UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
COMMISSION FILE NUMBER: 001-14765
HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in Its Charter)
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Maryland |
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251811499 |
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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44 Hersha Drive, Harrisburg, PA |
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17102 |
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(Address of Registrant’s Principal Executive Offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (717) 236-4400
Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act . (Check one):
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Large accelerated filer ☒ |
Accelerated filer ☐ |
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Non-accelerated filer ☐ |
Small reporting company ☐ Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to us e the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Yes ☐ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of April 25, 201 7 , the number of Class A common shares of beneficial interest outstanding wa s 41 ,79 5 , 638 a nd there were no Class B common shares of beneficial interest outstanding .
Hersha Hospitality Trust
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PART I. FINANCIAL INFORMATION |
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Item 1. |
Financial Statements. |
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Consolidated Balance Sheets as of March 31, 2017 [Unaudited] and December 31, 2016. |
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Consolidated Statements of Equity for the Three Months Ended March 31, 2017 and 2016 [Unaudited] . |
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Consolidated Statement s of Cash Flows for Three Months Ended March 31, 2017 and 201 6 [Unaudited] . |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements .
3
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
4
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
* 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 ant i-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:
The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.
5
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIV E INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE M ON THS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS , EXCEPT SHARES ]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
7
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS , EXCEPT SHARES ]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
8
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
9
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS]
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
10
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[ IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hersha Hospitality Trust (“we,” “us,” “our” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 201 7 or any future period. Accordingly, readers of these consolidated interim financial statements should refer to the Company’s audited financial statements prepared in accordance with US GAAP, and the related notes thereto, for the year ended December 31, 201 6 , which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 201 6 , as certain footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from this report pursuant to the rules of the Securities and Exchange Commission.
We are a self-administered Maryland real estate investment trust that was organized in May 1998 and completed our initial public offering in January 1999. Our common shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HT.” We own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (“HHLP” or “the Partnership” ), for which we serve as the sole general partner. As of March 31, 2017, we owned an approximate 93.3% p artnership interest in HHLP, including a 1.0% general partnership interest.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 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 in the entity. Control can be demonstrated when the general partner has the power to impact the economic performance of the partnership, which includes the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the limited partners and the inability of the limited partners to replace the general partner. Control can be demonstrated by the limited partners if the limited partners have the right to dissolve or liquidate the partnership or otherwise remove the general partner without cause or have rights to participate in the significant decisions made in the ordinary course of the partnership’s business.
We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. Entities are consolidated if the determination is made that we are the primary beneficiary in a 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 impact 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 VIEs: Cindat Hersha Owner JV, LLC; Cindat Hersha Lessee JV, LLC; South Bay Boston, LLC; Hersha Statutory Trust I; and Hersha Statutory Trust II. Cindat Hersha Owner JV, LLC is a VIE entity, however because we are not the primary beneficiary it is not consolidated by the Company. Our maximum exposure to losses due to our investment in Cindat Hersha Owner JV, LLC is limited to our basis in the joint venture which is $0 as of March 31, 2017. Also, South Bay Boston, LLC leases hotel property and is a VIE. This entity is consolidated by the lessor, the primary beneficiaries of each entity. 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.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[ IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – BASIS OF PRESENTATION (CONTINUED)
Noncontrolling Interest
We classify the noncontrolling interests of our consolidated variable interest entity, common units of limited partnership interest in HHLP (“Common Units”), and Long Term Incentive Plan (“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. The noncontrolling interest of Common Units totaled $47, 490 a s of March 31, 2017 and $44,321 as of December 31, 2016. As of March 31, 2017, there were 3,022,330 C ommon Units outstanding with a fair market value of $56,790 , based on the price per share of our common shares on the NYSE on such date. In accordance with the partnership agreement of HHLP, holders of these Common 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 but excluded from net income or loss applicable to common shareholders in the consolidated statements of operations.
Variable Interest Entities
On Januar y 1, 2016, we adopted ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis. We evaluated the application of ASU No. 2015-02 and concluded that no change was required for the accounting of our interests in less than wholly owned joint ventures. However, HHLP, our operating partnership, now meets the criteria as a variable interest entity. 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.
Shareholders’ Equity
Terms of the Series C, Series D, and Series E Preferred Shares outstanding at March 31, 2017 and December 31, 2016 are summarized as follows:
In October 2016, our Board of Trustees authorized a new share repurchase program for up to $100,000 of common shares which commenced upon the completion of the existing repurchase program. The new repurchase program will expire on December 31, 2017, unless extended by our Board of Trustees.
Subsequent to the quarter ended March 31, 2017, our Board of Trustees authorized the increase in the number of authori zed Class A Common Shares from 90,000 ,000 to 104 ,000,000 .
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[ IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – BASIS OF PRESENTATION (CONTINUED)
New Accounting Pronouncements
In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) . The update defines the term “in substance nonfinancial asset” as it is presented in Subtopic 610-20 as a “financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets that are promised to the counterparty in the contract is concentrated in nonfinancial assets.” As it relates to the Company, real estate, such as land and building, would be considered an example of a nonfinancial asset. Additionally, the update provides guidance over partial sale transactions, particularly, when an entity should derecognize a distinct nonfinancial asset or in substance nonfinancial asset in a partial sale transaction, and the extent of gain that should be recognized as a result of the partial sale transaction. This standard is effective in conjunction with ASU No. 2014-09 (presented below), which is effective for periods beginning after December 15, 2017, however early adoption is permitted. The provisions of this update must be applied at the same time as the adoption of ASU No. 2014-09. The Company is currently evaluating how the provisions of this update affect our adoption of ASU No. 2014-09. See below for our discussion of ASU No. 2014-09 and the effect it will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , which clarifies the definition of a business as it relates to acquisitions and business combinations. The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. We expect most of our hotel property acquisitions to qualify as asset acquisitions under the standard which permits the capitalization of acquisition costs to the underlying assets. This standard is effective for periods beginning after December 31, 2017, however early adoption is permitted. The Company is evaluating the ultimate effect that ASU No. 2017-01 will have on our consolidated financial statements and related disclosures.
We adopted ASU No. 2016-09, Improvements to Employee Share-Based Award Payment Accounting , which simplifies various aspects of how share-based payments are accounted for and presented in the financial statements. This standard requires companies to record all of the tax effects related to share-based payments through the income statement, allows companies to elect an accounting policy to either estimate the share based award forfeitures (and expense) or account for forfeitures (and expense) as they occur, and allows companies to withhold a percentage of the shares issuable upon settlement of an award up to the maximum individual statutory tax rate without causing the award to be classified as a liability. The Company has elected to expense forfeitures of share-based award as they occur as our accounting policy. T he adoption of ASU No. 2016-09 had no material impact on our consolidated financial statements and related disclosures.
In November 2016 the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) , which provides guidance on the presentation of restricted cash or restricted cash equivalents within the statement of cash flows . Accordingly , amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows . This standard is effective for the Company for per iods beginning after December 15 , 2017 . The adoption of ASU No. 2016-18 will change the presentation of the statement of cash flows for the Company and we will utilize a retrospective transition method for each period presented within financial statements for periods subsequent to the date of adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. The accounting for lessors will remain largely unchanged from current GAAP; however, the standard requires that certain initial direct costs be expensed rather than capitalized. Under the standard, lessees apply a dual approach, classifying leases as either finance or operating leases. A lessee is required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their lease classification. Based on the review of our real estate leases, we are a lessee on ground leases in certain markets and office space leases. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures .
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[ IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 1 – BASIS OF PRESENTATION (CONTINUED)
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. We are evaluating each of our revenue streams and related accounting policy under the standard. The new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. Based on our analysis to date, we do not expect the new revenue recognition model to have a material impact on our hotel operating revenue, including room revenue, food and beverage, and other revenue, however, our final evaluation has not been concluded. Our evaluation under the standard also includes sales to third parties, primarily a result of dispositions of real estate. Our evaluation over sales of real estate will be partially dependent on how the FASB defines a business with regard to sales of assets, which has recently been addressed through the issuance of ASU No. 2017-05. The Company continues to evaluate the ultimate effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.
Reclassification
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties c onsists of the following at March 31, 2017 and December 31, 201 6 :
Acquisitions
We acquired the following properties during the three months ended March 31, 2017:
(1) The Mystic Marriott Hotel & Spa was acquired as partial consideration within the transaction to redeem and transfer our joint venture interest in Mystic Partners, LLC. See Note 3 for further description of the transaction.
* Consists entirely of $899 of advanced bookings.
** Includes an intangible asset for a lease-in-place of $229 , a nd a below market lease liability of $520 .
The Company is currently finalizing our analysis over the fair value of assets acquired and liabilities incurred in connection with the purchase of the Ritz-Carlton, Coconut Grove. As such, the amount s reported in the table above are preliminary. We expect the amounts will be finalized within the one year remeasurement period as defined within ASC 805.
Acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the above acquired assets. During the three months ended March 31, 2017 , we paid $700 i n costs related to acquired assets and terminated transactions .
15
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
Included in the consolidated statement of operations for the three months ended March 31, 2017 are total revenues of $8,733 , and total net loss of $576 for the hotels we acquired or assumed ownership during the three months ended March 31, 2017 and consolidated since the date of acquisition of the hotels.
Hotel Dispositions
On January 5, 2017 , the Company closed on the sale s of the Residence Inn, Greenbelt, MD, and the Courtyard, Alexandria, VA to an unaffiliated buyer for a combined total sales price of $62,000 resulting in a gain on sale of approximately $18, 731 . The Residence Inn, Greenbelt, MD was acquired by the Company in July 200 4 and the Courtyard, Alexandria, VA was acquired by the Company in September 2006 . The operating results for th e s e hotels are included in operating income as shown in the consolidated statements of operations for the period owned during the three months ended March 3 1 , 201 7 and 201 6 as disposition of th e s e hotel s do es not represent a strategic shift in our business.
Assets Held For Sale
In July 2016, we entered into a purchase and sale agreement to sell the Residence Inn, Greenbelt, MD, Courtyard, Alexandria, VA, Hyatt House, Scottsdale, AZ, Hyatt House, Pleasant Hill, CA, and Hyatt House, Pleasanton, CA to an unaffiliated buyer for a sales price of $185,000 . The Residence Inn, Greenbelt, MD and Courtyard, Alexandria, VA were sold in January 2017 for a combined sale price of $62,000. The purchase and sale agreement was amended, increasing the sales price by $7,500 and providing the buyer with additional time to close on the remaining three as sets . The remainder of the transaction is expected to close in the third quarter of 2017 with an adjusted purchase price of $130,500 , subject to customary closing conditions.
We have classified the assets related to these hotels as held for sale as of March 31, 2017 and December 31, 2016:
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)
Pro Forma Results (Unaudited)
The following condensed pro forma financial data for the three months ended March 31, 2017 and 2016 are presented as if the hotels acquired by the Company in 2017 and 2016 had been acquired as of January 1, 2016 and 2015, respectively. The condensed pro forma financial data are not necessarily indicative of what actual results of operations of the Company would have been for the periods presented assuming the acquisitions had been consummated on January 1, 201 7 and 201 6 , nor do they purport to represent the results of operations for future periods.
17
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of March 31, 2017 and December 31, 201 6, our investment in unconsolidated joint ventures consisted of the following:
*See explanation below of the Cindat Hersha Owner JV, LLC (“Owner JV”) for more information on the preferred return provisions of this joint venture.
On January 3, 2017, we redeemed our joint venture interest in Mystic Partners, LLC by acquiring 100% ownership interest in the Mystic Marriott Hotel & Spa and transferring our minority ownership interests in the Hartford Marriott and Harford Hilton to the joint venture partner. We received $11,6 2 3 in cash and assumed a mortgage on the Mystic Marriott Hotel & Spa of $41,333 as consideration for this redemption and transfer of our minority interest. Subsequent to the assumption of the mortgage, the Company fully paid off the outstanding balance of the debt and added the property to the borrowing base of our Credit Facility . As a resu lt of the remeasurement of the consideration received to fair value, the Company recognized a gain of $16,239 in conjunction with this transaction.
Income/Loss Allocation
C ash available for distribution will be distributed (1) to us until we receive a 9% annual rate of return on our $43,194 preferred equity interest, (2) then to Cindat until they receive a return on their remaining $142,000 senior common equity interest , currently at 10% , and (3) then to us until we receive an 8% return on our $60,857 junior common equity interest. Any cash available for distribution remaining will be split 30% to us and 70% to Cindat. Cindat’s senior common equity return is reduced by 0.5% annually for 4 years following the closing until it is set at a rate of 8% for the remainder of the life of the joint venture. A lender determined that certain debt coverage ratio covenants contained therein were not met as of June 30, 2016. Pursuant to these agreements, the lender has elected to escrow the operating cash flow for the Owner JV. However, the failure to meet these covenants does not constitute an event of default. As of March 31, 2017, based on the income allocation methodology described above, the Company has absorbed cumulative losses equal to our accounting basis in the joint venture resulting in a $0 investment balance in the table above, however, we currently maintain a positive equity balance within the venture. This difference is due to difference in our basis inside the venture versus our basis outside of the venture, which is explained later in this note.
For SB Partners, LLC and Hiren Boston, LLC, income or loss is allocated to us and our joint venture partners consistent with the allocation of cash distributions in accordance with the joint venture agreements. This results in an income allocation consistent with our percentage of ownership interests.
Any difference between the carrying amount of any of our investments noted above and the underlying equity in net assets is amortized over the expected useful lives of the properties and other intangible assets. Income (loss) recognized during the three months ended March 31, 2017 and 201 6 , for our investments in unconsolidated joint ventures is as follows:
18
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 3 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
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Three Months Ended March 31, |
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2017 |
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2016 |
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SB Partners, LLC |
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$ |
(53) |
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$ |
(39) |
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Hiren Boston, LLC |
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(116) |
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(93) |
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Mystic Partners, LLC |
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- |
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(82) |
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Cindat Hersha Owner JV, LLC |
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(3,717) |
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- |
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Loss from Unconsolidated Joint Venture Investments |
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$ |
(3,886) |
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$ |
(214) |
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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 disc ussed above as of March 31, 2017 and December 31 , 2016 and for the three months ended March 31, 2017 and 201 6 .
