the maturity of these term loans in August of 2022, or an event of default. Currently the markets for financing and refinancing similar loans are open and absent an event that would impact the markets broadly, the Company believes that we will be able to refinance this debt or obtain a waiver prior to a default. However, given the unpredictable nature of the recovery from the impact of COVID-19, there can be no assurance that we will be able to obtain a waiver or amendment in a timely manner, or on acceptable terms, if at all. The failure to obtain a waiver or amendment, or otherwise repay the debt, could lead to an event of default, which would have a material adverse effect on our financial condition, which gives rise to substantial doubt about our ability to continue as a going concern.
We cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because the lodging industry has not previously experienced such an abrupt and drastic reduction in hotel demand, and as a consequence, our ability to be predictive is uncertain. In addition, the magnitude, duration, and speed of the pandemic is uncertain and we cannot estimate when travel demand will recover.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
We recognize revenue for all consolidated hotels as hotel operating revenue when earned. Revenues are recorded net of any sales or occupancy tax collected from our guests. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred. Hotel operating revenues are disaggregated on the face of the consolidated statement of operations into the categories of rooms revenue, food and beverage revenue, and other to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. The customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is generally secured at the end of the contract upon check-out by the customer from our hotel. The Company records advanced deposits when a customer or group of customers provides a deposit for a future stay at our hotels. Advanced deposits for room revenue are included in the balance of Accounts Payable, Accrued Expenses and Other Liabilities on the Consolidated Balance Sheet. Advanced deposits are recognized as revenue at the time of the guest's stay. The Company notes no significant judgments regarding the recognition of room revenue.
Food and beverage revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate for restaurant dining services or banquet services. The Company's contract performance obligations are fulfilled at the time that the meal is provided to the customer or when the banquet facilities and related dining amenities are provided to the customer. The Company recognizes food and beverage revenue upon the fulfillment of the contract with the customer. The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future banquet event at our hotels. Advanced deposits for food and beverage revenue are included in the balance of Accounts Payable, Accrued Expenses and Other Liabilities on the Consolidated Balance Sheet. Advanced deposits for banquet services are recognized as revenue following the completion of the banquet services. The Company notes no significant judgments regarding the recognition of food and beverage revenue.
Other revenues consist primarily of fees earned for asset management services provided to hotels we own through unconsolidated joint ventures. Fees are earned as a percentage of hotel revenue and are recorded in the period earned to the extent of the noncontrolling interest ownership.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company has elected to be taxed as a REIT under applicable provisions of the Internal Revenue Code of 1986, as amended, or the Code, and intends to continue to qualify as a REIT. In general, under such provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, will not be subject to federal income tax to the extent of the income which it distributes. Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation of hotel properties for federal income tax purposes.
Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS Lessee and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors.
The Company may recognize a tax benefit from an uncertain tax position when it is more-likely-than-not (defined as a likelihood of more than 50%) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite the Company’s belief that its filing position is supportable, the benefit of that tax position is not recognized in the statements of operations. The Company recognizes interest and penalties, as applicable, related to unrecognized tax benefits as a component of income tax expense. The Company recognizes unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation. For the years ended December 31, 2021, 2020 and 2019, the Company did not record any uncertain tax positions. As of December 31, 2021, with few exceptions, the Company is subject to tax examinations by federal, state, and local income tax authorities for years 2003 through 2021.
New Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued 2021-01, Reference Rate Reform (Topic 848), Scope, which further clarified the scope of the reference rate reform optional practical expedients and exceptions outlined in Topic 848. As a result of identified structural risks of interbank offered rates, in particular, the London Interbank Offered Rate (LIBOR), reference rate reform is underway to identify alternative reference rates that are more observable or transaction based. The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The provisions of these updates that will most likely affect our financial reporting process related to modifications of contracts with lenders and the related hedging contracts associated with each respective modified borrowing contract. In general, the provisions of these updates would impact the Company by allowing, among other things, the following:
•Allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 470 to be accounted for as a non-substantial modification and not be considered a debt extinguishment.
•Allowing a change to contractual terms of a hedging instrument in conjunction with reference rate reform to not require a dedesignation of the hedging relationship.
•Allowing a change to the interest rate used for margining, discounting, or contract price alignment for a derivative that is a cash flow hedge to not be considered a change to the critical terms of the hedge and will not require a dedesignation of the hedging relationship.
We have not entered into any contract modifications yet, as it directly relates to reference rate reform but we anticipate having to undertake such modifications in the future as a majority of our contracts with lenders and hedging counterparties are indexed to LIBOR. Some debt contract modifications will occur in the normal course of business and will include other changes in the terms, for which we do not anticipate that this accounting relief will be applicable. However, we anticipate that other debt contract modifications will occur prior to the phase of LIBOR on June 30, 2023 specifically to address the LIBOR transition, for which we will be able to apply the accounting relief.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties consists of the following at December 31, 2021 and December 31, 2020: | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| | | |
| Land | $ | 478,412 | | | $ | 488,463 | |
| Buildings and Improvements | 1,560,768 | | | 1,611,144 | |
| Furniture, Fixtures and Equipment | 274,802 | | | 281,440 | |
| Construction in Progress | 1,784 | | | 987 | |
| 2,315,766 | | | 2,382,034 | |
| | | |
| Less Accumulated Depreciation | (650,669) | | | (597,196) | |
| | | |
| Total Investment in Hotel Properties* | $ | 1,665,097 | | | $ | 1,784,838 | |
*The net book value of investment in hotel property at Ritz Coconut Grove, which is a variable interest entity, is $39,577 and $42,487 at December 31, 2021 and December 31, 2020, respectively.
Depreciation expense on hotel properties was $82,668, $96,216 and $95,673 for the years ended December 31, 2021, 2020 and 2019, respectively.
During the years ended December 31, 2021 and December 31, 2020, we acquired no hotel properties.
Property Damage from Natural Disaster
During September 2017, all six of our hotels located in South Florida incurred property damage and an interruption of business operations as a result of Hurricane Irma. During the year ended December 31, 2020, we closed our remaining open claim and recorded a net gain in excess of estimated insurance recoveries of $8,147.
During the year ended December 31, 2021, we received net proceeds of $961 for a business interruption claim as a result of COVID-19.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
Hotel Dispositions
During the years ended December 31, 2020 and December 31, 2021, we had the following hotel dispositions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Hotel | | Acquisition
Date | | Disposition
Date | | Consideration | | Gain on
Disposition |
| Courtyard San Diego, CA | | 5/30/2013 | | 2/19/2021 | | $ | 64,500 | | | $ | 5,032 | |
| The Capitol Hill Hotel Washington, DC | | 4/15/2011 | | 3/9/2021 | | 51,000 | | | 12,975 | |
| Holiday Inn Express Cambridge, MA | | 5/3/2006 | | 3/9/2021 | | 32,000 | | | 20,280 | |
| Residence Inn Miami Coconut Grove, FL | | 6/12/2013 | | 3/10/2021 | | 31,000 | | | 9,996 | |
| Duane Street Hotel (1) | | 1/4/2008 | | 5/13/2021 | | 18,000 | | | — | |
| 2021 Total | | | | | | | | $ | 48,283 | |
| | | | | | | | |
| Sheraton Wilmington South, DE | | 12/21/2010 | | 12/1/2020 | | $ | 19,500 | | | $ | 1,158 | |
| 2020 Total | | | | | | | | $ | 1,158 | |
(1) During 2020, the Company determined that the carrying value of the Duane Street hotel exceeded the anticipated net proceeds from sale, resulting in a $1,069 impairment charge recorded during the year ended December 31, 2020. We recorded an additional impairment charge of $147 prior to the disposition of the hotel property during the year ended December 31, 2021.
Assets Held For Sale
We classified the assets of the Duane Street Hotel, the Residence Inn Coconut Grove and the Courtyard San Diego as held for sale as of December 31, 2020. The sales of these hotels closed during the year ended December 31, 2021.
The table below shows the balances for the properties that were classified as assets held for sale as of December 31, 2020:
| | | | | | | | | | | | | | |
| December 31, 2020 |
| |
| Land | $ | 28,015 | |
| Buildings and Improvements | 93,314 | |
| Furniture, Fixtures and Equipment | 15,469 | |
| 136,798 | |
| Less Accumulated Depreciation | (40,578) | |
| Assets Held for Sale | $ | 96,220 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of December 31, 2021 and December 31, 2020 our investment in unconsolidated joint ventures consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| Joint Venture | | Hotel Properties | | Percent Owned | | | | December 31, 2021 | | December 31, 2020 |
| | | | | | | | | | |
| Cindat Hersha Owner JV, LLC | | Hilton and IHG branded hotels in NYC | | 31 | % | * | | | $ | — | | | $ | — | |
| Hiren Boston, LLC | | Courtyard by Marriott, South Boston, MA | | 50 | % | | | | 189 | | | 219 | |
| SB Partners, LLC | | Holiday Inn Express, South Boston, MA | | 50 | % | | | | — | | | — | |
| SB Partners Three, LLC | | Home2 Suites, South Boston, MA | | 50 | % | | | | 5,391 | | | 6,414 | |
| | | | | | | | $ | 5,580 | | | $ | 6,633 | |
*On February 7, 2021, all of the assets of the properties owned by this joint venture were transferred to the mezzanine lender of Cindat Hersha Owner JV, LLC. As a result, upon dissolution of the venture, we no longer maintain an interest in this venture.
Effective August 1, 2021, HHLP entered into Asset Management Agreements with the joint venture investments at the Courtyard by Marriott, South Boston, Holiday Inn Express, South Boston, and Home2 Suites, South Boston properties whereby it provides asset management services. Fees for these services are calculated as 1.0% of operating revenues, which we recognize as income in other revenues on the consolidated statement of operations.
Income/Loss Allocation
Prior to February 7, 2021, based on the income allocation methodology within Cindat Hersha Owner JV, LLC, the Company had absorbed cumulative losses equal to our accounting basis in the joint venture resulting in a $0 investment balance in the table above as of December 31, 2021 and December 31, 2020.