19
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[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 March 31, 2017 and December 31, 201 6 .
(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:
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· |
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cu mul ative impairment of our investment in joint ventures not reflected on the joint ventures' financial statements; |
|
|
· |
|
the difference between our basis in the investment in joint ventures and the equity recorded on the joint ventures' financial statements; and |
|
|
· |
|
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). |
20
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 4 – OTHER ASSETS
Other Assets
Other Assets co nsisted of the following at March 31, 2017 and December 31, 201 6 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 |
|
December 31, 2016 |
||
|
|
|
|
|
|
|
|
|
Derivative Asset |
|
$ |
2,152 |
|
$ |
1,835 |
|
Deferred Financing Costs |
|
|
1,248 |
|
|
1,383 |
|
Prepaid Expenses |
|
|
8,758 |
|
|
9,217 |
|
Investment in Statutory Trusts |
|
|
1,548 |
|
|
1,548 |
|
Investment in Non-Hotel Property and Inventories |
|
|
2,477 |
|
|
2,641 |
|
Deposits with Unaffiliated Third Parties |
|
|
4,210 |
|
|
3,332 |
|
Deferred Tax Asset, Net of Valuation Allowance of $804 |
|
|
13,954 |
|
|
16,197 |
|
Other |
|
|
3,593 |
|
|
3,217 |
|
|
|
$ |
37,940 |
|
$ |
39,370 |
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 expense over the life of the Line of Credit.
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.
Prepaid Expenses – Prepaid expenses include amounts paid for property tax, insurance and other expenditures that will be expensed in the next twelve months.
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 approximately $13,954 of net deferred tax assets as of March 31, 2017 . 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 be able to realize the $13,954 of net deferred tax assets in the future.
21
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT
Mortgages
Mortgages payable at March 31, 2017 and December 31, 2016 consisted of the following:
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 al so amortized over the remaining life of the loans.
Mortgage indebtedness balances are subject to fixed and variable interest rates, which ranged from 3.18% to 6.30% as of March 31, 2017 . Aggregate interest expense incurred under the mortgage loans payable totaled $2,969 and $6,271 during the three months ended March 31, 2017 and 201 6 , respectively.
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 debt service coverage ratio covenants contained in the loan agreements securing our hotel properties were met as of March 31, 2017 .
As of March 31, 2017 , the maturity dates for the outstanding mortgage loans ranged from September 201 7 to September 2025.
Subordinated 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 of notes issued to each of 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 face value of the notes payable is offset by $ 957 and $ 970 as of March 31, 2017 and December 31, 2016, respectively, in net deferred financing costs incurred as a result of entering into these indentures. The deferred financing costs are amortized over the life of the notes payable. The weighted average interest rate on our two junior subordinated notes payable was 3.97% and 3.56% during the three months ended March 31 , 201 7 and 201 6 , respectively. Interest expense in the amount of $ 511 and $459 was recorded for the three months ended March 31, 2017 and 201 6 , respectively.
Credit Facilities
We maintain three unsecured credit agreements which aggregate $1,000,000 with Citigroup Global Markets Inc., Wells Fargo Bank, Inc. and various other lenders. The first credit agreement provides for a $500,000 senior unsecured credit facility (“Credit Facility”) consisting of a $250,000 senior unsecured revolving line of credit (“Line of Credit”), and a $250,000 senior unsecured term loan (“First Term Loan”). The Credit Facility expires on February 28, 2018 , and, provided no event of default has occurred, we may request that the lenders renew the credit facility for an additional one -year period. The Credit Facility is also expandable to $850,000 at our request, subject to the satisfaction of certain conditions.
22
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
Our second credit agreement provides for a $300,000 senior unsecured term loan agreement (“Second Term Loan”) and expires on August 10, 2020 .
Our third credit agreement provides for a $200,000 senior unsecured term loan agreement (“Third Term Loan”) and expires on August 2, 2021 .
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 b orrowing base assets. As of March 31, 2017 , the following hotel properties were borrowing base assets:
The interest rate for borrowing s under the Line of Credit and Term L oans 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:
We maintain an interest rate swap , with a $150,000 notional amount, which effectively fix es the interest rate on $150,000 of th e $200,000 Third Term Loan at a blended rate of 3.211% . This swap agreement matures on October 3, 2019. See “Note 7 – Fair Value Measurements and Derivative Instruments” for more information regarding interest rate hedging strategies we employ .
On March 14, 2017, we entered into an inter est rate swap associated with $50,000 of our $200,000 Third Term Loan, which becomes effective on April 3, 2017. This swap effectively fixes the interest rate on $50,000 of the Third Term Loan at 3.894% . This swap matures on October 3, 2019 .
On March 23, 2017, we entered into an interest rate swap associated with our $300,000 Second Term Loan, which becomes effective beginning on August 10, 2017. This swap effectively fixes the interest rate of the Second Term Loan at 3.693% from the effective date through August 9, 2018 . For the period from August 10, 2018 to August 11, 2019, the interest rate will be fixed at 4.1155% . For the period from August 12, 2019 through maturity, the interest rate will be fixed at 4.3925% . This swap matures on August 10, 2020 .
23
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
The balance of the Term Loans is offset by $3,015 and $3,1 20 in net deferred financing costs as of March 31, 2017 and December 31, 2016, respectively. These costs were incurred as a result of originating the term loan borrowings and are amortized over the life of these loans.
The Credit Facility and the Term Loans include certain financial covenants and require 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 $900,000, 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 Company is in compliance with each of the covenants listed above as of March 31, 2017.
The Company recorded interest expense of $5,308 and $4 ,480 related to borrowings dr awn on the Credit Facility and Term Loans for the three months ended March 31, 2017 and 2016, respectively. The weighted average interest rate on the Credit Facility and Term Loans was 3.09% and 2.80% for the three months ended March 31, 2017 and 2016 , respectively .
Capitalized Interest
We utilize cash, mortgage debt and our Line of Credit to finance on-going capital improvement projects at our hotels. Interest incurred on mortgages and the Line of Credit that relates to our capital improvement projects is capitalized through the date when the assets are placed in service. For the three months ended March 31, 2017 and 201 6 , we capitalized $0 of interest expense to ongoing capital improvement projects .
Deferred Financing Costs
As noted above, costs associated with entering into mortgages, notes payable and our credit facilities are deferred and amortized over the life of the debt instruments. The deferred costs related to mortgages and term loans and unsecured notes payable are presented as reductions in the respective debt balances. Amortization of d eferred costs for the three months ended March 31, 2017 and 201 6 was $ 648 and $660 , respectively .
New Debt/Refinance
On February 24, 2017, we refinanced the outstanding mortgage debt with an original principal balance of $45,000 secured by the Hilton Garden Inn, 52 nd Street, NY. The loan was due to mature in May 2017, but will now mature on February 24, 2020. We incurred approximately $94 in expense in third party fees.
On February 1, 2017, we issued a note payable in the amount of $3,150 with the acquisition of the Ritz Carlton Coconut Grove. See “Note 2 – Investment in Hotel Properties ” for more information regarding our recent acquisition .
On January 31, 2017 , we repaid in full outstanding mortgage debt with an original principal balance of $9,500 secured by the Duane Street Hotel, NY, which was schedule to mature on February 1, 2017 and we incurred approximately $12 i n expense related to unamortized deferred financing costs and fees.
On January 6, 2017 , we repaid in full outstanding mortgage debt secured by the Hyatt House Scottsdale, AZ, the Hyatt House Pleasant Hill, CA, and the Hyatt House Pleasanton, which all matured on that date. These properties had a combined original principal balance of $51,428 and we incurred approximately $47 i n expense related to unamortized deferred financing costs and fees.
24
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 5 – DEBT (CONTINUED)
On January 3, 2017 , we repaid in full outstanding mortgage debt with an original principal balance of $21,000 secured by t he
Hilton Garden Inn, JFK Airport, New York, NY. The loan was due to mature o n March 7, 2017 , and we incurred approximately $37 i n expense related to unamortized deferred financing costs and fees.
On January 3, 2017 , we repaid in full outstanding mortgage debt with an original principal balance of $43,000 secured by t he Mystic Marriott Hotel & Spa, Groton, CT. The loan was due to mature in Au gust of 2018, and we incurred approximately $84 in expense related to unamortized deferred financing costs and fees.
On February 29, 2016, we repaid in full outstanding mortgage debt with an original principal balance of $8,500 secured by the Hawthorn Suites, Franklin, MA. The loan was due to mature on May 1, 2016, and we incurred approximately $42 in expense in unamortized deferred financing costs and fees.
25
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Management Agreements
Our wholly-owned TRS, 44 New England, and certain of our joint venture entities engage eligible independent contractors in accordance with the requirements for qua lification as a REIT under the I nternal R evenue C ode 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. HHMLP is owned, in part, by certain executives and trustees of the Company. 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. M anagement 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 three months ended March 31, 2017 and 2016 , base management fees incurred totaled $ 2,868 , and $3,025 , respectively, and are recorded as Hotel Operating Expenses. For the three months ended March 31, 2017 and 201 6 , we did no t incur incentive management fees.
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 three months ended March 31, 2017 and 201 6 were $ 5,109 and $5,895 , respectively , and are recorded in Hotel Operating Expenses. The initial fees incurred to enter into the franchise agreements are amortized over the life of the franchise agreements.
Accounting 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 three months ended March 31, 2017 and 201 6 , the Company incurred accounting fees of $ 336 and $392 , respectively. For the three months ended March 31, 2017 and 2016 , the Company incurred information technology fees of $ 112 and $141 , respectively. Accounting fees and information technology fees are included in Hotel Operating Expenses.
Capital Expenditure Fees
HHMLP charges a 5% fee on all 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 three months ended March 31, 2017 and 2016 , we incurred fees of $ 320 and $447 , respectively , which were capitalized with the cost of fixed asset additions.
26
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 6 – 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 three months ended March 31, 2017 and 2016 , we incurred charges for hotel supplies of $ 58 and $21 , respectively. For the three months ended March 31, 2017 and 201 6 , we incurred charges for capital expenditure purchases of $ 361 and $882 , 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. Approximately $ 1 and $1 is included in accounts payable at March 31, 2017 and December 31, 2016 , respectively.
Due From Related Parties
The due from related parties balance as of March 31, 2017 and December 31, 201 6 was approximately $ 18,311 and $18, 332 , 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 March 31, 2017 and December 31, 201 6 was $0 .
Hotel Ground Rent
For the three months ended March 31 , 201 7 and 201 6 , we incurred $ 807 and $893 , respectively , of rent expense payable pursuant to ground leases related to certain hotel properties.
27
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 – 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 March 31, 2017 , 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 March 31, 2017 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.
28
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
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 following table presents our derivative instruments as of March 31, 2017 and December 31, 2016.
* On February 24, 2017, we refinanced the debt associated with the Hilton Garden Inn 52 nd Street, New York, NY. As a result, we e ntered into an interest rate swap with a strike rate o f 1.60% . The interest rate swap designated as a hedge against the refinanced mortgage note matured on February 21, 2017 .
** On March 23, 2017 , we entered into an int erest rate swap associated with our $300,000 Second T erm Loan, which becomes effective beginning on August 10, 2017. This swap effectively fixes the interest rate of the Second Term Loan at 3.693% from the effective date through August 9, 2018 . For the period from August 10, 2018 to August 11, 2019, the interest rate will be fixed at 4.1155% . For the period from August 12, 2019 through maturity, the interest rate will be fixed at 4.3925% . This swap matures on August 10, 2020.
** On March 14, 2017 , we entered into an int erest rate swap associated with our $ 5 0,000 of our $200,000 Third Term Loan , which becomes effective on April 3, 2017 . This swap effectively fixes the interest rate of the Third Term Loan at 3.894%. This swap matures on October 3, 2019.
The fair value of certain swaps and our interest rate caps is included in other assets at March 31, 2017 and December 31, 201 6 and the fair value of certain of our interest rate swaps is included in accounts payable, accrued expenses and other liabilities at March 31, 2017 and December 31, 201 6 .
29
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 7 – FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
The net change in fair value of derivative instruments designated as cash flow hedges was a gain of $70 and a loss of $237 for the three months ended March 31, 2017 and 201 6, respectively . These unrealized gains/losses were reflected on our consolidated balance sheet in accumulated other comprehensive income/loss.
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 derivative. The change in net unrealized gains/losses on cash flow hedges reflects a reclassification of $150 and $179 of net unrealized gains/losses from accumulated other comprehensive income as an increase /decrease to interest expense for the three months ended March 31, 2017 and 2016, respectively. For the next twelve months ending March 31, 2018 , we estimate that an additional $366 will be reclassified as an increase to interest expense.
Fair Value of Debt
We estimate the fair value of our fixed rate debt and the credit spreads over variable market rates on our 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 March 31, 2017 , the carrying value and estimated fair value of our debt were $1,070,333 and $1,060,185 , respectively . As of December 31, 201 6 , the carrying value and estimated fair value of our debt were $1,103,327 and $1,098,248 , respectively.
30
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – 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 f orfeitures of share-based award s are expensed as they occur .
In May 2011, the Company established and 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.
In May 2014, the Company’s shareholders approved an amendment to the 2012 Plan that increased the aggregate number of common shares issuable under the 2012 Plan and added various scenarios that require shareholder approval.
Executives & Employees
Annual Long Term Equity Incentive Programs
To further align the interests of the Company’s executives with those of shareholders, the Compensation Committee grants annual long term equity incentive awards that are both “performance based” and “time based.”