For SB Partners, LLC, Hiren Boston, LLC, and SB Partners Three, LLC, income or loss is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. This results in an income allocation consistent with our percentage of ownership interests. When we absorb cumulative losses equal to our accounting basis in the joint venture, our investment balance is $0 as presented in the table above.
Any difference between the carrying amount of any of our investments noted above and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
Loss (income) recognized during the years ended December 31, 2021, 2020 and 2019, for our investments in unconsolidated joint ventures is as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Cindat Hersha Owner JV, LLC | $ | (229) | | | $ | — | | | $ | — | |
| Hiren Boston, LLC | (1,104) | | | (1,741) | | | 155 | |
| SB Partners, LLC | (185) | | | (600) | | | 626 | |
| SB Partners Three, LLC | (774) | | | (597) | | | (90) | |
| (Loss) Income from Unconsolidated Joint Venture Investments | $ | (2,292) | | | $ | (2,938) | | | $ | 691 | |
The following tables set forth the total assets, liabilities, equity and components of net income or loss, including the Company’s share, related to the unconsolidated joint ventures discussed above as of December 31, 2021 and December 31, 2020 and for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | |
| Balance Sheets | | | |
| December 31, 2021 | | December 31, 2020 |
| Assets | | | |
| Investment in Hotel Properties, Net | $ | 64,096 | | | $ | 581,452 | |
| Other Assets | 15,649 | | | 32,048 | |
| Total Assets | $ | 79,745 | | | $ | 613,500 | |
| | | |
| Liabilities and Equity | | | |
| Mortgages and Notes Payable | $ | 65,723 | | | $ | 452,284 | |
| Other Liabilities | 15,656 | | | 42,197 | |
| Equity: | | | |
| Hersha Hospitality Trust | 3,328 | | | 5,699 | |
| Joint Venture Partners | (4,962) | | | 113,452 | |
| Accumulated Other Comprehensive Loss | — | | | (132) | |
| Total Equity | (1,634) | | | 119,019 | |
| | | |
| Total Liabilities and Equity | $ | 79,745 | | | $ | 613,500 | |
| | | | | | | | | | | | | | | | | |
| Statements of Operations | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Room Revenue | $ | 11,790 | | | $ | 25,011 | | | $ | 94,384 | |
| Other Revenue | 731 | | | 1,020 | | | 2,408 | |
| Operating Expenses | (8,451) | | | (18,695) | | | (46,175) | |
| Lease Expense | (1,019) | | | (770) | | | (693) | |
| Property Taxes and Insurance | (3,095) | | | (12,906) | | | (12,477) | |
| General and Administrative | (87) | | | (2,638) | | | (5,783) | |
| Depreciation and Amortization | (6,065) | | | (16,200) | | | (14,947) | |
| Interest Expense | (4,619) | | | (23,908) | | | (28,072) | |
| Loss on Dissolution of Joint Venture | (112,371) | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Net Loss | $ | (123,186) | | | $ | (49,086) | | | $ | (11,355) | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
The following table is a reconciliation of our share in the unconsolidated joint ventures’ equity to our investment in the unconsolidated joint ventures as presented on our balance sheets as of December 31, 2021 and December 31, 2020.
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Our share of equity recorded on the joint ventures' financial statements | $ | 3,328 | | | $ | 5,699 | |
Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures(1) | 2,252 | | | 934 | |
| Investment in Unconsolidated Joint Ventures | $ | 5,580 | | | $ | 6,633 | |
(1) Adjustment to reconcile our share of equity recorded on the joint ventures' financial statements to our investment in unconsolidated joint ventures consists of the following:
•the difference between our basis in the investment in joint ventures and the equity recorded on the joint ventures' financial statements;
•accumulated amortization of our equity in joint ventures that reflects the difference in our portion of the fair value of joint ventures' assets on the date of our investment when compared to the carrying value of the assets recorded on the joint ventures’ financial statements (this excess or deficit investment is amortized over the life of the properties, and the amortization is included in Income (Loss) from Unconsolidated Joint Venture Investments on our consolidated statement of operations); and
•cumulative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements, if any.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 4 – OTHER ASSETS
Other Assets
Other Assets consisted of the following at December 31, 2021 and December 31, 2020: | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Derivative Asset | $ | 92 | | | $ | — | |
| Deferred Financing Costs | 1,070 | | | 2,395 | |
| Prepaid Expenses | 11,632 | | | 5,692 | |
| Investment in Statutory Trusts | 1,548 | | | 1,548 | |
| Investment in Non-Hotel Property and Inventories | 2,193 | | | 2,443 | |
| Deposits with Unaffiliated Third Parties | 2,663 | | | 2,561 | |
Deferred Tax Asset, Net of Valuation Allowance of $21,612 and $23,591, respectively | — | | | — | |
| | | |
| Other | 2,561 | | | 855 | |
| $ | 21,759 | | | $ | 15,494 | |
Derivative Asset - This category represents the Company’s gross asset fair value of interest rate swaps and interest rate caps. Any swaps and caps resulting in a liability to the Company are accounted for separately within Other Liabilities on the Balance Sheet.
Deferred Financing Costs - This category represents financing costs paid by the Company to establish our Line of Credit. These costs have been capitalized and will amortize to interest expense over the life of the Line of Credit.
Prepaid Expenses - Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in the next twelve months.
Investment in Statutory Trusts - We have an investment in the common stock of Hersha Statutory Trust I and Hersha Statutory Trust II. Our investment is accounted for under the equity method.
Investment in Non-Hotel Property and Inventories - This category represents the costs paid and capitalized by the Company for items such as office leasehold improvements, furniture and equipment, and property inventories.
Deposits with Unaffiliated Third Parties - These deposits represent deposits made by the Company with unaffiliated third parties for items such as lease security deposits, utility deposits, and deposits with unaffiliated third party management companies.
Deferred Tax Asset - We have $0 of net deferred tax assets as of December 31, 2021. We have considered various factors, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies in determining a valuation allowance for our deferred tax assets, and we believe that it is more likely than not that we will not be able to realize the net deferred tax assets in the future, and a valuation allowance for the entire deferred tax asset has been recorded.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT
Mortgages
Mortgages payable at December 31, 2021 and December 31, 2020 consisted of the following:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Mortgage Indebtedness | $ | 306,078 | | | $ | 332,264 | |
| Net Unamortized Premium | 13 | | | 354 | |
| Net Unamortized Deferred Financing Costs | (1,477) | | | (1,770) | |
| Mortgages Payable | $ | 304,614 | | | $ | 330,848 | |
| | | |
| | | |
Net Unamortized Deferred Financing Costs associated with entering into mortgage indebtedness are deferred and amortized over the life of the mortgages. Net Unamortized Premiums are also amortized over the remaining life of the loans. Mortgage indebtedness balances are subject to fixed and variable interest rates, which ranged from 2.75% to 5.05% as of December 31, 2021.
Our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, non-recourse financing arrangements. Our mortgage loans payable typically require that specified debt service coverage ratios be maintained with respect to the financed properties before we can exercise certain rights under the loan agreements relating to such properties. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan.
We have determined that all debt covenants contained in the loan agreements securing our consolidated hotel properties with the exception of one mortgage was met as of December 31, 2021. The lender of this mortgage has elected its right to escrow property level cash flow for the purpose of meeting future payment obligations.
As of December 31, 2021, the maturity dates for the outstanding mortgage loans ranged from December 2022 to September 2025.
During the year ended December 31, 2021, we refinanced the outstanding mortgages secured by the Hilton Garden Inn 52nd Street, the Courtyard Los Angeles Westside, the Hilton Garden Inn Tribeca, the Hyatt Union Square, and the St. Gregory Hotel, which resulted in $90 of debt modification expense.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
Credit Facilities
We maintain three secured credit agreements which aggregate to $747,481 with Citigroup Global Markets Inc., Wells Fargo Bank, Inc. and various other lenders. One credit agreement ("Credit Agreement") provides for a senior secured credit facility of $442,404 (“Credit Facility”). The Credit Facility consists of a $250,000 senior secured revolving line of credit (“Line of Credit”), and a $192,404 senior secured term loan (“First Term Loan”). The Credit Facility expires on August 10, 2022.
We maintain another credit agreement which provides for a $278,846 senior secured loan agreement (“Second Term Loan”) and expires on September 10, 2024.
A separate credit agreement provides for a $26,231 senior secured term loan agreement (“Third Term Loan” and collectively with the Credit Agreement and the Second Term Loan, the "Credit Agreements") and expires on August 10, 2022. Management intends to explore options including, but not limited to, additional asset sales, the refinancing of debt and the offering of equity or equity-linked securities prior to the maturity of the First Term Loan and the Third Term Loan on August 10, 2022.
On February 17, 2021, the Company signed amendments to the Credit Agreements which resulted in debt extinguishment expense $2,977. Debt extinguishment expense consists of $635 of debt extinguishment losses and $2,342 of debt modification losses. The signed amendments to the Credit Agreements, among other things, provide for:
•an extension of the maturity date of the Third Term Loan to August 10, 2022;
•a limited waiver of financial covenants through March 31, 2022; and
•the ability to borrow up to $174,729, inclusive of amounts already outstanding, under the Line of Credit, the proceeds of which may only be used to fund certain costs and expenses.
Certain conditions, such as minimum liquid assets in an aggregate amount of at least $30,000, and certain negative covenants and restrictions that are considered normal and customary, must be met on a recurring basis as outlined within the amendments.
The amendments to the Credit Agreements make certain other amendments to financial covenants in place beginning in the second quarter of 2022:
•a fixed charge coverage ratio of not less than 1.20 to 1.00 (was 1.50 to 1.00);
•a maximum leverage ratio of not more than 65% (was 60%); and
•a new financial covenant that requires the borrowing base leverage ratio to not exceed 60% at any time.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
The amount that we can borrow at any given time under our Line of Credit, and the First, Second and Third Term Loan (each a “Term Loan” and together the “Term Loans”) is governed by certain operating metrics of designated unencumbered hotel properties known as borrowing base assets. As of December 31, 2021, the following hotel properties were borrowing base assets:
| | | | | |
| - Courtyard by Marriott Brookline, Brookline, MA | - Hampton Inn, Washington, DC |
| - The Envoy Boston Seaport, Boston, MA | - Ritz-Carlton Georgetown, Washington, DC |
| - The Boxer, Boston, MA | - Hilton Garden Inn, M Street, Washington, DC |
| - Hampton Inn Seaport, Seaport, New York, NY | - The Winter Haven Hotel Miami Beach, Miami, FL |
| - Holiday Inn Express Chelsea, 29th Street, New York, NY | - The Blue Moon Hotel Miami Beach, Miami, FL |
| - Gate Hotel JFK Airport, New York, NY | - Cadillac Hotel & Beach Club, Miami, FL |
| - Hilton Garden Inn JFK Airport, New York, NY | - The Parrot Key Hotel & Villas, Key West, FL |
| - NU Hotel, Brooklyn, New York, NY | - TownePlace Suites, Sunnyvale, CA |
| - Hyatt House White Plains, White Plains, NY | - The Ambrose Hotel, Santa Monica, CA |
| - Hampton Inn Center City/ Convention Center, Philadelphia, PA | - The Pan Pacific Hotel Seattle, Seattle, WA |
| - The Rittenhouse, Philadelphia, PA | - Mystic Marriott Hotel & Spa, Groton, CT |
| - Philadelphia Westin, Philadelphia, PA | |
The interest rate for borrowings under the Line of Credit and Term Loans are based on a pricing grid with a range of one month U.S. LIBOR plus a spread. The following table summarizes the balances outstanding and interest rate spread for each borrowing:
| | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding Balance |
| Borrowing | | Spread | | December 31, 2021 | | December 31, 2020 |
| Line of Credit | | 1.50% to 2.25% | | $ | 118,684 | | | $ | 133,053 | |
| Secured Term Loan: | | | | | | |
| First Term Loan | | 1.45% to 2.20% | | 192,404 | | | 202,158 | |
| Second Term Loan | | 1.35% to 2.00% | | 278,846 | | | 292,983 | |
| Third Term Loan | | 1.45% to 2.20% | | 26,231 | | | 189,365 | |
| Deferred Financing Costs | | | | (1,396) | | | (2,762) | |
| Total Secured Term Loan | | | | $ | 496,085 | | | $ | 681,744 | |
Prior to the amendments noted above, the Credit Facility and the Term Loans included certain financial covenants and required that we maintain: (1) a minimum tangible net worth (calculated as total assets, plus accumulated depreciation, less total liabilities, intangibles and other defined adjustments) of $1,119,500, plus an amount equal to 75% of the net cash proceeds of all issuances and primary sales of equity interests of the parent guarantor or any of its subsidiaries consummated following the closing date; (2) annual distributions not to exceed 95% of adjusted funds from operations; and (3) certain financial ratios, including the following:
•a fixed charge coverage ratio of not less than 1.50 to 1.00;
•a maximum leverage ratio of not more than 60%; and
•a maximum secured debt leverage ratio of 45%.
The weighted average interest rate on our credit facilities was 3.69%, 4.07% and 4.11% for the years ended December 31, 2021, 2020 and 2019, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
Notes Payable
Notes payable at December 31, 2021 and December 31, 2020 consisted of the following:
| | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | |
| Statutory Trust I and Statutory Trust II Notes Payable Indebtedness | $ | 51,548 | | | $ | 51,548 | | |
| Net Unamortized Deferred Financing Costs | (706) | | | (759) | | |
| Statutory Trust I and Statutory Trust II Notes Payable | 50,842 | | | 50,789 | | |
| | | | |
| Junior Notes Payable Indebtedness | $ | 156,239 | | | $ | — | | |
| Net Unamortized Deferred Financing Costs | (4,209) | | | — | | |
| Net Unamortized Discount | (4,382) | | | — | | |
| Junior Notes Payable | 147,648 | | | — | | |
| | | | |
| Total Notes Payable | $ | 198,490 | | | $ | 50,789 | | |
| | | | |
Statutory Trust I and Statutory Trust II Notes Payable
We have two junior subordinated notes payable in the aggregate amount of $51,548 to the Hersha Statutory Trusts pursuant to indenture agreements which will mature on July 30, 2035, but may be redeemed at our option, in whole or in part, prior to maturity in accordance with the provisions of the indenture agreements. The $25,774 notes issued to Hersha Statutory Trust I and Hersha Statutory Trust II, bear interest at a variable rate of LIBOR plus 3% per annum. This rate resets two business days prior to each quarterly payment. The weighted average interest rate on our two junior subordinated notes payable during the years ended December 31, 2021, 2020 and 2019 was 3.21%, 3.95% and 5.50%, respectively.
Junior Notes Payable
On February 17, 2021, the Company entered into a note purchase agreement (the “Purchase Agreement”) with several purchasers (the “Purchasers”). The Company issued and sold to the Purchasers $150,000 aggregate principal amount of the Company’s 9.50% Unsecured PIK Toggle Notes due 2026 (the “Notes”) on February 23, 2021. The Notes will mature on February 23, 2026. The Notes bear interest at a rate of 9.50% per year, payable in arrears on June 30, September 30, December 31 and March 31 of each year, beginning on June 30, 2021. For any interest period ending on or prior to March 31, 2022, the Company, in our sole discretion, may elect to pay interest (a) in cash at a rate per annum equal to 4.75% per annum, and (b) in kind at a rate per annum equal to 4.75% per annum (“PIK Interest”). Any PIK Interest will be paid by increasing the principal amount of the Notes at the end of the applicable interest period by the amount of such PIK Interest. We elected the PIK Interest option for the interest periods ended June 30, 2021, September 30, 2021, and December 31, 2021 increasing the principal balance by $6,239 to $156,239 as of December 31, 2021. We have elected the PIK Interest option for the interest period ended March 31, 2022, which is the last period that the option is available to us.
The Notes may not be redeemed prior to February 23, 2022. The notes may be redeemed during the 12 month period beginning February 23, 2022 and the 12 month period beginning February 23, 2023, at a redemption price equal to 104% and 102% of the principal amount of the Notes being redeemed, respectively. After February 23, 2024, the notes may be redeemed at the principal amount.
The Notes are subject to representations, warranties, covenants, terms and conditions customary for transactions of this type, including limitations on liens, incurrence of debt, investments, mergers and asset dispositions, covenants to preserve corporate existence and comply with laws and default provisions.
The Company may only use the net proceeds from the issuance of the Notes in accordance with the mandatory prepayment waterfalls, which includes the repayment of outstanding borrowings under the Credit Agreement and use for certain other general corporate purposes.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
Debt Maturities
Aggregate annual principal payments for the Company’s credit facility and secured term loans, as amended, mortgages, Statutory Trust I and Statutory Trust II notes, and Junior notes payable for the five years following December 31, 2021 and thereafter are as follows: | | | | | | | | |
| Year Ending December 31, | | Amount |
| 2022 | | $ | 385,666 | |
| 2023 | | 103,148 | |
| 2024 | | 401,654 | |
| 2025 | | 40,250 | |
| 2026 | | 147,764 | |
| Thereafter | | 51,548 | |
| | |
| | $ | 1,130,030 | |
Interest Expense
The table below shows the interest expense incurred by the Company during the twelve months ended December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2021 | | 2020 | | 2019 | |
| Mortgage Loans Payable | | 10,537 | | | 12,277 | | | 15,804 | | |
| Interest Rate Swap Contracts on Mortgages* | | 2,477 | | | 1,895 | | | (453) | | |
| Unsecured Notes Payable | | 15,073 | | | 2,037 | | | 2,837 | | |
| Credit Facility and Term Loans | | 15,587 | | | 21,927 | | | 33,745 | | |
| Interest Rate Swap Contracts on Credit Facility and Term Loans* | | 8,866 | | | 11,018 | | | (2,630) | | |
| Deferred Financing Costs Amortization | | 4,628 | | | 3,551 | | | 2,241 | | |
| Capitalized Interest* | | — | | | — | | | (74) | | |
| Other | | 381 | | | 574 | | | 735 | | |
| Total Interest Expense | | $ | 57,549 | | | $ | 53,279 | | | $ | 52,205 | | |
*Negative amount indicates decrease to interest expense.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – LEASES
We own five hotels within our consolidated portfolio of hotels where we do not own the land on which the hotels reside, rather we lease the land from an unrelated third-party lessor. All of our land leases are classified as operating leases and have initial terms, with extension options that range from May 2062 to October 2103. Based on the nature of these leases, the Company assumed that all extension options would be fully executed in the measurement of the right of use assets and lease liabilities. Some of our land leases include variable payments, which are tied to an index such as the consumer price index or include rental payments based partially on the hotel revenues. Lease costs for our land leases are presented as Hotel Ground Rent in the Consolidated Statements of Operations.
Two additional office space leases are also factored into the lease liability and are classified as operating leases with terms ranging from March 2023 to December 2027. Our office space leases include variable payments for the Company's proportionate share of the building's property taxes, insurance, and common area maintenance. Lease costs for our office spaces are included in General and Administrative Expense in the Consolidated Statements of Operations.