On March 9 , 201 7 , the Compensation Committee approved the 201 7 Annual Long Term Equity Incentive Program (“201 7 Annual EIP”) for the executive officers, pursuant to which the executive officers are eligible to earn equity awards in the form of stock awards , LTIP Units, or performance share awards issuable pursuant to the 2012 Plan. These awards are earned under the 2017 Annual EIP based on achieving a threshold, target or maximum level of performance in the performance of RevPAR growth in certain defined areas. The Company accounts for these grants as performance awards for which the Company assesses the probability of achievement of the performance conditions at the end of each period. As of March 31, 2017 , no shares or LTIP Units have been issued in accordance with the 2012 Plan to the executive officers in settlement of 2017 Annual EIP awards.
31
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)
The following table is a summary of all unvested LTIP Units issued to executives:
|
|
(1) |
|
25% of the issued shares or LTIP Units vested immediately upon issuance. In general, the remaining shares or LTIP Units vest 25% on the first through third anniversaries of th e end of the performance period, which is a calendar year-end (subject to continuous employment through the applicable vesting date). |
|
|
(2) |
|
On April 18, 2012, the Company entered into amended and restated employment agreements with the Company’s executive officers. To induce the executives to agree to the substantial reduction in benefits upon certain terminations following a change of control as described in the agreements, the Company awarded an aggregate of 258,899 restricted common shares to the executives pursuant to the 2012 Plan, which were subsequently forfeited and replaced with LTIP Units. One-third of each award of LTIP Units vested or will vest on each of the third, fourth and fifth anniversaries of the original date of issuance. Vesting will accelerate upon a change of control or if the relevant executive’s employment with the Company were to terminate for any reason other than for cause (as defined in the employment agreements). |
Stock based compensation expense related to the Annual Long Term Equity Incentive Program s of $ 568 and $ 1,411 was incurred during the three months ended March 31, 2017 and 201 6 , respectively. Unea rned compensation related to the Annual Long Term Equity Incentive Program s as of March 31, 2017 and December 31, 201 6 was $ 2,091 a nd $1 ,550 , respectively.
Unearned c ompensation related to the grants and amortization of LTIP Units is included in Noncontrolling Interests on the Company’s Consolidated Balance Sheets and Consolidated Statements of Equity.
Multi-Year Long Term Equity Incentive Programs
On March 9, 2017, the Compensation Committee approved the 2017 Multi-Year Long Term Equity Incentive Program (“2017 Multi-Year EIP”). This program has a three-year performance period which commenced on January 1, 2017 and ends December 31, 2019. As of March 31, 2017, no shares or LTIP Units have been issued to the executive officers in settlement of 2017 Multi-Year EIP awards.
The followin g table is a summary of the approved Multi-Year Long Term Equity Incentive Programs :
32
HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)
The shares or LTIP Units issuable under the Multi-Year Long Term Incentive Programs, including the 2016 Multi-Year EIP, are based on the Company’s achievement of a certain level of (1) absolute total shareholder return ( 37.50% of the award), (2) relative total shareholder return as compared to the Company’s peer group ( 37.50% of the award), and (3) relative growth in revenue per available room (RevPar) compared to the Company’s peer group ( 25% of the award).
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 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.
Stock based compensation expe nse of $ 671 and $841 was recorded for the three months ended March 31, 2017 and 201 6 , respectively, for the Multi-Year Long Term Equity Incentive Programs. Unearned compensation related to the multi-year program as of March 31, 2017 and December 31, 201 6 , respectively, was $1,491 a nd $ 1,568 .
Restricted Share Awards
In addition to share based compensation expense related to awards to executives under the Multi-Year and Annual Long Term Equity Incentive Programs, share based compensation expense related to restricted common shares issued to employees of the Company o f $ 132 and $ 122 was incurred during the three months ended March 31, 2017 and 201 6 , respectively. Unearned compensation related to the restricted share awards as of March 31, 2017 and December 31, 201 6 was $ 518 and $ 505 , respectively. The following table is a summary of all unvested s hare awards issued to employees u nder the 2012 Plan and prior equity incentive plans:
Trustees
Annual Retainer
The Compensation Committee approved a program that allows the Company’s trustees to make a voluntary election to receive any portion of the annual cash retainer in the form of common equity valued at a 25% premium to the cash that would have been received. On December 30, 201 6, we issued 4,395 shares which do not fully vest until December 31, 201 7 . Compensation expense incurred for the three months ended March 31, 2017 and 2016, respectively, was $ 24 and $0 . The following table is a summary of all unvested share awards issued to trustees in lieu of an annual cash retainer:
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 8 – SHARE BASED PAYMENTS (CONTINUED)
Multi-Year Long-Term Equity Incentives
Compensation expense for the Multi-Year Long Term Incentive Programs for the Company’s trustees incurred for the three months ended March 31, 2017 and 201 6 w as $ 19 and $ 15 , respectively. Une arn ed compensation related to the Multi-Year Long Term Equity Incentive Programs was $ 147 and $1 67 as of March 31, 2017 and December 31, 201 6 , respectively.
The following table is a summary of all unvested share awards issued to trustees u nder the 2012 Plan and prior equity incentive plans:
Non-employees
The Company issues share based awards as compensation to non-employees for services provided to the Company consisting primarily of restricted common sh ares. The Company recorded stock based compensation expense of $ 15 and $ 17 for the three months ended March 31, 2017 and 2016, respectively. Unearned compensation related to the restricted share awards as of March 31, 2017 and December 31, 201 6 was $ 349 and $7 9 , respectively. The following table is a summary of all unvested share awards issued to non-em ployees under the 2012 Plan:
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 9 – 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.
* 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.
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HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR T HE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE/UNIT AND PER SHARE AMOUNTS]
NOTE 10 – CASH FLOW DISCLOSURES AND NON CASH INVESTING AND FINANCING ACTIVITIES
Interest paid during the three months ended March 31, 2017 and 201 6 totaled $9,261 a nd $11,495 , respectively. Cash paid for income taxes during the three months ended March 31, 2017 and 2016 totaled $378 and $201 , respectively. The following non-cash investing and financing activities occurred during 201 7 and 201 6 :
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I tem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this and other reports filed by us with the SEC, including, but not limited to those discussed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:
● our business or investment strategy;
● our projected operating results;
● our distribution policy;
● our liquidity;
● completion of any pending transactions;
● our ability to obtain future financing arrangements or refinance or extend the maturity of existing financing arrangements as they come due;
● our ability to repurchase shares on attractive terms from time to time;
● our understanding of our competition;
● market trends; and
● projected capital expenditures.
Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:
● general volatility of the capital markets and the market price of our common shares;
● changes in our business or investment strategy;
● availability, terms and deployment of capital;
● availability of qualified personnel;
● changes in our industry and the market in which we operate, interest rates, or the general economy;
● decreased international travel because of geopolitical events, including terrorism and current U.S. government policies;
● the degree and nature of our competition;
● financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;
● levels of spending in the business, travel and leisure industries, as well as consumer confidence;
● declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;
● hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
● financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;
● increased interest rates and operating costs;
● ability to complete development and redevelopment projects;
● risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;
● availability of and our ability to retain qualified personnel;
● decreases in tourism due to geopolitical instability or changes in foreign exchange rates;
● our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended;
● environmental uncertainties and risks related to natural disasters;
● changes in real estate and zoning laws and increases in real property tax rates; and
● the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Risk Factors” and in other reports we file with the SEC from time to time.
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These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.
All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
BACKGROUND
As of March 31, 2017 , we owned interests in 53 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles, Seattle, and Miami, including 44 wholly-owned hotels and interests in 9 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 to manage the hotels. As of March 31, 2017 , we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.
OVERVIEW
We believe the changes in our equity and debt capitalization and repositioning of our portfolio better enables us to capitalize on further improvement in lodging fundamentals. During 2017 thus far, we continued to see improvements in Occupancy, ADR and RevPAR across most of our markets. We continue to seek acquisition opportunities of both branded and independent hotels in urban centers and central business districts, as well as in select destination markets . In addition, we will continue to look for attractive opportunities to divest certain of our properties at favorable prices, potentially redeploying that capital in our focus markets or opportunistically repurchasing our common shares.
We expect continued stability and improvement in consumer and commercial spending and lodging demand in many of our markets during 2017. However some markets, such as New York City and South Florida, are encountering less favorable supply and demand dynamics. Industry wide occupancy has surpassed peak occupancy from the previous cycle which should allow hotel operators to increase ADR across the United States (“U.S.”). International visitation to the U.S. is expected to grow at a compound annual growth rate of 3.3% through 2021, according to the National Travel and Tourism Office. However, the manner in which the economy will continue to grow, if at all, is not predictable. In addition, the availability of hotel-level financing for the acquisition of new hotels is not within our control. As a result, there can be no assurances that we will be able to grow hotel revenues, occupancy, ADR or RevPAR at our properties as we hope. Factors that might contribute to less-than-anticipated performance include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 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.
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SUMMARY OF OPERATING RESULTS
The following table outlines operating results for the Company’s portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the three months ended March 31, 2017 and 2016.
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. Based on this definition, for the three months ended March 31, 2017 and 2016, there are 44 comparable consolidated hotels. The comparable key hotel operating statistics presented in the table below have been computed using pro forma methodology to compute the operating results for the portion of time prior to our ownership of hotels purchased during the comparable period for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 for our comparable hotels.
For the comparison of March 31, 2017 to March 31, 2016, comparable hotel operating results contain results from our consolidated hotels owned as of March 31, 2017, excluding the results of all hotels sold since December 31, 2015. The comparison of March 31, 2017 to March 31, 2016 includes results as reported by the prior owners for the following hotels acquired since December 31, 2015:
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Sanctuary Resort – Monterey, CA (acquired 1/28/2016) |
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Hilton Garden Inn M Street – Washington, DC (acquired 3/9/2016) |
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The Envoy – Boston, MA (acquired 7/21/2016) |
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Courtyard – Sunnyvale, CA (acquired 10/20/2016) |
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The Ambrose – Santa Monica, CA (acquired 12/1/2016) |
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Mystic Marriott Hotel & Spa – Groton, CT (acquired 1/3/2017) |
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The Ritz-Carlton – Coconut Grove, FL (acquired 2/1/2017) |
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The Pan Pacific Hotel – Seattle, WA (acquired 2/21/2017) |
RevPAR for the three months ended March 31, 2017 increased 3.1% for our comparable consolidated hotels when compared to 2016. The 3.1% increase in 2017 exceeds the 0.6% comparable hotel growth experienced in 2016, which can be partially explained by the strong performance in our Washington D.C., Philadelphia, Boston, and West Coast markets offset partially by the continued negative performance of the South Florida markets during the first quarter of 2017. Our South Florida market negatively impacted RevPAR growth on a comparable basis by -330 basis points while the performance of our New York City market remained relatively flat with RevPAR growth of 1.3% for the comparable periods. The Company experienced stronger RevPAR growth from comparable consolidated hotels in our Philadelphia, Boston, and Washington D.C. markets which expe rienced 11.1 %, 8.2%, and 1 5 . 4 % growth, respectively for 2017 when compared to 2016 .
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The increases in ADR and RevPAR for the three months ended March 31, 2017 over the same period in 2016 are driven by the hotel properties located in New York City within the Cindat joint venture. While occupancy is down 3 24 basis points from the prior year, overall, the Cindat properties remained relatively flat, down only 160 basis points in occupancy. Offsetting this slight dip in occupancy was the ability to generate an overall 5.6% increase in ADR, with the Cindat assets achieving a 6.3% growth in ADR. As a result of these performance metrics, the properties within our unconsolidated joint ventures, on a comparable basis, generated 1.5% growth in RevPAR with the Cindat properties achieving 4.3% RevPAR growth during the three months ended March 31, 2017.
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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the three months ended March 31, 2017 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99.9% of total revenues for the three months ended March 31, 2017 and 2016. 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 $1,105, or 1.0%, to $107,952 for the three months ended March 31, 2017 compared to $106,847 for the same period in 2016. This increase in hotel operating revenues can be explained by the following table:
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Expenses
Total hotel operating expenses increased 2.4% to approximately $67,267 for the three months ended March 31, 2017 from $65,718 for the three months ended March 31, 2016. This increase in operating expenses is primarily attributable to hotel properties acquired in our existing portfolio, offset by a decrease in hotel operating expenses which were not recognized in the three months ended March 31, 2016 due to hotel dispositions and the contribution of seven hotel properties to the joint venture with Cindat. This increase in hotel operating expenses can be explained by the following table:
Depreciation and amortization decreased by 3.0%, or $598, to $19,462 for the three months ended March 31, 2017 from $20,060 for the three months ended March 31, 2016. The decrease in depreciation and amortization was primarily attributable to the contribution of the seven hotel properties contributed to the joint venture with Cindat, offset by depreciation and amortization recorded on the hotels recently acquired. Real estate and personal property tax and property insurance decreased $1,530, or 16.7%, for the three months ended March 31, 2017 when compared to the same period in 2016. This was primarily attributable to $ 2,252 in real estate and property insurance recognized for the seven hotel properties contributed to the joint venture with Cindat for the three months ended March 31, 2016 which was not an expense of the Company during the three months ended March 31, 2017. We otherwise typically experience increases in tax assessments and tax rates as the economy improves which are offset by reductions resulting from our management of this expense.
General and administrative expense decreased by 14.4%, or approximately $775, from $5,400 in the three months ended March 31, 2016 to $4,625 for the same period in 2017. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Expenses related to share based compensation decreased $977 when comparing the three months ended March 31, 2017 to the same period in 2016. Please refer to “Note 8 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.
Amounts recorded on our consolidated statement of operations for acquisition and terminated transaction costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Acquisition and terminated transaction costs decreased $808 from $1,508 for the three months ended March 31, 2016 to $700 for the same period in 2017.