The components of lease costs for the years ended December 31, 2021, 2020, and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| | Ground Lease | | Office Lease | | Total |
| Operating lease costs | | $ | 4,228 | | | $ | 483 | | | $ | 4,711 | |
| Variable lease costs | | 172 | | 298 | | 470 |
| Total lease costs | | $ | 4,400 | | | $ | 781 | | | $ | 5,181 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| | Ground Lease | | Office Lease | | Total |
| Operating lease costs | | $ | 4,153 | | | $ | 483 | | | $ | 4,636 | |
| Variable lease costs | | 139 | | | 253 | | | 392 | |
| Total lease costs | | $ | 4,292 | | | $ | 736 | | | $ | 5,028 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 |
| | Ground Lease | | Office Lease | | Total |
| Operating lease costs | | $ | 4,195 | | | $ | 483 | | | $ | 4,678 | |
| Variable lease costs | | 386 | | | 308 | | | 694 | |
| Total lease costs | | $ | 4,581 | | | $ | 791 | | | $ | 5,372 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – LEASES (CONTINUED)
Other information related to leases as of and for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | |
| | December 31, 2021 | December 31, 2020 |
| Cash paid from operating cash flows for operating leases | | $ | 4,657 | | $ | 4,383 | |
| Weighted average remaining lease term in years | | 63.5 | 64.2 |
| Weighted average discount rate | | 7.86 | % | 7.86 | % |
Maturities of lease liabilities as of December 31, 2021 are as follows:
| | | | | |
| Amount |
| 2022 | $ | 4,965 | |
| 2023 | 4,612 | |
| 2024 | 4,473 | |
| 2025 | 4,515 | |
| 2026 | 4,578 | |
| Thereafter | 279,840 | |
| Total undiscounted lease payments | 302,983 |
| Less imputed interest | (249,292) | |
| Total lease liability | $ | 53,691 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Management Agreements
Our wholly-owned TRS, 44 New England Management Company, and certain of our joint venture entities engage eligible independent contractors in accordance with the requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended, including Hersha Hospitality Management Limited Partnership (“HHMLP”), as the property managers for hotels it leases from us pursuant to management agreements. Certain executives and trustees of the Company own a minority interest in HHMLP. Our management agreements with HHMLP provide for five-year terms and are subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, HHMLP must qualify as an “eligible independent contractor” during the term of the management agreements. Under the management agreements, HHMLP generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by HHMLP in performing its authorized duties are reimbursed or borne by our TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. HHMLP is not obligated to advance any of its own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel. Management agreements with other unaffiliated hotel management companies have similar terms.
For its services, HHMLP receives a base management fee and, if a hotel exceeds certain thresholds, an incentive management fee. The base management fee for a hotel is due monthly and is equal to 3% of gross revenues associated with each hotel managed for the related month. The incentive management fee, if any, for a hotel is due annually in arrears on the ninetieth day following the end of each fiscal year and is based upon the financial performance of the hotels. For the years ended December 31, 2021, 2020 and 2019, base management fees incurred totaled $7,423, $4,795 and $14,123 respectively, and are recorded as Other Hotel Operating Expenses. For the years ended December 31, 2021, 2020 and 2019, incentive management fees incurred totaled $347, $0 and $161 respectively.
Franchise Agreements
Our branded hotel properties are operated under franchise agreements assumed by the hotel property lessee. The franchise agreements have 10 to 20 year terms, but may be terminated by either the franchisee or franchisor on certain anniversary dates specified in the agreements. The franchise agreements require annual payments for franchise royalties, reservation, and advertising services, and such payments are based upon percentages of gross room revenue. These payments are paid by the hotels and charged to expense as incurred. Franchise fee expenses for the years ended December 31, 2021, 2020 and 2019 were $11,262, $7,237 and $23,389 respectively, and are recorded in Other Hotel Operating Expenses. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
Accounting, Revenue Management and Information Technology Fees
Each of the wholly-owned hotels and consolidated joint venture hotel properties managed by HHMLP incurs a monthly accounting and information technology fee. Monthly fees for accounting services are between $2 and $3 per property and monthly information technology fees range from $1 to $2 per property. For the years ended December 31, 2021, 2020 and 2019, the Company incurred accounting fees of $1,144, $1,298 and $1,261 respectively. For the years ended December 31, 2021, 2020 and 2019, the Company incurred information technology fees of $370, $419 and $402 respectively. For the years ended December 31, 2021, 2020 and 2019, the Company incurred revenue management service fees of $1,635, $1,940 and $3,127. Accounting fees, revenue management fees, and information technology fees are included in Other Hotel Operating Expenses.
Capital Expenditure Fees
HHMLP charges a 5% fee on certain capital expenditures and pending renovation projects at the properties as compensation for procurement services related to capital expenditures and for project management of renovation projects. For the years ended December 31, 2021, 2020 and 2019, we incurred fees of $509, $1,148 and $2,525 respectively, which were capitalized with the cost of the related capital expenditures.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Acquisitions from Affiliates
We have entered into an option agreement with certain of our officers and trustees such that we obtain a right of first refusal to purchase any hotel owned or developed in the future by these individuals or entities controlled by them at fair market value. This right of first refusal would apply to each party until one year after such party ceases to be an officer or trustee of the Company. Our Acquisition Committee of the Board of Trustees is comprised solely of independent trustees, and the purchase prices and all material terms of the purchase of hotels from related parties are approved by the Acquisition Committee.
Hotel Supplies
For the years ended December 31, 2021, 2020 and 2019, we incurred charges for hotel supplies of $3, $82 and $307 respectively. For the years ended December 31, 2021, 2020 and 2019, we incurred charges for capital expenditure purchases of $1,034, $1,212 and $12,721 respectively. These purchases were made from Hersha Purchasing and Design, a hotel supply company owned, in part, by certain executives and trustees of the Company. Hotel supplies are expensed and included in Hotel Operating Expenses on our consolidated statements of operations, and capital expenditure purchases are included in investment in hotel properties on our consolidated balance sheets.
Insurance Services
Prior to January 1, 2021, the Company utilized the services of the Hersha Group, a risk management business owned, in part, by certain executives and trustees of the Company. The Hersha Group provided consulting and procurement services to the Company related to the placement of property and casualty insurance, placement of general liability insurance, and for claims handling for our hotel properties. Beginning January 1, 2021, these services were provided by a third-party service provider. The total costs of property insurance that we paid through the Hersha Group were $6,968, and $5,934 for the years ended December 31, 2020 and 2019, respectively. These amounts paid to the Hersha Group include insurance premiums and brokerage fees as compensation for brokerage services.
Restaurant Lease Agreements with Independent Restaurant Group
The Company has entered into management agreements with Independent Restaurant Group (“IRG”), subject to the supervision of HHMLP, as property manager, for restaurants at three of its hotel properties. Jay H. Shah and Neil H. Shah, executive officers and/or trustees of the Company, collectively own a 70.0% interest in IRG. Management fees incurred to IRG were $163 and $33 for the years ended December 31, 2021 and 2020, respectively. Prior to April 1, 2020, the restaurants at these three hotel properties were leased to IRG under lease agreements which generally provided for the payment of base rents and percentage rents, which were based on IRG’s revenue in excess of defined thresholds. At the time of the conversion of the lease agreements to management agreements, there was rent due of $103, which was forgiven due to the impact of the COVID-19 pandemic on the operations of our hotels and IRG's restaurants.
Due From Related Parties
The due from related parties balance as of December 31, 2021 and December 31, 2020 was $2,495 and $2,641, respectively. The balances primarily consisted of working capital deposits made to HHMLP and other entities owned, in part, by certain executives and trustees of the Company.
Due to Related Parties
The balance due to related parties as of December 31, 2021 and December 31, 2020 was $1,723 and $0, respectively. The balance at December 31, 2021 primarily consists of amounts due to HHMLP for monthly management fees discussed above.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Fair Value Measurements
Our determination of fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, we utilize a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
As of December 31, 2021, the Company’s derivative instruments represented the only financial instruments measured at fair value. Currently, the Company uses derivative instruments, such as interest rate swaps and caps, to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties. However, as of December 31, 2021 we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Derivative Instruments
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges limit the Company’s exposure to increased cash payments due to increases in variable interest rates. The table on the following page presents our derivative instruments as of December 31, 2021 and 2020.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Estimated Fair Value |
| | | | | | | Asset / (Liability) Balance |
| Hedged Debt | Type | Strike Rate | Index | Effective Date | Derivative Contract Maturity Date | Notional Amount | December 31, 2021 | December 31, 2020 |
| Term Loan Instruments: | | | | | | | | |
| Credit Facility | Swap | 1.341 | % | 1-Month LIBOR + 2.20% | October 3, 2019 | August 2, 2021 | 150,000 | | $ | — | | $ | (1,070) | |
| Credit Facility (1) | Swap | 1.316 | % | 1-Month LIBOR + 2.20% | September 3, 2019 | August 2, 2021 | 43,900 | | — | | (307) | |
| Credit Facility | Swap | 1.824 | % | 1-Month LIBOR + 2.20% | September 3, 2019 | August 10, 2022 | 103,500 | | (970) | | (2,793) | |
| Credit Facility | Swap | 1.824 | % | 1-Month LIBOR + 2.20% | September 3, 2019 | August 10, 2022 | 103,500 | | (970) | | (2,793) | |
| Credit Facility | Swap | 1.460 | % | 1-Month LIBOR + 2.00% | September 10, 2019 | September 10, 2024 | 300,000 | | (3,729) | | (13,286) | |
| | | | | | | | |
| Mortgages: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Hyatt, Union Square, New York, NY | Swap | 1.870 | % | 1-Month LIBOR + 2.30% | June 7, 2019 | June 7, 2023 | 56,000 | | (987) | | (2,305) | |
| Hilton Garden Inn Tribeca, New York, NY | Swap | 1.768 | % | 1-Month LIBOR + 2.25% | July 25, 2019 | July 25, 2024 | 22,725 | | (460) | | (1,222) | |
| Hilton Garden Inn Tribeca, New York, NY | Swap | 1.768 | % | 1-Month LIBOR +2.25% | July 25, 2019 | July 25, 2024 | 22,725 | | (460) | | (1,222) | |
| Hilton Garden Inn 52nd Street, New York, NY | Swap | 1.540 | % | 1-Month LIBOR + 2.30% | December 4, 2019 | December 4, 2022 | 44,325 | | (458) | | (1,186) | |
| Courtyard, LA Westside, Culver City, CA | Swap | 0.495 | % | 1-Month LIBOR + 2.75% | June 1, 2020 | August 1, 2021 | 35,000 | | — | | (75) | |
| Courtyard, LA Westside, Culver City, CA | Cap | 2.500 | % | 1-Month LIBOR | August 1, 2021 | August 1, 2024 | 35,000 | | 92 | | — | |
| | | | | | | $ | (7,942) | | $ | (26,259) | |
(1) During the year ended December 31, 2021, we dedesignated this swap as a cash flow hedge and recorded expense of $372 accordingly.
The fair value of the interest rate swaps and caps with an asset balance are included in Other Assets and the fair value of the interest rate swaps and caps with a liability balance are included in Accounts Payable, Accrued Expenses and Other Liabilities on our Consolidated Balance Sheets at December 31, 2021 and December 31, 2020.
The net change related to derivative instruments designated as cash flow hedges recognized as unrealized gains and losses reflected on our consolidated balance sheet in accumulated other comprehensive income was a gain of $18,346, a loss of $22,348, and a loss of $3,495 for the years ended December 31, 2021, 2020 and 2019, respectively.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate derivatives. The change in net unrealized gains/losses on cash flow hedges reflects a reclassification of $366, $4,083 and $1,007 of net unrealized gains/losses from accumulated other comprehensive income as an increase/decrease to interest expense during 2021, 2020 and 2019, respectively. During 2022, the Company estimates that an additional $6,799 will be reclassified as an increase to interest expense.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
Fair Value of Debt
The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the fair value hierarchy. As of December 31, 2021, the carrying value and estimated fair value of the Company’s debt were $1,117,873 and $1,146,699, respectively. As of December 31, 2020, the carrying value and estimated fair value of the Company’s debt were $1,196,434 and $1,176,625, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 – SHARE BASED PAYMENTS
We measure the cost of employee service received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost is amortized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award. The compensation cost related to performance awards that are contingent upon market-based criteria being met is recorded at the fair value of the award on the date of the grant and amortized over the performance period. As discussed in Note 1, forfeitures of share-based awards are expensed as they occur.
Our shareholders approved the Hersha Hospitality Trust 2012 Equity Incentive Plan, as amended, (the “2012 Plan”) for the purpose of attracting and retaining executive officers, employees, trustees and other persons and entities that provide services to the Company.
Summary of Share Based Compensation Programs
Executives
The Compensation Committee of our Board of Trustees implements executive compensation strategies that align the interests of the Company’s executives with those of shareholders. It does so through a mix of base salary, the Short Term Incentive Program ("STIP"), and the Long-Term Incentive Program ("LTIP"). The STIP and LTIP are incentive compensation programs that align executive compensation with the performance of the Company.
•Short Term Incentive Program - On March 3, 2021, the Compensation Committee approved the 2021 STIP, pursuant to which the executive officers are eligible to earn cash and equity awards based on achieving a threshold, target or maximum level of defined performance objectives at the end of the performance period, December 31, 2021. Any amounts earned are satisfied 50% in cash and 50% in equity awards. The Compensation Committee provided the option to the executive officers to elect equity awards in lieu of cash payment for amounts earned under the 2021 STIP. On December 31, 2021, 960,384 Units were issued to the executive officers in settlement of the 2021 STIP. These Units vest on December 31, 2023, the two year anniversary following the end of the performance period and were determined by dividing the dollar amount of award earned by $9.04, the per share volume weighted average trading price of the Company's common shares on the NYSE for the 20 trading days prior to December 31, 2021.
The Company accounts for grants earned under the STIP as performance awards for which the Company assesses the probability of achievement of the performance conditions at the end of each period. Estimates of amounts earned under the STIP are recorded in general and administrative expense on the consolidated statement of operations and a liability is recorded in accounts payable, accrued expenses and other liabilities on the consolidated balance sheet. In the case of the 2021 STIP issued on December 31, 2021, please see information on the next page for the presentation for awards upon issuance.
•Long Term Incentive Program - On March 3, 2021, the Compensation Committee approved the 2021 LTIP in which 50% of the awards provide for time based vesting and the remaining 50% are issuable based on the Company's achievement of a certain level of (1) absolute total shareholder return (37.5% of the award), (2) relative total shareholder return as compared to the Company’s peer group (37.5% of the award), and (3) relative growth in revenue per available room ("RevPar") compared to the Company’s peer group (25.0% of the award). On March 17, 2021, the Compensation Committee awarded 247,689 LTIP Units related to the time based portion of the plan. These Units will vest over a three year period from January 1, 2021 to December 31, 2023 and were determined by dividing the dollar amount of award earned by $8.43, the per share volume weighted average trading price of the Company's common shares on the NYSE for the 20 trading days prior to December 31, 2020. The 50% market-based portion of the 2021 LTIP has a three-year performance period which commenced on January 1, 2021 and ends December 31, 2023.
NOTE 9 – SHARE BASED PAYMENTS (CONTINUED)
The Company accounts for the total shareholder return components of these grants as market based awards where the Company estimates unearned compensation at the grant date fair value which is then amortized into
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
compensation cost over the vesting period of each individual plan. The Company accounts for the RevPAR component of the grants as performance-based awards for which the Company assesses the probable achievement of the performance conditions at the end of the reporting period. As of December 31, 2021, no shares or LTIP Units have been issued to the executive officers in settlement of the 2021 market-based LTIP awards.
Remaining unearned compensation for LTIP Units issued to executives in settlement of awards under the STIP, LTIP or the Company’s legacy incentive compensation programs is recorded in noncontrolling interests on the Company’s consolidated balance sheets and is amortized in general and administrative expense on the consolidated statement of operations over the remaining vesting period.
Trustees
To align the interests of the Company’s trustees with those of shareholders, our trustees receive equity as a component of the compensation for their service on our board of trustees.
•Share Awards - Trustees receive biennial share awards that vest immediately upon issuance.
•Trustee Long Term Incentive Program - Trustees receive grants of restricted shares which vest over a three-year period subject to continued service to the Company’s board of trustees.
•Board Fee Compensation Elected in Equity - Trustees can make a voluntary election to receive any portion of their board fee compensation in the form of common equity valued at a 25% premium to the cash that would have been received. Shares issued for board retainer elected in equity vest over the year of service covered by the retainer and shares issued for service as lead director, committee chair and committee membership vest immediately upon issuance.
For shares issued that are subject to vesting, unearned compensation is recorded in additional paid in capital on the consolidated balance sheet and is amortized in general and administrative expense on the consolidated statement of operations over the vesting period. Share based compensation for shares issued that immediately vest is recorded in general and administrative expense on the consolidated statement of operations.
Employees and Non-Employees
Grants of restricted shares are issued to attract, retain and reward employees and non-employees that are critical to the Company’s success. These restricted shares typically vest over a period of between one and four years, subject to continued service to the Company.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 – SHARE BASED PAYMENTS (CONTINUED)
Share Based Compensation Activity
A summary of our share based compensation activity from January 1, 2019 to December 31, 2021 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | LTIP Unit Awards | | Restricted Share Awards | | Share Awards |
| | Number of Units | | Weighted Average Grant Date Fair Value | | Number of Restricted Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested Balance as of January 1, 2019 | | 450,903 | | | $ | 17.95 | | | 91,859 | | | $ | 19.56 | | | — | | | |
| | | | | | | | | | | | |
| Granted | | 530,281 | | | 18.00 | | | 83,805 | | | 16.40 | | | 42,533 | | | $ | 16.01 | |
| Vested | | (539,983) | | | 17.97 | | | (80,924) | | | 19.11 | | | (42,533) | | | 16.01 | |
| Forfeited | | — | | | N/A | | (2,638) | | | 19.78 | | | — | | | N/A |
| | | | | | | | | | | | |
Unvested Balance as of December 31, 2019 | | 441,201 | | | 17.99 | | | 92,102 | | | 17.07 | | | — | | | |
| | | | | | | | | | | | |
| Granted | | 1,112,862 | | | 5.24 | | | 189,851 | | | 5.34 | | | — | | | N/A |
| Vested | | (655,937) | | | 12.56 | | | (78,962) | | | 12.49 | | | — | | | N/A |
| Forfeited | | — | | | N/A | | (113) | | | 18.00 | | | — | | | N/A |
| | | | | | | | | | | | |
Unvested Balance as of December 31, 2020 | | 898,126 | | | 6.15 | | | 202,878 | | | 7.87 | | | — | | | |
| | | | | | | | | | | | |
| Granted | | 1,774,990 | | | 10.82 | | | 207,748 | | | 9.88 | | | 32,460 | | | 11.31 | |
| Vested | | (1,014,121) | | | 6.84 | | | (239,736) | | | 7.73 | | | (32,460) | | | 11.31 | |
| Forfeited | | — | | | N/A | | (150) | | | 11.31 | | | — | | | N/A |
| | | | | | | | | | | | |
Unvested Balance as of December 31, 2021 | | 1,658,995 | | | 10.73 | | | 170,740 | | | 10.52 | | | — | | | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 – SHARE BASED PAYMENTS (CONTINUED)
The following table summarizes share based compensation expense and unearned compensation for the years ended December 31, 2021, 2020 and 2019 and as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Share Based
Compensation Expense | | Unearned
Compensation |
| | For the Year Ended December 31, | | As of December 31, |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Issued Awards | | | | | | | | | | |
| LTIP Unit Awards | | 8,952 | | | 6,105 | | | 5,646 | | | 11,344 | | | 1,842 | |
| Restricted Share Awards | | 1,215 | | | 2,063 | | | 1,495 | | | 834 | | | 276 | |
| Share Awards | | 367 | | | — | | | 680 | | | — | | | — | |
| Unissued Awards | | | | | | | | | | |
| Market Based | | 1,499 | | | 1,320 | | | 1,467 | | | 2,230 | | | 1,933 | |
| Performance Based | | — | | | — | | | 1,515 | | | — | | | — | |
| Total | | $ | 12,033 | | | $ | 9,488 | | | $ | 10,803 | | | $ | 14,408 | | | $ | 4,051 | |
The weighted-average period of which the unrecognized compensation expense will be recorded is approximately 1.9 years for LTIP Unit Awards and 1.3 years for Restricted Share Awards.