Operating Income
Operating income for the three months ended March 31, 2017 was $7,511 compared to operating income of $4,135 during the same period in 2016 . O perating income was positively impacted by reduced costs in areas such as real estate taxes, stock compensation expenses, acquisition expenses , and depreciation and amortization.
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Interest Expense
Interest expense decreased $2,372 from $12,221 for the three months ended March 31, 2016 to $9,849 for the three months ended March 31, 2017. Our borrowings have decreased in total between March 31, 2016 and March 31, 2017, as we have entered into a Second and Third Term Loan but have also completely repaid our borrowings on our Line of Credit. A partial amount of our consolidated mortgage debt, Line of Credit outstanding draws and a partial amount of our First Term Loan were all repaid with proceeds from the disposition and simultaneous contribution of seven hotel properties to the joint venture with Cindat, which occurred during the second quarter of 2016. Additionally, a portion of the liquidity generated from our issuance of Series D and Series E preferred equity during 2016 was utilized to further pay down consolidated mortgage debt. These actions reduced our interest expense for the three months ended March 31, 2017 when compared to the same period in 2016.
Gain on Disposition of Hotel Properties
During the three months ended March 31, 2017 , the Company recorded a gain of $ 18,731 related to the sale s of the Residence Inn, Greenbelt, MD, and the Courtyard, Alexandria, VA .
Unconsolidated Joint Venture Investments
The loss from unconsolidated joint ventures consists of our interest in the operating results of the proper ties we own in joint ventures. Loss from our unconsolidated joint ventures in creased by $ 3,672 from a loss of $ 214 for the three months ended March 31, 2016 compared to a loss of $ 3,886 during the same period in 201 7 . We recognized a $16,239 gain on the remeasurement of investment in unconsolidated joint ventures related to our transfer and redemption of our joint venture interest in Mystic Partners, LLC. In exchange for our interest in the partnership, we received 100% ownership of the Mystic Marriott Hotel & Spa and $11,623 in cash proceeds.
Income Tax Expense
During the three months ended March 31, 2017, the Company recorded an income tax expense of $2,243 compared to an income tax expense of $0 for the three months ended March 31, 2016 .
Net Income (Loss) Applicable to Common Shareholders
Net income applicable to common shareholders for the three months ended March 31, 2017 was $18,732 compared to a loss of $11,321 during the same period in 2016 . This increase was primarily related to the gain recognized on the sale of hotel properties and the gain recognized on the assignment and assumption of our investment in Mystic Partners. Offsetting this increase is an increase in the amount of distributions attributable to preferred shares and an increase in income tax expense .
Comprehensive Income (Loss) Attributable to Common Shareholders
Comprehensive income attributable to common shareholders for the three months ended March 31, 2017 was $18,798 compared to comprehensive loss of $11,558 for the same period in 2016. For the three months ended March 31, 2017, we recorded comprehensive income of $26,025 compared to comprehensive loss of $8,656 for the three months ended March 31, 2016.
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per 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 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. We have determined that debt service coverage ratio covenants contained in the loan agreements securing our hotel properties were met as of March 31, 2017.
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We have unsecured debt facilities in the aggregate of $1,000,000 which is comprised of a $500,000 senior unsecured credit facility and two unsecured term loans totaling $500,000. The unsecured credit facility (“Credit Facility”) contains a $250,000 unsecured term loan (“First Term Loan”) and a $250,000 unsecured revolving line of credit (“Line of Credit”). This Credit Facility expires on February 28, 2018 and, provided no event of default has occurred, we may request that the lenders renew the credit facility for an additional one-year period. The Credit Facility is also expandable to $850,000 at our request, subject to the satisfaction of certain conditions. Our two additional unsecured term loans are $300,000 (“Second Term Loan”) and $200,000 (“Third Term Loan”), which mature on August 10, 2020 and August 2, 2021, respectively.
As of March 31, 2017, the outstanding balance under the First Term Loan was $210,520, under the Second Term Loan was $300,000, under the Third Term Loan was $200,000 and we had no outstanding borrowings under the Line of Credit. As of March 31, 2017, our remaining borrowing capacity under the Credit Facility, Second Term Loan and Third Term Loan was $226,135 which is based on certain operating metrics of unencumbered hotel properties designated as borrowing base assets.
We will continue to monitor our debt maturities to manage our liquidity needs. 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. As of March 31, 2017, we have $35,000 of indebtedness maturing on or before December 31, 2017. We currently expect that cash requirements for all debt that is not refinanced by our existing lenders for which the maturity date is not extended will be met through a combination of cash on hand, refinancing the existing debt with new lenders, draws on the Line of Credit and the issuance of our securities.
In addition to the incurrence of debt and the offering of equity securities, dispositions of property or investment from a joint venture partner may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets, as evidenced by our transaction involving the Cindat JV properties, 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.
Common Share Repurchase Plan
In October 2016, our Board of Trustees authorized a new share repurchase program for up to $100,000 of common shares which commenced upon the completion of the existing repurchase program. The new program will expire on December 31, 2017, unless extended by our Board of Trustees. For the three months ended March 31, 2017, the Company repurchased no common shares.
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Acquisitions
During the three months ended March 31, 2017, we acquired the following wholly-owned hotel properties:
* Consists entirely of $899 of advanced bookings.
** Includes an intangible asset for a lease-in-place of $229, a nd a below market lease liability of $520.
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.
Operating Liquidity and Capital Expenditures
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under the Line of Credit. We believe that the net cash provided by operations in the coming year and borrowings drawn on the Line of Credit will be adequate to fund the Company’s operating requirements, monthly recurring debt service and the payment of dividends in accordance with REIT requirements of the Internal Revenue Code of 1986, as amended.
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 continue to make distributions to our shareholders at the current rate of $0.28 per share per quarter or at all. Due to the seasonality of our business, cash provided by operating activities fluctuates significantly from quarter to quarter. However, we believe that, based on our current estimates, which include the addition of cash from operations provided by hotels acquired during 2017, our cash provided by operating activities will be sufficient over the next 12 months to fund the payment of our dividend at its current level. However, our Board of Trustees continues to evaluate the dividend policy in the context of our overall liquidity and market conditions and may elect to reduce or suspend these distributions. Net cash provided by operating activities for the three months ended March 31, 2017 was $17,764 and cash used for the payment of distributions and dividends for the three months ended March 31, 2017 was $27,256, which included a special dividend of $8,343 that was funded by a portion of our proceeds from 2016 dispositions. Historically, the first quarter of each year produces weaker financial results, including cash provided by operating activities, when compared the remaining quarters of the year. As such, we do not expect the cash paid on dividends to exceed cash provided by operating activities for the year ended December 31, 2017 .
We also project that our operating cash flow and available borrowings under the Line of Credit will be sufficient to satisfy our liquidity and other capital needs over the next twelve to eighteen months.
Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovation and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties and scheduled debt repayments. We will seek to satisfy these long-term liquidity requirements through 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. Certain factors may have a material adverse effect on our ability to access these 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.
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Spending on capital improvements during the three months ended March 31, 2017 de creased when compared to spending on capital improvements during the three months ended March 31, 2016 . During the three months ended March 31, 2017 , we spent $ 10,529 on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $ 11,090 during the same perio d in 2016 . These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will generate a return on investment to take advantage of the continuing recovery in the lodging sector.
In addition to capital reserves required under certain loan agreements and capital expenditures to renovate, improve or replace assets at our hotels, we have opportunistically engaged in hotel development projects. During the three months ended March 31, 2017 , we spent $ 455 on hotel deve lopment projects compared to $0 during the same period of 2016 .
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, borrowings under the Line of Credit, and proceeds from issuances of our securities to pay for the cost of capital improvements and any furniture, fixture and equipment requirements in excess of the set aside referenced above.
CASH FLOW ANALYSIS
(dollars in thousands, except per share data)
Comparison of the Three Months Ended March 31, 2017 and 2016
Net cash provided by operating activities increased $8,665 from $9,099 for the three months ended March 31, 2016 to $17,764 for the comparable period in 2017. Net income, adjusted for non-cash items reflected in the statement of cash flows for the three months ended March 31, 2017 and 2016, increased by $4,196 for the three months ended March 31, 2017 when compared to 2016, partially driven by reduced costs in areas such as real estate taxes, stock compensation expenses, acquisition expenses, and depreciation and amortization . Further , a net decrease in working capital assets provided additional cash from operating activities.
Net cash used in investing activities for the three months ended March 31, 2017 was $50,379 compared to net cash used in investing activities of $137,312 for the three months ended March 31, 2016. During the three months ended March 31, 2017, we received $60,001 in proceeds from the disposition of two hotel properties. Additionally, we received $11,623 in proceeds from the sale of our joint venture interest in Mystic Partners. We did not have similar transactions during the three months ended March 31, 2016. Offsetting these sources of funds were $112,189 for the purchase of two hotel properties during the three months ended March 31, 2017 compared to $126,284 for the purchase of two hotel properties during the three months ended March 31, 2016.
Net cash used in financing activities for the three months ended March 31, 2017 was $105,396 compared to net cash provided by financing activities for the three months ended March 31, 2016 of $123,935. This is primarily due to $121,366 in repayments of mortgages payable offset partially by $43,900 in borrowings under the unsecured term loan facility during the three months ended March 31, 2017. During the three months ended March 31, 2016, we received proceeds from borrowings under the Line of Credit of $151,550 and repayments of mortgages payable of $8,470. In addition, dividends and distributions paid during the three months ended March 31, 2017 increased $10,542 when compared to the same period in 2016, due to the increased number of preferred shares outstan ding over the comparable period , and the special dividend declared on common shares during the fourth quarter of 2016 that was paid during the first three months of 2017.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 April 2002 National Policy Bulletin 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 extraordinary items as defined
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under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as loss from impairment of assets and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. 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. We determined that the loss from the impairment of certain depreciable assets including investments in unconsolidated joint ventures and land, was driven by a measurable decrease in the fair value of certain hotel properties and other assets as determined by our analysis of those assets in accordance with applicable GAAP. As such, these impairments have been eliminated from net loss to determine FFO.
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.
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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):
(1) 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.
(2) 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.
Based on guidance provided by NAREIT, we have eliminated loss from the impairment of certain depreciable assets, including investments in unconsolidated joint ventures and land, from net loss to arrive at FFO in each year presented.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2017 and 2016 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. See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 for a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements.
Revenue Recognition
Approximately 100% of our revenues are derived from hotel room revenues and revenue from other hotel operating departments. We directly recognize revenue and expense for all consolidated hotels as hotel operating revenue and hotel operating expense when earned and incurred. These revenues are recorded net of any sales or occupancy taxes collected from our guests. All revenues are recorded on an accrual basis, as earned. 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.
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.
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Investment in Hotel Properties
Investments in hotel properties are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life of up to 40 years for buildings and improvements, two to seven years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in hotel properties. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in hotel properties we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Identifiable assets, liabilities, and noncontrolling interests related to hotel properties acquired in a business combination are recorded at full fair value. Estimating techniques and assumptions used in determining fair values involve significant estimates and judgments. These estimates and judgments have a direct impact on the carrying value of our assets and liabilities which can directly impact the amount of depreciation expense recorded on an annual basis and could have an impact on our assessment of potential impairment of our investment in hotel properties.
Properties intended to be sold are designated as “held for sale” on the balance sheet. In accordance with ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations, we evaluate each disposition to determine whether we need to classify the disposition as discontinued operations. This amendment defines discontinued operations as a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.
Based on the occurrence of certain events or changes in circumstances, we review the recoverability of the property’s carrying value. Such events or changes in circumstances include the following:
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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. 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. 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.
As of March 31, 2017, based on our analysis, we have determined that the estimated future cash flow of each of the properties in our portfolio is sufficient to recover its carrying value.
Investment in Joint Ventures
Properties owned in joint ventures 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 VIE that most significantly impact 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
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partnerships without the consent of the other member and the inability of the members to replace the managing member. This evaluation requires significant judgment.
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, 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 rather than as dividends or other distributions are received, 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.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if circumstances exist indicating 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. Subsequent changes in estimates could impact the determination of whether impairment exists. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount over the fair value of our investment in the unconsolidated joint venture.
Accounting for Derivative Financial Investments and Hedging Activities
We use derivatives to hedge, fix and cap interest rate risk and we account for our derivative and hedging activities by recording all derivative instruments at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. Cash flow hedges that are considered highly effective are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Amounts are reclassified from other comprehensive income to the income statements in the period or periods the hedged forecasted transaction affects earnings.
Under cash flow hedges, derivative gains and losses not considered highly effective in hedging the change in expected cash flows of the hedged item are recognized immediately in the income statement. For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.
New Accounting Pronouncements
In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) . The update defines the term “in substance nonfinancial asset” as it is presented in Subtopic 610-20 as a “financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets that are promised to the counterparty in the contract is concentrated in nonfinancial assets.” As it relates to the Company, real estate, such as land and building, would be considered an example of a nonfinancial asset. Additionally, the update provides guidance over partial sale transactions, particularly, when an entity should derecognize a distinct nonfinancial asset or in substance nonfinancial asset in a partial sale transaction, and the extent of gain that should be recognized as a result of the partial sale transaction. This standard is effective in conjunction with ASU No. 2014-09 (presented below), which is effective for periods beginning after December 15, 2017, however early adoption is permitted. The provisions of this update must be applied at the same time as the adoption of ASU No. 2014-09. The Company is currently evaluating how the provisions of this update affect our adoption of ASU No. 2014-09. See below for our discussion of ASU No. 2014-09 and the effect it will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , which clarifies the definition of a business as it relates to acquisitions and business combinations. The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. We expect most of our hotel property acquisitions to qualify as asset acquisitions under the standard which permits the capitalization of acquisition costs to the underlying assets. This standard is effective for periods beginning after December 31, 2017, however early adoption is permitted. The Company is evaluating the ultimate effect that ASU No. 2017-01 will have on our consolidated financial statements and related disclosures.