The remaining unvested target units are expected to vest as follows: | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2023 | | 2024 |
| | | | | | |
| LTIP Unit Awards | | 616,047 | | 1,042,948 | | — | |
| Restricted Share Awards | | 115,325 | | 52,415 | | 3,000 |
| | 731,372 | | | 1,095,363 | | | 3,000 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 10 – EARNINGS PER SHARE
The following table is a reconciliation of the income or loss (numerator) and the weighted average shares (denominator) used in the calculation of basic and diluted earnings per common share. The computation of basic and diluted earnings per share is presented below. | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, |
| 2021 | | 2020 | | 2019 |
| NUMERATOR: | | | | | |
| Basic and Diluted* | | | | | |
| Net Loss | $ | (44,845) | | | $ | (189,260) | | | $ | (5,847) | |
| Loss allocated to Noncontrolling Interests | 4,672 | | | 22,915 | | | 2,178 | |
| Distributions to Preferred Shareholders | (24,174) | | | (24,176) | | | (24,174) | |
| Dividends Paid on Unvested Restricted Shares and LTIP Units | — | | | — | | | (981) | |
| | | | | |
| Net Loss from Continuing Operations attributable to Common Shareholders | $ | (64,347) | | | $ | (190,521) | | | $ | (28,824) | |
| | | | | |
| DENOMINATOR: | | | | | |
| Weighted average number of common shares - basic | 39,089,987 | | | 38,613,563 | | | 38,907,894 | |
| Effect of dilutive securities: | | | | | |
| Restricted Stock Awards and LTIP Units (unvested) | — | | | — | | | — | |
| Contingently Issued Shares and Units | — | | | — | | | — | |
| Weighted average number of common shares - diluted | 39,089,987 | | | 38,613,563 | | | 38,907,894 | |
* Income (loss) allocated to noncontrolling interest in HHLP has been excluded from the numerator and Common Units and Vested LTIP Units have been omitted from the denominator for the purpose of computing diluted earnings per share since including these amounts in the numerator and denominator would have no impact. In addition, potentially dilutive common shares, if any, have been excluded from the denominator if they are anti-dilutive to income (loss) applicable to common shareholders.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 11 – CASH FLOW DISCLOSURES AND NON CASH INVESTING AND FINANCING ACTIVITIES
Interest paid during 2021, 2020 and 2019 totaled $34,661, $38,170 and $54,158 respectively. Net Cash paid on Interest Rate Derivative contracts during 2021, 2020 and 2019 totaled $11,822, $7,635 and $(4,336), respectively. Cash paid for income taxes during 2021, 2020 and 2019 was $113, $79 and $53, respectively. The following non-cash investing and financing activities occurred during 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Common Shares issued as part of the Dividend Reinvestment Plan | $ | — | | | $ | 14 | | | $ | 60 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Conversion of Common Units to Common Shares | 3,026 | | | — | | | — | |
| Issuance of share based payments | 22,955 | | | 7,259 | | | 12,924 | |
| Accrued payables for fixed assets placed into service | 835 | | | 658 | | | 2,506 | |
| Increase in accrued liabilities related to insurance premium financing agreements | 5,820 | | | — | | | — | |
| | | | | |
| Adjustment to Record Non-Controlling Interest at Redemption Value | 2,310 | | | (3,196) | | | 488 | |
| Right of Use Assets obtained in exchange for Lease Liabilities | 699 | | | — | | | 55,515 | |
| | | | | |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Cash and cash equivalents | $ | 72,238 | | $ | 16,637 | | $ | 27,012 | |
| Escrowed cash | 12,707 | | 6,970 | | 9,973 | |
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 84,945 | | $ | 23,607 | | $ | 36,985 | |
Amounts included in restricted cash represent those required to be set aside in escrow by contractual agreements with various lenders for the payment of specific items such as property insurance, property tax, and capital expenditures.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 12 – SHAREHOLDERS’ EQUITY, NONCONTROLLING INTERESTS IN PARTNERSHIP, AND REDEEMABLE NON-CONTROLLING INTERESTS
Common Shares
The Company’s outstanding common shares have been duly authorized, and are fully paid and non-assessable. Common shareholders are entitled to receive dividends if and when authorized and declared by the Board of Trustees of the Company out of assets legally available and to share ratably in the assets of the Company legally available for distribution to its shareholders in the event of its liquidation, dissolution or winding up after payment of, or adequate provision for, all known debts and liabilities of the Company.
Preferred Shares
As of December 31, 2021, we have 14,703,214 Cumulative Redeemable Preferred Shares outstanding consisting of three separate Series issuances. Terms of the Series C, Series D and Series E Preferred Shares outstanding at December 31, 2021 and 2020 are summarized as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Dividend Per Share (1) |
| | Shares Outstanding | | | | | | Year Ended December 31, |
| Series | | December 31, 2021 | | December 31, 2020 | | Aggregate Liquidation Preference | | Distribution Rate | | 2021 | | 2020 |
| Series C | | 3,000,000 | | | 3,000,000 | | | $ | 75,000 | | | 6.875 | % | | $ | 3.4376 | | | $ | — | |
| Series D | | 7,701,700 | | | 7,701,700 | | | 192,543 | | | 6.500 | % | | 3.2500 | | | — | |
| Series E | | 4,001,514 | | | 4,001,514 | | | 100,038 | | | 6.500 | % | | 3.2500 | | | — | |
| Total | | 14,703,214 | | | 14,703,214 | | | | | | | | | |
(1) We suspended the payment of our preferred dividends in 2020. The total arrearage as of December 31, 2020 of approximately $24,176 was paid on March 26, 2021. During the year ended December 31, 2021, the Company paid cash dividends on the Company's Series C, Series D and Series E cumulative redeemable preferred stock reflecting accrued and unpaid dividends for the dividend periods ended April 15, 2020, July 15, 2020, October 15, 2020 and January 15, 2021. In addition, the Company paid a cash dividend on all Series of cumulative redeemable preferred stock for the dividend periods ending April 15, 2021, July 15, 2021, October 15, 2021, and declared a similar cash dividend for the fourth dividend period ending January 15, 2021, which was paid on January 18, 2022 to holders of record as of December 31, 2021.
Our Board of Trustees authorized a share repurchase program for up to $50,000 of common shares which expired on December 31, 2019. For the year ended December 31, 2019, we repurchased 933,436 common shares for an aggregate purchase price of $14,194. Upon repurchase by the Company, these common shares ceased to be outstanding and became authorized but unissued common shares. There was no share repurchase program for the years ended December 31, 2020 and December 31, 2021.
Common Units and LTIP Units
The noncontrolling interest of Common Units and LTIP Units totaled $50,922 as of December 31, 2021 and $49,246 as of December 31, 2020. As of December 31, 2021, there were 6,926,253 Common Units and LTIP Units collectively outstanding with a fair market value of $63,514, based on the price per share of our common shares on the NYSE on such date.
Common Units are issued in connection with the acquisition of wholly owned hotels and joint venture interests in hotel properties. The total number of Common Units outstanding as of December 31, 2021, 2020 and 2019 was 1,835,820, 2,066,615 and 2,066,615, respectively. These units can be redeemed for cash or converted to common shares, at the Company’s option, on a one-for-one basis. The number of common shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidation or similar pro rata share transactions, that otherwise would have the effect of diluting the ownership interest of the limited partners or our shareholders. During December 31, 2021, 241,545 Common Units were converted to common shares, and there were no conversions of Common Units during the years ended December 31, 2020 and December 31, 2019. In addition, as noted in “Note 9 – Share Based Payments,” during 2021, the Company issued 1,774,990 LTIP Units.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
Redeemable Non-controlling Interest
Our joint venture partner has a noncontrolling equity interest of 15% in the Ritz-Carlton Coconut Grove, FL. Hersha Holding RC Owner, LLC, the owner entity of the Ritz-Carlton Coconut Grove joint venture ("Ritz Coconut Grove"), distributes income based on cash available for distribution as follows: (1) to us until we receive a cumulative return on our contributed senior common equity interest, currently at 8%, and (2) then to the owner of the noncontrolling interest until they receive a cumulative return on their contributed junior common equity interest, currently at 8%, and (3) then 75% to us and 25% to the owner of the noncontrolling interest until we both receive a cumulative return on our contributed senior common equity interest, currently at 12%, and (4) finally, any remaining operating profit shall be distributed 70% to us and 30% to the owner of the noncontrolling interest. Additionally, our joint venture partner in the Ritz Coconut Grove has the right to put their ownership interest to us for cash consideration at any time during the life of the venture.
The balance sheet and financial results of the Ritz Coconut Grove are included in our consolidated financial statements and the noncontrolling interest in the Ritz Coconut Grove is classified as temporary equity within our Consolidated Balance Sheet. The noncontrolling interest in the Ritz Coconut Grove is measured at the put option redemption value, which is defined in the joint venture agreement. For the years ended December 31, 2021, 2020 and 2019, based on the income allocation methodology described above, the noncontrolling interest in this joint venture was allocated losses of $158, $21 and $300, respectively, and is recorded as part of the (Income) Loss Allocated to Noncontrolling Interests line item within the Consolidated Statements of Operations. We reclassified $2,310 and $(3,196) from Additional Paid in Capital to Noncontrolling Joint Venture Interest to recognize the minority interest at the put option redemption value of $2,310 and $0, at December 31, 2021 and December 31, 2020, respectively.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 13 – INCOME TAXES
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1999. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to its shareholders. It is the Company’s current intention to adhere to these requirements and maintain the Company’s qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax for taxable years prior to 2018) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.
Taxable income from non-REIT activities managed through TRSs is subject to federal, state and local income taxes. As a TRS, 44 New England is subject to income taxes at the applicable federal, state and local tax rates.