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We adopted ASU No. 2016-09, Improvements to Employee Share-Based Award Payment Accounting , which simplifies various aspects of how share-based payments are accounted for and presented in the financial statements. This standard requires companies to record all of the tax effects related to share-based payments through the income statement, allows companies to elect an accounting policy to either estimate the share based award forfeitures (and expense) or account for forfeitures (and expense) as they occur, and allows companies to withhold a percentage of the shares issuable upon settlement of an award up to the maximum individual statutory tax rate without causing the award to be classified as a liability. The Company has elected to expense forfeitures of share-based award as they occur as our accounting policy. The adoption of ASU No. 2016-09 had no material impact on our consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) , which provides guidance on the presentation of restricted cash or restricted cash equivalents within the statement of cash flows . Accordingly , amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows . This standard is effective for the Company for per iods beginning after December 15 , 2017 . The adoption of ASU No. 2016-18 will change the presentation of the statement of cash flows for the Company and we will utilize a retrospective transition method for each period presented within financial statements for periods subsequent to the date of adoption
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases. The accounting for lessors will remain largely unchanged from current GAAP; however, the standard requires that certain initial direct costs be expensed rather than capitalized. Under the standard, lessees apply a dual approach, classifying leases as either finance or operating leases. A lessee is required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their lease classification. Based on the review of our real estate leases, we are a lessee on ground leases in certain markets and office space leases. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures .
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. We are evaluating each of our revenue streams and related accounting policy under the standard. The new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. Based on our analysis to date, we do not expect the new revenue recognition model to have a material impact on our hotel operating revenue, including room revenue, food and beverage, and other revenue, however, our final evaluation has not been concluded. Our evaluation under the standard also includes sales to third parties, primarily a result of dispositions of real estate. Our evaluation over sales of real estate will be partially dependent on how the FASB defines a business with regard to sales of assets, which has recently been addressed through the issuance of ASU No. 2017-05. The Company continues to evaluate the ultimate effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.
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Item 3. 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. As of March 31, 2017 , we are exposed to interest rate risk with respect to varia ble rate borrowings under our Credit Facility, Second and Third Term Loans and certain variable rate mortgages and notes payable. As of March 31, 2017 , we had total variable rate debt outstanding of $ 723,998 with a weight ed average interest rate of 3.14 %. The effect of a 100 basis point increase or decrease in the interest rate on our variable rate debt outstanding as of March 31, 2017 would be an increase or decrease in our inter est expense for the three months ended March 31, 2017 of $1, 901 .
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 March 31, 2017 , we have an interest rate cap related to debt on the Hyatt Union Square, New York, NY and Courtya rd, LA Westside, Culver City, CA , and we have four interest rate swaps related to debt on the Hilton Garden Inn, 52 nd Street, New York, NY, and our Second and Third Term Loans . We do not intend to enter into derivative or interest rate transactions for speculative purposes.
As of March 31, 2017 , approxim ately 41 % of our outstanding consolidated long-term indebtedness is subject to fixed rates or effectively capped, while 59 % of our out standing long term indebtedness is subject to floating rates, including borrowings under our Credit Facility, and First Term Loan .
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 March 31, 2017 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 March 31, 2017 to be approximately $ 1,043,986 and a 100 basis point decrease in market interest rates would cause the fair value of our fixed-rate debt outstanding at March 31, 2017 to be approximately $ 1,077,306 .
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 March 31, 2017 , the following table presents expected principal repayments and related weighted average interest rates by expected maturity dates:
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Item 4. Controls and Procedures
Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31, 2017 .
There were no changes to the Company’s internal controls over financial reporting during the three months ended March 31, 2017 , that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II. OTHER INFORMATION
None.
None .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None .
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures .
Not Applicable .
None.
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SIGNATURES
Pu rsua nt to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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HERSHA HOSPITALITY TRUST |
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April 26, 2017 |
/s/ Ashish R. Parikh |
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Ashish R. Parikh |
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Chief Financial Officer (Principal Financial Officer) |
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HERSHA HOSPITALITY TRUST
AMENDED AND RESTATED BYLAWS
(Effective as of February 10, 2012)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Trust shall be located at such place or places as the Board of Trustees may designate.
Section 2. ADDITIONAL OFFICES. The Trust may have additional offices at such places as the Board of Trustees may from time to time determine or the business of the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of shareholders shall be held at the principal office of the Trust or at such other place within the United States as shall be determined, from time to time, by the Board of Trustees and stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders for the election of Trustees and the transaction of such other business within the powers of the Trust as may properly come before the meeting shall be held during the month of May of each year, or at such other date and time determined by the Board of Trustees. Failure to hold an annual meeting shall not invalidate the Trust’s existence or affect any otherwise valid acts of the Trust.
Section 3. SPECIAL MEETINGS.
(a) Special meetings of the shareholders of the Trust may be called only by (i) the Chairman of the Board of Trustees, (ii) the Chief Executive Officer, (iii) one-third of the total number of authorized Trustees (whether or not there exist any vacancies in previously authorized trusteeships) or (iv) the holders of shares of beneficial interest in the Trust (“Shares”) entitled to cast not less than a majority of the votes at the meeting, determined as of the record date fixed in accordance with Section 3(d), upon written demand by such holders to the Secretary of the Trust in accordance with, and subject to, this Section 3. The notice of a special meeting shall state the purpose or purposes of the special meeting, and the business to be conducted at the special meeting shall be limited to the purpose or purposes stated in the notice.
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(b) No shareholder may demand that the Secretary of the Trust call a special meeting of the shareholders pursuant to Section 3(a) unless a shareholder of record has first submitted a request in writing that the Board of Trustees fix a record date for the purpose of determining the shareholders entitled to demand that the Secretary of the Trust call such special meeting, which request shall be in proper form and delivered to or mailed and received by the Secretary of the Trust at the principal executive offices of the Trust.
(c) To be in proper form for purposes of this Section 3, a request by a shareholder for the Board of Trustees to fix a record date for a special meeting of shareholders shall set forth, with respect to (i) such shareholder, (ii) any persons being nominated by such shareholder for election to the Board of Trustees at such special meeting and (iii) any other business proposed by such shareholder to be considered by the shareholders at such special meeting, all of the information that must be set forth in the notice required by Section 14(a)(ii) of this Article II (including all information with respect to any Shareholder Associated Person) as if the shareholder requesting such record date was nominating persons for election to the Board of Trustees and/or proposing other business to be considered by the shareholders at an annual meeting of shareholders.
(d) Within ten (10) days after the Secretary’s receipt of a request to fix a record date in proper form and otherwise in compliance with this Section 3 from any shareholder of record, the Board of Trustees may adopt a resolution fixing a record date for the purpose of determining the shareholders entitled to demand that the Secretary of the Trust call a special meeting of shareholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees. If no resolution fixing a record date has been adopted by the Board of Trustees within the ten (10) day period after the date on which such a request to fix a record date was received, the record date in respect thereof shall be deemed to be the tenth (10th) day after the date on which such request was received. Notwithstanding anything in this Section 3 to the contrary, no record date shall be fixed if the Board of Trustees determines that the demand or demands that would otherwise be submitted following such record date could not comply with the requirements set forth in clauses (ii), (iv), (v) or (vi) of Section 3(f).
(e) Without qualification, a special meeting of the shareholders shall not be called by shareholders unless shareholders of record as of the record date fixed in accordance with Section 3(d) who hold, in the aggregate, Shares entitled to cast not less than a majority of the votes at the meeting (the “Requisite Percentage”) timely provide one or more demands to call such special meeting in writing and in proper form to the Secretary of the Trust at the principal executive offices of the Trust on or following the record date fixed in accordance with Section 3(d). Only shareholders of record on such record date shall be entitled to demand that the Secretary of the Trust call a special meeting of the shareholders. To be timely, a shareholder’s demand to call a special meeting must be delivered to or mailed and received by the Secretary at the principal executive offices of the Trust not later than the sixtieth (60th) day following the record date fixed in accordance with Section 3(d). To be in proper form for purposes of this Section 3, a demand to call a special meeting shall set forth with respect to (i) the shareholders
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and any Shareholder Associated Persons thereof demanding such special meeting (except for any shareholder that has provided such demand in response to a solicitation made pursuant to, and in accordance with, Section 14(a) of the Securities Exchange Act of 1933, as amended (the “Exchange Act”) by way of a solicitation statement filed on Schedule 14A (a “Solicited Shareholder”)), (ii) any persons being nominated by such shareholders for election to the Board of Trustees at such special meeting and (iii) any other business proposed by such shareholders to be considered by the shareholders at such special meeting, all of the information that must be set forth in the notice required by Section 14(a)(ii) of this Article II (including all information with respect to any Shareholder Associated Person) as if the shareholders demanding the special meeting were nominating persons for election to the Board of Trustees and/or proposing other business to be considered by the shareholders at an annual meeting of shareholders (provided that if the shareholders demanding such special meeting are the same shareholders that requested the record date for such special meeting, such shareholders can update and supplement the information provided pursuant to Section 3(c) in requesting such record date). A shareholder may revoke a demand to call a special meeting by written revocation delivered to the Secretary at any time prior to the special meeting. If any such revocation(s) are received by the Secretary after the Secretary’s receipt of written demands from the holders of the Requisite Percentage of shareholders, and as a result of such revocation(s), there no longer are unrevoked demands from the Requisite Percentage of shareholders to call a special meeting, the Board of Trustees shall have the discretion to determine whether or not to proceed with the special meeting.
(f) The Secretary shall not accept, and shall consider ineffective, a written demand from any shareholder to call a special meeting (i) that does not comply with this Section 3, (ii) that relates to an item of business to be transacted at such special meeting that is not a proper subject for shareholder action under applicable law, these Bylaws or the Declaration of Trust, (iii) that includes an item of business to be transacted at such special meeting that did not appear on the written request that resulted in the determination of the record date (the “Current Record Date”) to determine the shareholders entitled to submit such written demand, (iv) that relates to an item of business (other than the election of trustees) that is identical or substantially similar to an item of business (a “Similar Item”) for which a record date (other than the Current Record Date) was previously fixed and such demand is delivered between the time beginning on the sixty-first (61st) day after such previous record date and ending on the one-year anniversary of such previous record date, (v) if a Similar Item will be submitted for shareholder approval at any shareholder meeting to be held on or before the ninetieth (90th) day after the Secretary receives such demand or (vi) if a Similar Item has been presented at the most recent annual meeting or at any special meeting held within one year prior to receipt by the Secretary of such demand to call a special meeting.
(g) After receipt of demand(s) in proper form and in accordance with this Section 3 from a shareholder or shareholders holding the Requisite Percentage, the Secretary shall inform such shareholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment by such shareholders to the Trust of such cost, the Board of Trustees shall duly call, and determine the date, time and place of, a special meeting of
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shareholders for the purpose or purposes and to conduct the business specified in the demand(s) received by the Trust, which shall be held not less than ten (10) nor more than ninety (90) days after the date of the receipt by the Secretary of the Trust of such demands in accordance with Section 3(e). The record date for such special meeting shall be fixed in accordance with Section 4 of Article VII of these Bylaws. The Board of Trustees shall provide written notice of such special meeting to shareholders in accordance with Section 4 of this Article II. Notwithstanding anything in these Bylaws to the contrary, the Board of Trustees may submit its own proposal or proposals for consideration and nominate persons for election to the Board of Trustees at any such special meeting called by the shareholders.
(h) In connection with a special meeting called in accordance with this Section 3, the shareholder or shareholders (except for any Solicited Shareholder) who requested that the Board of Trustees fix a record date in accordance with this Section 3 or who delivered a demand to call a special meeting to the Secretary of the Trust shall further update and supplement the information previously provided to the Trust in connection with such request or demand, if necessary, so that the information provided or required to be provided in such request or demand pursuant to this Section 3 shall be true and complete as of the record date for the special meeting and as of the date that is ten (10) business days prior to the special meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to or mailed and received by the Secretary of the Trust at the principal executive offices of the Trust not later than five (5) business days after the record date for the special meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date for the special meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the special meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the special meeting or any adjournment or postponement thereof). Unless otherwise required by law, the shareholder or shareholders (except for any Solicited Shareholder) who requested that the Board of Trustees fix a record date in accordance with this Section 3 or who delivered a demand to call a special meeting do not update and supplement such notice as required by this Bylaw or do not appear at the meeting to present the proposal set forth in the request or demand, such proposal or nominations shall be disregarded, notwithstanding that proxies in respect of any proposals or nominations may have been received by the Trust.
(i) Notwithstanding anything in these Bylaws to the contrary, the Secretary of the Trust shall not be required to call a special meeting at the request of shareholders except in accordance with this Section 3. If the Board of Trustees shall determine that any request by a shareholder or shareholders to fix a record date or demand by a shareholder or shareholders to call and hold a special meeting was not properly made in accordance with this Section 3, or shall determine that the shareholder or shareholders requesting that the Board of Trustees fix such record date or submitting a demand to call the special meeting have not otherwise complied with this Section 3, then the Board of Trustees shall not be required to fix a record date or to call and hold the special meeting. In addition to the requirements of this Section 3,
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each shareholder requesting a record date or demanding a special meeting shall comply with all requirements of applicable law, including all requirements of the Exchange Act, with respect to any request to fix a record date or demand to call a special meeting.