The provision for income taxes differs from the amount of income tax determined by applying the applicable statutory federal income tax rate (21%) to pretax income from continuing operations as a result of the following differences:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Statutory federal income tax provision | $ | (9,241) | | | $ | (37,365) | | | $ | (1,208) | |
| Adjustment for nontaxable income for Hersha Hospitality Trust | 13,065 | | | 29,636 | | | 1,419 | |
| | | | | |
| State income taxes, net of federal income tax effect | (1,367) | | | (2,720) | | | 456 | |
| Non-deductible expenses, tax credits, and other, net | 361 | | | (1,317) | | | (575) | |
| Changes in valuation allowance | (1,980) | | | 23,095 | | | — | |
| | | | | |
| Total income tax expense | $ | 838 | | | $ | 11,329 | | | $ | 92 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 13 – INCOME TAXES (CONTINUED)
The components of the Company’s income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 were as follows: | | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income tax expense (benefit): | | | | | |
| Current: | | | | | |
| Federal | $ | — | | | $ | (51) | | | $ | (60) | |
| State | 838 | | | (10) | | | 464 | |
| Deferred: | | | | | |
| Federal | — | | | 7,688 | | | (302) | |
| State | — | | | 3,702 | | | (10) | |
| Total | $ | 838 | | | $ | 11,329 | | | $ | 92 | |
The components of consolidated TRS’s net deferred tax asset as of December 31, 2021 and 2020 were as follows: | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 19,084 | | | $ | 21,569 | |
| Accrued expenses and other | 2,002 | | | 1,493 | |
| Tax credit carryforwards | 355 | | | 355 | |
| Depreciation and amortization | 171 | | | 174 | |
| Total gross deferred tax assets | 21,612 | | | 23,591 | |
| Valuation allowance | (21,612) | | | (23,591) | |
| | | |
| | | |
| | | |
| Total Net deferred tax assets | $ | — | | | $ | — | |
In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the level of historical taxable income and projections for future taxable income over which the deferred tax assets are deductible and limitations related to the utilization of certain tax attribute carryforwards, Management believes it is more likely than not that the remaining deferred tax assets will not be realized.
As of December 31, 2021, we have gross federal net operating loss carryforwards of $56,248 of which $14,429 expire over various periods from 2023 through 2036 and $41,819 carries forward indefinitely. As of December 31, 2021, we have gross state net operating loss carryforwards of $114,770 which expire over various periods from 2023 to 2040. The Company has tax credits of $355 available which begin to expire in 2032.
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 13 – INCOME TAXES (CONTINUED)
Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to compute depreciation. The following table sets forth certain per share information regarding the Company’s common and preferred share distributions for the years ended December 31, 2021, 2020 and 2019. | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Preferred Shares - 6.875% Series C | | | | | |
| Ordinary income | 0.00 | % | | 0.00 | % | | 100.00 | % |
| Return of Capital | 0.00 | % | | 100.00 | % | | 0.00 | % |
| Capital Gain Distribution | 100.00 | % | | 0.00 | % | | 0.00 | % |
| Preferred Shares - 6.5% Series D | | | | | |
| Ordinary income | 0.00 | % | | 0.00 | % | | 100.00 | % |
| Return of Capital | 0.00 | % | | 100.00 | % | | 0.00 | % |
| Capital Gain Distribution | 100.00 | % | | 0.00 | % | | 0.00 | % |
| Preferred Shares - 6.5% Series E | | | | | |
| Ordinary income | 0.00 | % | | 0.00 | % | | 100.00 | % |
| Return of Capital | 0.00 | % | | 100.00 | % | | 0.00 | % |
| Capital Gain Distribution | 100.00 | % | | 0.00 | % | | 0.00 | % |
| Common Shares - Class A | | | | | |
| Ordinary income | N/A | | 0.00 | % | | 33.03 | % |
| Return of Capital | N/A | | 100.00 | % | | 66.97 | % |
| Capital Gain Distribution | N/A | | 0.00 | % | | 0.00 | % |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 14 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Hotel Operating Revenues: | | | | | | | |
| Room | $ | 39,350 | | | $ | 56,539 | | | $ | 68,302 | | | $ | 73,797 | |
| Food & Beverage | 3,074 | | | 7,230 | | | 9,616 | | | 11,858 | |
| Other | 4,729 | | | 6,314 | | | 7,289 | | | 7,768 | |
| Other Revenues | 12 | | | 13 | | | 44 | | | 54 | |
| Hotel Operating Expenses: | | | | | | | |
| Room | 9,198 | | | 12,350 | | | 14,706 | | | 15,631 | |
| Food & Beverage | 2,873 | | | 5,409 | | | 7,123 | | | 9,351 | |
| Other | 20,109 | | | 23,551 | | | 28,160 | | | 29,695 | |
| Other Expenses | 5,826 | | | 51,569 | | | 50,306 | | | 51,847 | |
| Loss from Unconsolidated Joint Ventures | (658) | | | (589) | | | (611) | | | (434) | |
| Income (Loss) Before Income Taxes | 8,501 | | | (23,372) | | | (15,655) | | | (13,481) | |
| Income Tax Benefit (Expense) | 589 | | | (151) | | | (277) | | | (999) | |
| Net Income (Loss) | 9,090 | | | (23,523) | | | (15,932) | | | (14,480) | |
| | | | | | | |
| Income (loss) Allocated to Noncontrolling Interests | 322 | | | (2,945) | | | (2,177) | | | (2,024) | |
| (Loss) Income Allocated to Noncontrolling Interests - Consolidated Joint Venture | (158) | | | 1,968 | | | — | | | 342 | |
| Preferred Distributions | 6,043 | | | 6,044 | | | 6,044 | | | 6,043 | |
| Net Income (Loss) applicable to Common Shareholders | $ | 2,883 | | | $ | (28,590) | | | $ | (19,799) | | | $ | (18,841) | |
| Earnings per share: | | | | | | | |
| Basic Net Income (Loss) applicable to Common Shareholders | $ | 0.07 | | | $ | (0.73) | | | $ | (0.51) | | | $ | (0.48) | |
| Diluted Net Income (Loss) applicable to Common Shareholders | $ | 0.07 | | | $ | (0.73) | | | $ | (0.51) | | | $ | (0.48) | |
| Weighted Average Common Shares Outstanding - Basic | 38,970,893 | | | 39,097,820 | | | 39,139,610 | | | 39,149,120 | |
| Weighted Average Common Shares Outstanding - Diluted | 39,840,474 | | | 39,097,820 | | | 39,139,610 | | | 39,149,120 | |
| | | | | | | |
| Year Ended December 31, 2020 |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Hotel Operating Revenues: | | | | | | | |
| Room | $ | 71,083 | | | $ | 15,139 | | | $ | 27,546 | | | $ | 28,492 | |
| Food & Beverage | 10,075 | | | 136 | | | 2,441 | | | 2,766 | |
| Other | 8,780 | | | 2,137 | | | 3,734 | | | 4,114 | |
| Other Revenues | 235 | | | 31 | | | 26 | | | 10,082 | |
| Hotel Operating Expenses: | | | | | | | |
| Room | 19,092 | | | 3,622 | | | 7,436 | | | 8,637 | |
| Food & Beverage | 10,621 | | | 721 | | | 2,344 | | | 2,513 | |
| Other | 35,806 | | | 14,035 | | | 17,965 | | | 17,464 | |
| Other Expenses | 54,106 | | | 54,471 | | | 53,534 | | | 59,443 | |
| Loss from Unconsolidated Joint Ventures | (1,018) | | | (502) | | | (669) | | | (749) | |
| Loss Before Income Taxes | (30,470) | | | (55,908) | | | (48,201) | | | (43,352) | |
| Income Tax Benefit (Expense) | 4,498 | | | (15,872) | | | 28 | | | 17 | |
| Net Loss | (25,972) | | | (71,780) | | | (48,173) | | | (43,335) | |
| | | | | | | |
| Loss Allocated to Noncontrolling Interests | (2,897) | | | (7,164) | | | (5,032) | | | (4,605) | |
| Loss Allocated to Noncontrolling Interests - Consolidated Joint Ventures | — | | | (3,196) | | | — | | | (21) | |
| Preferred Distributions | 6,044 | | | 6,044 | | | 6,044 | | | 6,044 | |
| Net Loss applicable to Common Shareholders | $ | (29,119) | | | $ | (67,464) | | | $ | (49,185) | | | $ | (44,753) | |
| Earnings per share: | | | | | | | |
| Basic Net Loss applicable to Common Shareholders | $ | (0.76) | | | $ | (1.75) | | | $ | (1.27) | | | $ | (1.16) | |
| Diluted Net Loss applicable to Common Shareholders | $ | (0.76) | | | $ | (1.75) | | | $ | (1.27) | | | $ | (1.16) | |
| Weighted Average Common Shares Outstanding - Basic | 38,564,099 | | | 38,609,922 | | | 38,639,048 | | | 38,640,604 | |
| Weighted Average Common Shares Outstanding - Diluted | 38,564,099 | | | 38,609,922 | | | 38,639,048 | | | 38,640,604 | |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2021
[IN THOUSANDS] | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Costs | | Costs Capitalized Subsequent to Acquisition (1) | | Gross Amounts at Close of Period | | Accumulated Depreciation | | Net Book Value | | |
| Description | Encumbrances | | Land | | Buildings & Improvements | | Land | | Buildings & Improvements | | Land | | Buildings & Improvements | | Total | | Buildings & Improvements* | | Land, Buildings & Improvements | | Date of Acquisition |