Section 4. NOTICE. Except as otherwise provided herein, not less than ten nor more than 90 days before each meeting of shareholders, the Secretary shall give to each shareholder entitled to vote at such meeting and to each shareholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the date, time and place of the meeting and, in the case of a special meeting or as otherwise may be required by applicable law, the purpose for which the meeting is called, either by mail, by presenting it to such shareholder personally, by leaving it at the shareholder’s residence or usual place of business, by electronic transmission or by any other means permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the shareholder at the shareholder’s post office address as it appears on the records of the Trust, with postage thereon prepaid. If transmitted electronically, such notice shall be deemed to be given when transmitted to the shareholder by an electronic transmission to any address or number of the shareholder at which the shareholder receives electronic transmissions. The Trust may, to the extent permitted by applicable law, give a single notice to all shareholders who share an address, which single notice shall be effective as to any shareholder at such address, unless a shareholder objects to receiving such single notice or revokes a prior consent to receiving such single notice.
Section 5. SCOPE OF NOTICE. Subject to Section 14 of this Article II, any business of the Trust may be transacted at an annual meeting of shareholders without being specifically designated in the notice, except such business as is required by applicable law to be stated in such notice. No business shall be transacted at a special meeting of shareholders except as specifically designated in the notice.
Section 6. CHAIRMAN OF MEETINGS. At every meeting of the shareholders, the Chairman of the Board shall preside over and serve as chairman of the meeting. If he or she is not present, or if there is none in office, one of the following officers present shall preside over and serve as chairman of the meeting in the order stated: the Chief Executive Officer, the President, the Lead Independent Trustee (if any), the Vice Presidents in their order of rank and seniority; or a chairman of the meeting chosen by the shareholders entitled to cast a majority of the votes that all shareholders present in person or by proxy are entitled to cast. The Secretary, or, if he or she is not present, or if there is none in office, an Assistant Secretary, or in the absence of both the Secretary and Assistant Secretaries, a person appointed by the chairman of the meeting, shall act as secretary of the meeting.
Section 7. CONDUCT OF MEETINGS. The Board of Trustees may, to the extent not prohibited by applicable law, adopt by resolution such rules, regulations and procedures for the conduct of any annual or special meeting of shareholders as the Board of Trustees shall deem appropriate. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board of Trustees, the chairman of any annual or special meeting of
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shareholders shall have the right, power and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such person, are appropriate for the proper conduct of the meeting of shareholders. Such rules, regulations and procedures, whether adopted by the Board of Trustees or prescribed by the chairman of the meeting, may to the fullest extent not prohibited by applicable law include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record, their duly authorized and constituted proxies and any such other persons as the chairman of the meeting shall determine; (iv) restrictions on the entry to the meeting after the time fixed for the commencement thereof; (v) the manner in which all persons attending the meeting may participate, including limiting the time allotted to questions or comments from such persons; and (vi) the opening and closing of the voting polls. Unless, and to the extent, determined by the Board of Trustees or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 8. ADJOURNMENT AND POSTPONEMENT. The chairman of any annual or special meeting of shareholders or the vote by holders of a majority of Shares casting votes, excluding abstentions, and who are present in person or by proxy may adjourn such meeting from time to time whether or not a quorum is present. In the event that a quorum does not exist with respect to any vote to be taken by a particular class or series of Shares, the chairman of the meeting or the vote of a majority of the holders of such class or series of Shares, excluding abstentions, who are present in person or by proxy may adjourn the meeting with respect to the vote(s) to be taken by such class or series. The chairman of the meeting may determine the date, time and place that a meeting so adjourned is to reconvene. Notice of adjournment of a meeting of shareholders need not be given if the date, time and place to which it is adjourned are announced at such meeting, unless the adjournment is for more than 120 days after the original record date or a new record date is fixed by the Board of Trustees for the adjourned meeting. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Any previously scheduled meeting of shareholders may be postponed or canceled by action of the Board of Trustees taken prior to the time previously scheduled for such meeting of shareholders.
Section 9. QUORUM. At any meeting of shareholders, the presence in person or by proxy of shareholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; provided, however, that this Section 9 shall not affect any requirement under any applicable law, these Bylaws or the Declaration of Trust for the vote necessary for the approval of any measure.
Section 10. VOTING.
(a) (i) A nominee for Trustee shall be elected as a Trustee only if the total votes cast in favor of the election of such nominee exceeds the total votes cast against the election of
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such nominee at a meeting of shareholders duly called and at which a quorum is present. If, however, as of the close of business on the tenth day before the date the Trust files with the Securities and Exchange Commission its definitive proxy statement for such meeting of shareholders, the number of nominees is greater than the number of Trustees to be elected at such meeting of shareholders (a “Contested Election”), a plurality of the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to elect a Trustee.
(ii) In an election that is not a Contested Election, if a nominee for Trustee who is an incumbent Trustee is not elected and no successor has been elected at such meeting, the Trustee shall promptly tender his or her resignation to the Board of Trustees. The Nominating and Corporate Governance Committee shall make a recommendation to the Board of Trustees as to whether to accept or reject such resignation, or whether other action should be taken. The Board of Trustees shall act on such resignation, taking into account the Nominating and Corporate Governance Committee’s recommendation, and publicly disclose (by a press release, a filing with the Securities and Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. The Nominating and Corporate Governance Committee in making its recommendation, and the Board of Trustees in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The Trustee who tenders his or her resignation shall not participate in the recommendation of the Nominating and Corporate Governance Committee or the decision of the Board of Trustees with respect to his or her resignation. If such incumbent Trustee’s resignation is not accepted by the Board of Trustees, such Trustee shall continue to serve until the next annual meeting and until his or her successor is duly elected, or his or her earlier resignation or removal. If a Trustee’s resignation is accepted by the Board of Trustees pursuant to this Bylaw, or , in an election that is not a Contested Election, if a nominee for Trustee is not elected and such nominee is not an incumbent Trustee, then the Board of Trustees, in its sole discretion, may fill any resulting vacancy pursuant to the provisions of the Declaration of Trust and these Bylaws or may decrease the size of the Board of Trustees pursuant to the provisions of the Declaration of Trust and these Bylaws.
(b) A majority of the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to approve any matter (other than the election of Trustees) that may properly come before the meeting, unless more than a majority of the votes cast is required by applicable law, these Bylaws or the Declaration of Trust. Unless otherwise provided in the Declaration of Trust, each outstanding share entitled to vote, regardless of class, shall be entitled to one vote per share on each matter submitted to a vote at a meeting of shareholders. Any action permitted or required to be taken by shareholders must be effected at a meeting of shareholders.
Section 11. PROXIES. A shareholder may cast the votes entitled to be cast by the Shares owned of record by such shareholder either in person or by proxy executed in writing by
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the shareholder or by such shareholder’s duly authorized attorney in fact. The shareholder may authorize a person to act as such shareholder’s proxy by transmitting, or authorizing the transmission of, an authorization for such person to act as proxy to the person authorized to act as proxy or any other person authorized to receive the proxy authorization on behalf of the person authorized to act as the proxy, including a proxy solicitation firm or proxy support service organization. Any such authorization may be transmitted by a telegram, cablegram, datagram, electronic mail or any other electronic or telephonic means. Such proxy shall be filed with the Secretary of the Trust before or at the time of the meeting of shareholders and shall be revocable unless stated in writing that the proxy is irrevocable at the time of filing. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy.
Section 12. VOTING OF SHARES BY CERTAIN HOLDERS.
(a) Shares of the Trust registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such Shares pursuant to a bylaw or a resolution of the governing board of such corporation or other entity or agreement of the partners of the partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such Shares. Any trustee or other fiduciary may vote Shares registered in his, her or its name as such fiduciary, either in person or by proxy.
(b) Shares directly or indirectly owned by the Trust shall not be voted at any meeting of shareholders and shall not be counted in determining the total number of outstanding Shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding Shares at any given time.
(c) The Board of Trustees may adopt by resolution a procedure by which a shareholder may certify in writing to the Trust that any Shares registered in the name of the shareholder are held for the account of a specified person other than the shareholder. The resolution shall set forth the class of shareholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Trust; and any other provisions with respect to the procedure that the Board of Trustees considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the shareholder of record of the specified Shares in place of the shareholder who makes the certification.
Section 13. INSPECTORS. At any meeting of shareholders, the chairman of the meeting may, or upon the request of any shareholder shall, appoint one or more persons as
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inspectors for such meeting. Such inspectors shall ascertain and report the number of Shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders and such other duties as shall be required by law or specified by the chairman of the meeting. Each report of an inspector shall be in writing and signed by him or her or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of their duties.
Section 14. CONDUCT OF BUSINESS.
(a) Annual Meetings of Shareholders.
(i) Nominations of persons for election to the Board of Trustees and the proposal of any other business to be considered by the shareholders may be made at an annual meeting of shareholders only (A) pursuant to the Trust’s notice of meeting given by or at the direction of the Board of Trustees, (B) otherwise by or at the direction of the Board of Trustees or (C) by any shareholder of the Trust who was a shareholder at the time of giving of notice provided for in this Bylaw and at the time of the annual meeting, is entitled to vote at the annual meeting and complies with the notice procedures set forth in this Bylaw as to such nomination or proposal; provided, however, that clause (C) of this Section 14(a)(i) shall be the exclusive means for a shareholder to make nominations or submit any other business (other than matters properly brought under Rule 14a-8 under the Exchange Act and included in the Trust’s notice of meeting) before an annual meeting of shareholders.
(ii) In order for any nominations or any other business to be properly brought before an annual meeting by a shareholder pursuant to Section 14(a)(i), the shareholder must have given timely notice thereof in writing to the Secretary and such other business must otherwise be a proper matter for action by the shareholders under applicable law, these Bylaws and the Declaration of Trust . To be timely, a shareholder’s notice shall be delivered to or mailed to and received by the Secretary at the principal executive offices of the Trust not earlier than 5:00 p.m., Eastern Time, on the 150th day and not later than 5:00 p.m., Eastern Time, on the 120th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than 5:00 p.m., Eastern Time, on the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Trust . In no event shall a postponement of the mailing of the notice for such annual meeting or any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above . To be in proper form, a shareholder’s notice (whether given pursuant to this Section 14(a)(ii),
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Section 14(b) or Section 3) to the Secretary must: (A) set forth, as to the shareholder giving the notice (1) the name and address of such shareholder as they appear on the Trust’s books, and the name and address of any Shareholder Associated Person, (2)(a)(i) the class and number of Shares which are, directly or indirectly, owned by such shareholder and any Shareholder Associated Person, (ii) the nominee holder for, and number of shares, owned beneficially but not of record by such shareholder and by any Shareholder Associated Person and (iii) a representation that the shareholder is entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate such person for election or propose such business, (b) a description of any contract, agreement, arrangement or understanding (including, without limitation, any convertible securities, derivative or short positions, swaps, profit interests, options, puts, warrants, stock appreciation rights, hedging transactions and borrowed or loaned shares) that has been entered into by, or on behalf of, the shareholder or any Shareholder Associated Person, the effect or intent of which is to increase or decrease the voting power of the shareholder or any Shareholder Associated Person or to hedge against, reduce or mitigate loss to, manage economic risk or benefit of share price changes for, or otherwise profit or share in any profit derived from any increase or decrease in the price, value or volatility of any securities of the Trust, (c) any rights to dividends on any securities of the Trust owned beneficially by such shareholder or any Shareholder Associated Person that are separated from the underlying securities of the Trust and (d) any proxy (other than a revocable proxy given in response to a solicitation made pursuant to, and in accordance with, Section 14(a) of the Exchange Act by way of a solicitation statement filed on Schedule 14A), voting trust, voting agreement or other contract, arrangement, understanding or relationship pursuant to which such shareholder or any Shareholder Associated Person has a right to vote or direct the voting of any security of the Trust, and (3) any other information relating to such shareholder and any Shareholder Associated Person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of trustees in a contested election (even if an election contest is not involved) pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; (B) if the notice relates to any business other than a nomination of any person for election to the Board of Trustees that the shareholder proposes to bring before the meeting, set forth (1) a description of the business desired to be brought before the meeting, the complete text of any resolutions to be presented, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and any Shareholder Associated Person, individually or in the aggregate, including any anticipated benefit to the shareholder and any such Shareholder Associated Person therefrom, and (2) a description of all contracts, agreements, arrangements and understandings between such shareholder or any Shareholder Associated Person, on the one hand, and any other persons or entities (including their names), on the other hand, in connection with the proposal of such business by such shareholder; (C) set forth, as to each person, if any, whom the shareholder proposes to nominate for election or reelection to the Board of Trustees (1) the name, age, business address, residence address and principal occupation or employment of such person, (2) the class and number of Shares which are, directly or indirectly, owned beneficially and of record by such person and his or her associates and affiliates, and the date or dates such shares were acquired and the investment intent of
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such acquisition, (3) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such shareholder and any such Shareholder Associated Person, if any, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the shareholder or any Shareholder Associated Person were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant, (4) all other information concerning such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of trustees in a contested election (even if an election contest is not involved) pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a trustee if elected); (D) with respect to each nominee for election or reelection to the Board of Trustees, include a completed and signed questionnaire, representation and agreement required by Section 15 of this Article; (E) to the extent known by the shareholder giving the notice or any Shareholder Associated Person, set forth the name and address of any other shareholder supporting the nominee for election or reelection as a trustee or the proposal of other business on the date of such notice; and (F) include a representation and covenant that the shareholder will update and supplement such notice as required by Section 14(c)(ii) of this Article. The Trust may require any proposed nominee for election to the Board of Trustees to furnish such other information as may reasonably be required by the Trust to determine the eligibility of such proposed nominee to serve as an independent trustee of the Trust or that could be material to a reasonable shareholder’s understanding of the independence, or lack thereof, of such nominee.
(iii) Notwithstanding anything in the second sentence of Section 14(a)(ii) of this Article to the contrary, in the event that the number of trustees to be elected to the Board of Trustees is increased and there is no public announcement by the Trust naming all of the nominees for trustee or specifying the size of the increased Board of Trustees at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a shareholder’s notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to or mailed to and received by the Secretary at the principal executive offices of the Trust not later than 5:00 p.m., Eastern Time, on the 10th day following the day on which such public announcement is first made by the Trust.
(b) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Trust’s notice of meeting. Nominations of persons for election to the Board of Trustees may be made at a special meeting of shareholders pursuant to the Trust’s notice of meeting only (i) by or at the direction of the Board of Trustees, (ii) by shareholders pursuant to Section 3 of this Article II or (iii) provided that the Board of Trustees or the shareholders pursuant to Section 3 of this Article II have determined that trustees shall be elected at such special meeting, by any
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shareholder of the Trust who is a shareholder at the time of giving of notice provided for in this Bylaw and at the time of the special meeting, is entitled to vote at the special meeting, and complies with the notice procedures set forth in this Bylaw as to such nomination or other business. In the event the Board of Trustees or the shareholders pursuant to Section 3 of this Article II call a special meeting of shareholders for the purpose of electing one or more trustees to the Board of Trustees, any shareholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Trust’s notice of meeting, if the shareholder’s notice required by Section 14(a)(ii) of these Bylaws with respect to any nomination (including the completed and signed questionnaire, representation and agreement required by Section 15 of these Bylaws) shall be delivered to or mailed to and received by the Secretary at the principal executive offices of the Trust not earlier than 5:00 p.m., Eastern Time, on the 120th day prior to the date of such special meeting and not later than 5:00 p.m., Eastern Time, on the later of the 90th day prior to the date of such special meeting or, if the first public announcement of the date of such special meeting is less than 100 days prior to the date of such special meeting, the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Trustees to be elected at such meeting. In no event shall a postponement of the mailing of the notice for such special meeting or any adjournment or postponement of a special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above. Notwithstanding anything else in these Bylaws to the contrary, Section 3 of Article II shall be the sole and exclusive means by which any shareholder can nominate persons for election to the Board of Trustees or propose other business to be considered by the shareholders at a special meeting of shareholders that was called by any such shareholder.
(c) General.
(i) Only such persons who are nominated in accordance with the procedures set forth in this Section 14 or Section 3, as applicable, of this Article II shall be eligible to serve as Trustees and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 14 or Section 3, as applicable . The chairman of the meeting shall have the power and duty to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective nomination or proposal shall be disregarded.
(ii) A shareholder providing notice of nominees for election to the Board of Trustees or other business proposed to be brought before an annual or special meeting of shareholders pursuant to Section 14(a) or (b), as applicable, shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to Section 14(a)(ii) shall be true and complete as of the record date for the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be
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delivered to, or mailed and received by, the Secretary at the principal executive offices of the Trust not later than five (5) business days after the record date for the meeting or the date on which public announcement of the record date is first made by the Trust (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date for the meeting, if practicable (or, if not practicable, on the first practicable date prior to) any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof) . Unless otherwise required by law, if a shareholder intending to make a nomination or propose business at a meeting of shareholders does not update and supplement such notice as required by this Bylaw or does not appear at the meeting to present the nomination or proposal, such nomination or proposal shall be disregarded, notwithstanding that proxies in respect of such nomination may have been received by the Trust.
(iii) For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire, Reuters Information Service or any similar or successor news service or in a document publicly filed by the Trust with the Securities and Exchange Commission pursuant to the Exchange Act and the rules and regulations promulgated thereunder.
(iv) For purposes of these Bylaws, “Shareholder Associated Person” shall mean, with respect to any shareholder, (A) any affiliate or associate (each within the meaning of Rule 12b-2 under the Exchange Act for purposes of these Bylaws) of such shareholder, (B) any beneficial owner of any securities of the Trust owned of record or beneficially by such shareholder, (C) any person controlling, controlled by or under common control with a Shareholder Associated Person of such shareholder and (D) any person with whom such shareholder or any Shareholder Associated Person is acting in concert.
(v) Notwithstanding the foregoing provisions of this Section 14, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw; provided, however, that any references in these Bylaws to the Exchange Act or the rules or regulations promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to Section 3, Section 14(a)(ii) or Section 14(b) of these Bylaws . Nothing in Section 3 or this Section 14 shall be deemed to affect any rights (x) of shareholders to request inclusion of proposals in the Trust’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (y) of the holders of any series of preferred shares if and to the extent provided for under the Declaration of Trust or these Bylaws.
Section 15. SUBMISSION OF QUESTIONNAIRE, REPRESENTATION AND AGREEMENT. To be eligible to be a nominee for election or reelection as a Trustee of the Trust, a person nominated by any shareholder must deliver (in accordance with the time periods prescribed for
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delivery of notice under Section 14 and Section 3, as applicable, of this Article II) to the Secretary at the principal executive offices of the Trust a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request) and a written representation and agreement (in the form provided by the Secretary upon written request) that such person (a) is not and will not become a party to (i) any contract, agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a Trustee of the Trust, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Trust or (ii) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a Trustee, with such person’s legal duties under applicable law, (b) is not and will not become a party to any contract, agreement, arrangement or understanding with any person or entity other than the Trust with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a Trustee that has not been disclosed therein, and (c) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a Trustee, and will comply with all applicable corporate governance, conflict of interest, corporate opportunities, confidentiality and share ownership and trading policies and guidelines of the Trust.
Section 16. VOTING BY BALLOT. Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter at a meeting of shareholders, including the election of trustees, need not be by written ballot.
ARTICLE III
TRUSTEES
Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER. The business and affairs of the Trust shall be managed under the direction of its Board of Trustees. A Trustee shall be an individual at least 21 years of age who is not under legal disability. Trustees need not be shareholders of the Trust. Subject to Article II, Section 10(a)(ii) of these Bylaws, in case of failure to elect Trustees at an annual meeting of the shareholders, the Trustees holding over shall continue to direct the management of the business and affairs of the Trust until their successors are elected and qualify.
Section 2. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Trustees shall be held immediately after and at the same place as the annual meeting of shareholders, no notice other than this Bylaw being necessary, or at such other date, time and place as the Board of Trustees may determine. The Board of Trustees may provide, by resolution, the date, time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Trustees without other notice than such resolution.
Section 3. SPECIAL MEETINGS. Special meetings of the Board of Trustees may be called by or at the request of the Chairman of the Board, the Chief Executive Officer or by two
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of the Trustees then in office. The person or persons authorized to call special meetings of the Board of Trustees may fix any date, time and place, either within or without the State of Maryland, for holding any special meeting of the Board Trustees called by them.
Section 4. NOTICE. Notice of any special meeting of the Board of Trustees shall be given by written notice delivered personally, telegraphed, facsimile transmitted, electronically mailed or mailed to each Trustee at his or her business or residence address or by telephone. Personally delivered, telegraphed or electronically mailed notices shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting. Telephone or facsimile-transmission notice shall be given at least 24 hours prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Telephone notice shall be deemed given when the Trustee is personally given such notice in a telephone call to which he or she is a party. Facsimile-transmission notices shall be deemed given upon completion of the transmission of the message to the number given to the Trust by the Trustee and receipt of a completed answer back indicating receipt. Electronic mail notices shall be deemed to be given upon transmission of the message to the electronic mail address given to the Trust by the Trustee. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Trustees need be stated in the notice of such meeting, unless specifically required by applicable law or these Bylaws.
Section 5. QUORUM. A majority of the entire Board of Trustees shall constitute a quorum for transaction of business at any meeting of the Board of Trustees, provided that, if less than a majority of such Trustees are present at said meeting, a majority of the Board of Trustees present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the Declaration of Trust or these Bylaws, the vote of a majority of a particular group of Trustees is required for action, a quorum must also include a majority of such group. The Trustees present at a meeting that has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Trustees to leave less than a quorum.
Section 6. VOTING.
(a) Except as provided in Section 6(b), the action of the majority of the members of the Board of Trustees present at a meeting at which a quorum is initially present shall be the action of the Board of Trustees, unless the concurrence of a greater proportion is required for such action by applicable law, these Bylaws or the Declaration of Trust.
(b) Notwithstanding anything in these Bylaws to the contrary, any transaction involving the Trust, including the purchase, sale, lease or mortgage of any real estate asset, in which a Trustee or officer of the Trust, or any affiliate (as defined in the Declaration of Trust) thereof, has an interest (other than solely as a result of such person’s status as a Trustee, officer or shareholder of the Trust), must be approved by a majority of the Independent
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Trustees (as defined in the Declaration of Trust), even if the Independent Trustees constitute less than a quorum.
Section 7. TELEPHONE MEETINGS. Trustees may participate in any meeting of the Board of Trustees by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 8. INFORMAL ACTION BY TRUSTEES. Any action required or permitted to be taken at any meeting of the Board of Trustees may be taken without a meeting if a consent in writing to such action is signed by each Trustee and such written consent is filed with the minutes of proceedings of the Board of Trustees.
Section 9. VACANCIES. If for any reason any or all the Trustees cease to be Trustees, such event shall not terminate the Trust or affect these Bylaws or the powers of the remaining Trustees hereunder (even if fewer than two Trustees remain). Except as provided in the Declaration of Trust, any vacancy (including a vacancy created by an increase in the number of Trustees) shall be filled, at any regular meeting of the Board of Trustees or at any special meeting of the Board of Trustees called for that purpose, by a majority of the remaining Trustees, or if no Trustees remain, by a plurality of the votes cast by the shareholders at a meeting of the shareholders. Any individual so elected as Trustee shall hold office for the unexpired term of the Trustee he or she is replacing.
Section 10. COMPENSATION.
(a) Trustees shall not receive any stated salary for their services as Trustees but, by resolution of the Board of Trustees, may receive a fixed sum of cash and/or Shares (or options to acquire Shares) per meeting (including committee meeting and/or Independent Trustee meeting), per year and/or per visit to real property owned or to be acquired by the Trust and for any service or activity they performed or engaged in as Trustees. Trustees may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Trustees or of any committee thereof; and for their expenses, if any, in connection with each property visit and any other service or activity performed or engaged in as Trustees; but nothing herein contained shall be construed to preclude any Trustee from serving the Trust in any other capacity and receiving compensation therefor.
(b) The Trust may lend money to, guarantee an obligation of or otherwise assist a Trustee or a trustee of its direct or indirect subsidiary. The loan, guarantee or other assistance may be with or without interest, unsecured or secured in any manner that the Board of Trustees, including a majority of the Independent Trustees, approves, including a pledge of Shares.
Section 11. REMOVAL OF TRUSTEES. The shareholders may remove any Trustee only in the manner provided in the Declaration of Trust at a meeting of the shareholders called for that purpose.
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Section 12. LOSS OF DEPOSITS. No Trustee shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or Shares have been deposited.
Section 13. SURETY BONDS. Unless required by law, no Trustee shall be obligated to give any bond or surety or other security for the performance of any of his or her duties.
Section 14. RELIANCE. Each Trustee, officer, employee and agent of the Trust shall, in the performance of his or her duties with respect to the Trust, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel or upon reports made to the Trust by any of its officers or employees or by advisers, accountants, appraisers or other experts or consultants selected by the Trustees or officers of the Trust, regardless of whether such counsel or other expert may also be a Trustee.
Section 15. NUMBER AND CLASSIFICATION. The number of Trustees of the Trust shall be determined, from time to time, by resolution of the Board of Trustees, but such number shall not be less than three (3) nor more than nine (9). The Board of Trustees shall be classified, with respect to the terms for which they severally hold office, into separate classes, if and in the manner prescribed in the Declaration of Trust. At any regular meeting or at any special meeting of the Board of Trustees called for that purpose, a vote of at least 80% of the members of the Board of Trustees shall be required in order to increase or decrease the number of Trustees, provided that the number thereof shall never be less than required by Maryland law and further provided that the tenure of office of a Trustee shall not be affected by any decrease in the number of Trustees.
Section 16. INTERESTED TRUSTEE TRANSACTIONS. Section 2-419 of the Maryland General Corporation Law (the “MGCL”) shall be available for and apply to any contract or other transaction between the Trust and any of its Trustees or between the Trust and any other trust, corporation, firm or other entity in which any of its Trustees is a trustee or director or has a material financial interest.
Section 17. CERTAIN RIGHTS OF TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS. The Trustees shall have no responsibility to devote their full time to the affairs of the Trust. Any Trustee, officer, employee or agent of the Trust (other than a full-time officer or agent of any other person or otherwise) may have business interests and engage in business activities similar or in addition to those of or relating to the Trust.
Section 18. ADVISORY OR EMERITUS TRUSTEES.
(a) If the Board of Trustees wishes one or more persons to regularly attend meetings of the Board of Trustees, the Board of Trustees may confer upon any such person the honorary title of “Advisory Trustee” or, if such person previously served as a trustee of the Trust, the title of “Trustee Emeritus.” An Advisory Trustee or Trustee Emeritus shall be
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compensated in such manner and in such amounts as the Board of Trustees may from time to time determine.
(b) The business of the Trust shall remain solely under the direction of the Board of Trustees and any such person designated as Advisory Trustee or Trustee Emeritus shall not by virtue of such designation or by virtue of their consultation to the Board of Trustees be deemed to have undertaken any duty to the Trust or its shareholders. An Advisory Trustee or Trustee Emeritus shall not be entitled to vote at any meeting of the Board of Trustees and shall not be included in the calculation of a quorum at any such meeting.
(c) An Advisory Trustee or Trustee Emeritus shall enjoy limitations of liability to the maximum extent permissible under law and shall also be entitled to the protection of the indemnification and limitation of liability provisions of Trust’s Declaration of Trust or of these Bylaws, and any other indemnification or limitation of liability provisions that may exist from time to time with respect to members of the Board of Trustees, either in the Declaration of Trust, Bylaws, minutes, agreements, or other documents of the Trust or applicable law, including without limitation advancement of expenses.