Courtyard by Marriott Brookline,
Brookline, MA | $ | — | | | $ | — | | | $ | 47,414 | | | $ | — | | | $ | 5,068 | | | $ | — | | | $ | 52,482 | | | $ | 52,482 | | | $ | (24,012) | | | $ | 28,470 | | | 6/16/2005 |
| Annapolis Waterfront Hotel, Annapolis, MD | (27,378) | | | — | | | 43,251 | | | — | | | 4,159 | | | — | | | 47,410 | | | 47,410 | | | (5,113) | | | 42,297 | | | 3/28/2018 |
Hilton Garden Inn JFK,
JFK Airport, NY | — | | | — | | | 25,018 | | | — | | | 4,304 | | | — | | | 29,322 | | | 29,322 | | | (13,143) | | | 16,179 | | | 2/16/2006 |
| | | | | | | | | | | | | | | | | | | | | |
Hyatt House White Plains,
White Plains, NY | — | | | 8,823 | | | 30,273 | | | — | | | 13,954 | | | 8,823 | | | 44,227 | | | 53,050 | | | (18,889) | | | 34,161 | | | 12/28/2006 |
Hampton Inn Seaport,
Seaport, NY | — | | | 7,816 | | | 19,040 | | | — | | | 1,748 | | | 7,816 | | | 20,788 | | | 28,604 | | | (8,436) | | | 20,168 | | | 2/1/2007 |
Gate Hotel JFK Airport,
JFK Airport, NY | — | | | — | | | 27,315 | | | — | | | 2,362 | | | — | | | 29,677 | | | 29,677 | | | (11,524) | | | 18,153 | | | 6/13/2008 |
Hampton Inn Center City/ Convention Center,
Philadelphia, PA | — | | | 3,490 | | | 24,382 | | | — | | | 11,434 | | | 3,490 | | | 35,816 | | | 39,306 | | | (19,833) | | | 19,473 | | | 2/15/2006 |
| | | | | | | | | | | | | | | | | | | | | |
NU Hotel Brooklyn,
Brooklyn, NY | — | | | — | | | 22,042 | | | — | | | 1,983 | | | — | | | 24,025 | | | 24,025 | | | (9,173) | | | 14,852 | | | 1/14/2008 |
Hilton Garden Inn Tribeca,
Tribeca, NY | (45,450) | | | 21,077 | | | 42,955 | | | — | | | 1,457 | | | 21,077 | | | 44,412 | | | 65,489 | | | (14,681) | | | 50,808 | | | 5/1/2009 |
Hampton Inn Washington, D.C.,
Washington, DC | — | | | 9,335 | | | 58,048 | | | — | | | 5,151 | | | 9,335 | | | 63,199 | | | 72,534 | | | (18,849) | | | 53,685 | | | 9/1/2010 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Courtyard by Marriott Los Angeles Westside,
LA Westside, CA | (35,000) | | | 13,489 | | | 27,025 | | | — | | | 5,004 | | | 13,489 | | | 32,029 | | | 45,518 | | | (11,988) | | | 33,530 | | | 5/19/2011 |
Cadillac Hotel & Beach Club,
Miami, FL | — | | | 35,700 | | | 55,805 | | | — | | | 45,073 | | | 35,700 | | | 100,878 | | | 136,578 | | | (32,138) | | | 104,440 | | | 11/16/2011 |
The Rittenhouse
Hotel, Philadelphia, PA | — | | | 7,108 | | | 29,556 | | | — | | | 28,053 | | | 7,108 | | | 57,609 | | | 64,717 | | | (29,451) | | | 35,266 | | | 3/1/2012 |
The Boxer Boston,
Boston, MA | — | | | 1,456 | | | 14,954 | | | — | | | 2,157 | | | 1,456 | | | 17,111 | | | 18,567 | | | (5,333) | | | 13,234 | | | 5/7/2012 |
Holiday Inn Express Chelsea,
Manhattan, NY | — | | | 30,329 | | | 57,016 | | | — | | | 2,159 | | | 30,329 | | | 59,175 | | | 89,504 | | | (15,115) | | | 74,389 | | | 6/18/2012 |
Hyatt Union Square,
Union Square, NY | (56,000) | | | 32,940 | | | 79,300 | | | — | | | 4,335 | | | 32,940 | | | 83,635 | | | 116,575 | | | (20,254) | | | 96,321 | | | 4/9/2013 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
The Hotel Milo,
Santa Barbara, CA | (21,133) | | | — | | | 55,080 | | | — | | | 5,160 | | | — | | | 60,240 | | | 60,240 | | | (14,483) | | | 45,757 | | | 2/28/2014 |
Hilton Garden Inn Manhattan Midtown East,
Midtown East, NY | (44,325) | | | 45,480 | | | 60,762 | | | — | | | 605 | | | 45,480 | | | 61,367 | | | 106,847 | | | (11,869) | | | 94,978 | | | 5/27/2014 |
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2021 (CONTINUED)
[IN THOUSANDS] | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial Costs | | Costs Capitalized Subsequent to Acquisition (1) | | Gross Amounts at Close of Period | | Accumulated Depreciation | | Net Book Value | | |
| Description | Encumbrances | | Land | | Buildings & Improvements | | Land | | Buildings & Improvements | | Land | | Buildings & Improvements | | Total | | Buildings & Improvements* | | Land, Buildings & Improvements | | Date of Acquisition |
Parrot Key Hotel & Villas,
Key West, FL | — | | | 57,889 | | | 33,959 | | | — | | | 14,247 | | | 57,889 | | | 48,206 | | | 106,095 | | | (14,955) | | | 91,140 | | | 5/7/2014 |
The Winter Haven Hotel Miami Beach,
Miami Beach, FL | — | | | 5,400 | | | 18,147 | | | — | | | 926 | | | 5,400 | | | 19,073 | | | 24,473 | | | (4,258) | | | 20,215 | | | 12/20/2013 |
The Blue Moon Hotel Miami Beach,
Miami Beach, FL | — | | | 4,874 | | | 20,354 | | | — | | | 2,397 | | | 4,874 | | | 22,751 | | | 27,625 | | | (4,905) | | | 22,720 | | | 12/20/2013 |
| The St. Gregory Hotel, Dupont Circle, Washington D.C. | (23,000) | | | 23,764 | | | 33,005 | | | — | | | 7,644 | | | 23,764 | | | 40,649 | | | 64,413 | | | (10,142) | | | 54,271 | | | 6/16/2015 |
| TownePlace Suites Sunnyvale, Sunnyvale, CA | — | | | — | | | 18,999 | | | — | | | 691 | | | — | | | 19,690 | | | 19,690 | | | (3,492) | | | 16,198 | | | 8/25/2015 |
| The Ritz-Carlton Georgetown, Washington D.C. | — | | | 17,825 | | | 29,584 | | | — | | | 4,079 | | | 17,825 | | | 33,663 | | | 51,488 | | | (6,530) | | | 44,958 | | | 12/29/2015 |
| The Sanctuary Beach Resort, Marina, CA | (13,951) | | | 20,278 | | | 17,319 | | | — | | | 7,015 | | | 20,278 | | | 24,334 | | | 44,612 | | | (6,589) | | | 38,023 | | | 1/28/2016 |
| Hilton Garden Inn M Street, Washington D.C. | — | | | 30,793 | | | 67,420 | | | — | | | 268 | | | 30,793 | | | 67,688 | | | 98,481 | | | (9,914) | | | 88,567 | | | 3/9/2016 |
| The Envoy Boston Seaport, Boston, MA | — | | | 25,264 | | | 75,979 | | | — | | | 3,944 | | | 25,264 | | | 79,923 | | | 105,187 | | | (12,209) | | | 92,978 | | | 7/21/2016 |
| Courtyard by Marriott Sunnyvale, Sunnyvale, CA | (39,841) | | | 17,694 | | | 53,272 | | | — | | | 152 | | | 17,694 | | | 53,424 | | | 71,118 | | | (6,955) | | | 64,163 | | | 10/20/2016 |
| Mystic Marriott Hotel & Spa, Groton, CT | — | | | 1,420 | | | 40,440 | | | — | | | 9,907 | | | 1,420 | | | 50,347 | | | 51,767 | | | (9,764) | | | 42,003 | | | 1/3/2017 |
| The Ritz-Carlton Coconut Grove, Coconut Grove, FL | — | | | 5,185 | | | 30,825 | | | — | | | 10,129 | | | 5,185 | | | 40,954 | | | 46,139 | | | (8,184) | | | 37,955 | | | 2/1/2017 |
| The Pan Pacific Hotel Seattle, Seattle, WA | — | | | 13,079 | | | 59,255 | | | — | | | 748 | | | 13,079 | | | 60,003 | | | 73,082 | | | (7,370) | | | 65,712 | | | 2/21/2017 |
| Philadelphia Westin, Philadelphia, PA | — | | | 19,154 | | | 103,406 | | | — | | | 4,795 | | | 19,154 | | | 108,201 | | | 127,355 | | | (12,966) | | | 114,389 | | | 6/29/2017 |
| The Ambrose Hotel, Santa Monica, CA | — | | | 18,750 | | | 26,839 | | | — | | | 1,621 | | | 18,750 | | | 28,460 | | | 47,210 | | | (4,193) | | | 43,017 | | | 12/1/2016 |
| Total Investment in Real Estate | $ | (306,078) | | | $ | 478,412 | | | $ | 1,348,039 | | | $ | — | | | $ | 212,729 | | | $ | 478,412 | | | $ | 1,560,768 | | | $ | 2,039,180 | | | $ | (406,710) | | | $ | 1,632,470 | | | |
(1)Costs capitalized subsequent to acquisition include reductions of asset value due to impairment.
* Assets are depreciated over a 7 to 40 year life, upon which the latest income statement is computed.
The aggregate cost of land, buildings and improvements for Federal income tax purposes for the years ended December 31, 2021, 2020 and 2019 is approximately $1,450,092, $1,633,467 and $1,675,650, respectively.
Depreciation is computed for buildings and improvements using a useful life for these assets of 7 to 40 years.
See Accompanying Report of Independent Registered Public Accounting Firm
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2021 (CONTINUED)
[IN THOUSANDS] | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Reconciliation of Real Estate | | | | | |
| Balance at beginning of year | $ | 2,220,936 | | | $ | 2,228,864 | | | $ | 2,206,701 | |
| Additions during the year | 5,322 | | | 17,967 | | | 22,163 | |
| Dispositions | (187,078) | | | (25,895) | | | — | |
| Total Real Estate | $ | 2,039,180 | | | $ | 2,220,936 | | | $ | 2,228,864 | |
| | | | | |
| Reconciliation of Accumulated Depreciation | | | | | |
| Balance at beginning of year | $ | 396,016 | | | $ | 340,499 | | | $ | 277,580 | |
| Depreciation for year | 57,768 | | | 64,083 | | | 62,919 | |
| Accumulated depreciation on assets sold | (47,074) | | | (8,566) | | | — | |
| Balance at the end of year | $ | 406,710 | | | $ | 396,016 | | | $ | 340,499 | |