(d) Except as otherwise provided by agreement or resolution of the Board of Trustees, the Board of Trustees may terminate the status as an Advisory Trustee or Trustee Emeritus of any person so designated at any time without any liability or obligation to such person whatsoever; provided, however, that the obligation of the Trust to indemnify the Advisory Trustee or Trustee Emeritus to the full extent provided above and the obligation of the Trust to pay the Advisory Trustee or Trustee Emeritus the full amount of compensation earned through the date of termination as provided above shall continue notwithstanding any such termination of status.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS; VACANCIES.
(a) The Board of Trustees may appoint from among its members an Executive Committee and other committees comprised of two or more Trustees. A majority of the members of any committee so appointed shall be Independent Trustees. The Board of Trustees shall appoint an audit committee comprised of not less than two members, all of whom shall be Independent Trustees.
(b) Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Trustees.
(c) Subject to the provisions hereof, the Board of Trustees shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate
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alternative members, to replace any absent or disqualified member and to dissolve any such committee.
Section 2. POWERS. The Board of Trustees may delegate to committees appointed under Section 1 of this Article IV any of the powers of the Board of Trustees, except as prohibited by applicable law.
Section 3. MEETINGS.
(a) One-third, but not less than two, of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board of Trustees may designate a chairman of any committee, and such chairman or any two members of any committee may fix the date, time and place of its meetings unless the Board of Trustees shall otherwise provide. In the absence or disqualification of any member of any such committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Trustee to act at the meeting in the place of such absent or disqualified members; provided, however, that in the event of the absence or disqualification of an Independent Trustee, such appointee shall be an Independent Trustee.
(b) Each committee shall keep minutes of its proceedings and shall report the same to the Board of Trustees at the meeting next succeeding, and any action by the committees shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Trustees may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust may consist of a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, one or more Chief Operating Officers, a President, one or more Vice Presidents, a Treasurer, one or more Assistant Treasurers, a Secretary and one or more Assistant Secretaries. In addition, the Board
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of Trustees may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Trust shall be elected annually by the Board of Trustees at the first meeting of the Board of Trustees held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his or her successor is elected and qualified or until his or her death, resignation or removal in the manner hereinafter provided. Any two or more offices except President and Vice President may be held by the same person. In its discretion, the Board of Trustees may leave unfilled any office except that of President and Secretary. Election of an officer or appointment of an agent shall not of itself create contract rights between the Trust and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust may be removed by the Board of Trustees if in its judgment the best interests of the Trust would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Trust may resign at any time by giving written notice of his or her resignation to the Board of Trustees, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Any resignation shall take effect at any subsequent time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Trust.
Section 3. VACANCIES. A vacancy in any office may be filled by the Board of Trustees for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Trustees may designate a Chief Executive Officer from among the elected officers. The Chief Executive Officer shall have responsibility for implementation of the policies of the Trust, as determined by the Board of Trustees, and for the administration of the business affairs of the Trust. In the absence of both the Chairman and the Vice Chairman of the Board, the Chief Executive Officer, if a Trustee, shall preside over the meetings of the Board of Trustees.
Section 5. CHIEF OPERATING OFFICER. The Board of Trustees may designate one or more Chief Operating Officers from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Board of Trustees.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Trustees may designate a Chief Financial Officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Board of Trustees or the Chief Executive Officer.
Section 7. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside over the meetings of the Board of Trustees and shall in general oversee all of the business and affairs of the Trust. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at such meetings of the Board of Trustees at which
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he or she shall be present. The Chairman or the Vice Chairman of the Board may execute any deed, mortgage, bond, contract or other instrument on behalf of the Trust, except in cases where the execution thereof shall be expressly delegated by the Board of Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed. The Chairman of the Board and the Vice Chairman of the Board shall perform such other duties as may be assigned to him or them by the Board of Trustees.
Section 8. PRESIDENT. In the absence of a designation of a Chief Executive Officer by the Board of Trustees, the President shall be the Chief Executive Officer. The President may execute any deed, mortgage, bond, contract or other instrument on behalf of the Trust, except in cases where the execution thereof shall be expressly delegated by the Board of Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Trustees from time to time.
Section 9. VICE PRESIDENTS. In the absence of the President or in the event of a vacancy in such office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their initial election as Vice President) shall perform the duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President; and shall perform such other duties as from time to time may be assigned to him or them by the President or by the Board of Trustees. The Board of Trustees may designate one or more Vice Presidents as Executive or Senior Vice President or as Vice President for particular areas of responsibility.
Section 10. SECRETARY. The Secretary shall b) keep the minutes of the proceedings of the shareholders, the Board of Trustees and committees of the Board of Trustees in one or more books provided for that purpose; c) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; d) be custodian of the Trust records and of the seal of the Trust; e) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; f) have general charge of the share transfer books of the Trust; and g) in general perform such other duties as from time to time may be assigned to him by the Chief Executive Officer, the President or the Board of Trustees.
Section 11. TREASURER. The Treasurer shall have the custody of the funds and securities of the Trust and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Trust and shall deposit all moneys and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Board of Trustees.
The Treasurer shall disburse the funds of the Trust as may be ordered by the Board of Trustees, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer, the President and the Board of Trustees, at the regular meetings of the Board of Trustees or whenever they may require it, an account of all his or her transactions as Treasurer and of the financial condition of the Trust.
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If required by the Board of Trustees, the Treasurer shall give the Trust a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Trustees for the faithful performance of the duties of his or her office and for the restoration to the Trust, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his or her possession or under his or her control belonging to the Trust.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or Treasurer, respectively, or by the Chief Executive Officer, the President or the Board of Trustees. The Assistant Treasurers shall, if required by the Board of Trustees, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Trustees.
Section 13. SALARIES. The salaries and other compensation of the officers, if any, shall be fixed from time to time by the Board of Trustees, and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he or she is also a Trustee.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Trustees may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Trust and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Trustees or by an authorized person shall be valid and binding upon the Trust when authorized or ratified by action of the Board of Trustees.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Trust shall be signed by such officer or officers, agent or agents of the Trust in such manner as shall from time to time be determined by the Board of Trustees.
Section 3. DEPOSITS. All funds of the Trust not otherwise employed shall be deposited from time to time to the credit of the Trust in such banks, trust companies or other depositories as the Board of Trustees may designate.
ARTICLE VII
SHARES
Section 1. CERTIFICATES. The Trust may issue some or all of the Shares of any or all of the Trust’s classes or series without certificates if authorized by the Board of Trustees. In the
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event that the Trust issues Shares evidenced by certificates, such certificates shall be in such form as prescribed by the Board of Trustees or a duly authorized officer, shall contain the statements and information required by Maryland law and shall be signed by the officers of the Trust in the manner permitted by Maryland law. In the event that the Trust issues Shares without certificates, to the extent then required by Maryland law, the Trust shall provide to the record holders of such Shares a written statement of the information required by Maryland law to be included on share certificates. There shall be no differences in the rights and obligations of shareholders based on whether or not their Shares are evidenced by certificates. If Shares of a class or series are authorized by the Board of Trustees to be issued without certificates, no shareholder shall be entitled to a certificate or certificates evidencing any Shares of such class or series held by such shareholder unless otherwise determined by the Board of Trustees and then only upon written request by such shareholder to the secretary of the Trust.
Section 2. TRANSFERS. Certificates shall be treated as negotiable, and title thereto and to the Shares they represent shall be transferred by delivery thereof to the same extent as those of a Maryland stock corporation. No transfers of Shares shall be made if (i) void ab initio pursuant to any provision of the Declaration of Trust or (ii) the Board of Trustees, pursuant to any provision of the Declaration of Trust, shall have refused to permit the transfer of such Shares. Permitted transfers of Shares shall be made on the share records of the Trust only upon the instruction of the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued, for such Shares properly endorsed or accompanied by a duly executed share transfer power and the payment of all taxes thereon. Upon surrender to the Trust or the transfer agent of the Trust of a certificate for Shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, as to any transfers not prohibited by any provision of the Declaration of Trust or by action of the Board of Trustees thereunder, it shall be the duty of the Trust to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
The Trust shall be entitled to treat the holder of record of any Share or Shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Share or Shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board of Trustees may direct a new certificate be issued in place of any certificate previously issued by the Trust alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person or entity claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, the officer designated by the Board of Trustees may, in his or her discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner’s legal representative to advertise the same in such manner as he or she shall require and/or to give bond, with
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sufficient surety, to the Trust to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE.
(a) The Board of Trustees may set, in advance, a record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or determining shareholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of shareholders for any other purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of shareholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of shareholders of record is to be held or taken.
(b) In lieu of fixing a record date, the Board of Trustees may provide that the share transfer books shall be closed for a stated period but not longer than 20 days. If the share transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten days before the date of such meeting.
(c) If no record date is fixed and the share transfer books are not closed for the determination of shareholders, (i) the record date for the determination of shareholders entitled to notice of or to vote at any meeting of shareholders shall be at the close of business on the day on which the notice of meeting is mailed by the Trust or the 30th day before the meeting, whichever is the closer date to the meeting; and (ii) the record date for the determination of shareholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Board of Trustees, declaring the dividend or allotment of rights, is adopted.
(d) When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 4 of Article VII, such determination shall apply to any postponement or adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein, or (ii) the Board of Trustees otherwise determines to fix a new record date for such postponed or adjourned meeting.
Section 5. STOCK LEDGER. The Trust shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each shareholder and the number of Shares of each class held by such shareholder.
Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Board of Trustees may issue fractional Shares or provide for the issuance of scrip, all on such terms and under such
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conditions as it may determine. Notwithstanding any other provision of the Declaration of Trust or these Bylaws, the Board of Trustees may issue units consisting of different securities of the Trust. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Trust, except that the Board of Trustees may provide that for a specified period securities of the Trust issued in such unit may be transferred on the books of the Trust only in such unit.
ARTICLE VIII
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the Shares may be authorized and declared by the Board of Trustees, subject to applicable law and the Declaration of Trust. Dividends and other distributions may be paid in cash, property or Shares, subject to applicable law and the Declaration of Trust.
Section 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any funds of the Trust available for dividends such sum or sums as the Board of Trustees may from time to time, in its absolute discretion, deem proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Trust or for such other purpose as the Board of Trustees shall determine to be in the best interest of the Trust, and the Board of Trustees may modify or abolish any such reserve in the manner in which it was created.
ARTICLE IX
SEAL
Section 1. SEAL. The Board of Trustees may authorize the adoption of a seal by the Trust. The seal shall have inscribed thereon the name of the Trust and the year of its formation. The Board of Trustees may authorize one or more duplicate seals and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Trust is required to place its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Trust.
ARTICLE X
INDEMNIFICATION AND ADVANCE FOR EXPENSES
Section 1. INDEMNIFICATION.
(a) To the maximum extent permitted by Maryland law in effect from time to time, the Trust shall indemnify and hold harmless any present or former Trustee or officer (including
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any person who, while a Trustee or officer of the Trust and at the express request of the Trust, serves or served another real estate investment trust, corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, manager, partner or trustee of such real estate investment trust, corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise) who has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding, or in the defense of any claim, issue or matter in any action, suit or proceeding, to which such person was made a party by reason of service in such capacity, against all reasonable costs, fees and expenses (including attorneys’ fees) incurred by such person in connection with the action, suit or proceeding or the claim, issue or matter in which the Trustee or officer has been successful.
(b) To the maximum extent permitted by Maryland law in effect from time to time, the Trust shall indemnify and hold harmless any present or former Trustee or officer (including any person who, while a Trustee or officer of the Trust and at the express request of the Trust, serves or served another real estate investment trust, corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, manager, partner or trustee of such real estate investment trust, corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise) made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of service in such capacity against all judgments, penalties, fines and settlements and all reasonable costs, fees and expenses (including attorneys’ fees) incurred by such person in connection with such action, suit or proceeding unless it is established that (A) such person’s act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (B) such person actually received an improper personal benefit in money, property or services or (C) in the case of a criminal proceeding, such person had reasonable cause to believe that his or her act or omission was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the requisite standard of conduct necessary for indemnification under this Article X.
Section 2. EXPENSES PAYABLE IN ADVANCE. Reasonable costs, fees and expenses incurred by a present or former Trustee or officer in defending or investigating any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, or in any suit brought pursuant to Section 3 of this Article X shall, to the maximum extent permitted by Maryland law in effect from time to time for directors of Maryland corporations, be paid or reimbursed by the Trust in advance of the final disposition of such action, suit or proceeding upon receipt of (i) a written affirmation of such person’s good faith belief that he or she has met the applicable standard of conduct necessary for indemnification by the Trust under this Article X and (ii) a written undertaking by or on such person’s behalf to repay the amount paid or reimbursed by the Trust if it shall ultimately be determined that such person did not meet the applicable standard of conduct necessary for such indemnification. The undertaking required by this Section 2 shall be an unlimited general obligation of such person
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but need not be secured and shall be accepted without reference to financial ability to make the repayment.
Section 3. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this Article X is not paid in full by the Trust within sixty days after a written claim has been received by the Trust, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the present or former Trustee or officer making such claim may at any time thereafter bring suit against the Trust to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be indemnified for the costs, fees and expenses actually and reasonably incurred by such person in prosecuting such suit.
Section 4. NON-EXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The indemnification and advancement of expenses provided by or granted pursuant to this Article X shall be independent and not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, Declaration of Trust, bylaw, agreement, contract, vote of shareholders or disinterested trustees or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Trust that indemnification of and advancement of expenses to present and former Trustees and officers shall be made to the fullest extent permitted by law.
Section 5. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE TRUST. The Trust may, by action of the Board of Trustees from time to time, grant rights to indemnification and advancement of expenses to employees and agents of the Trust with the same scope and effect as the provisions of this Article X with respect to the indemnification and advancement of Trustees and officers.
Section 6. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Article X, to the extent that a present or former Trustee or officer is, by reason of being or having been a Trustee or officer, a witness in any action, suit or proceeding to which such person is not a party, such person shall be indemnified against all costs, fees and expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith.
Section 7. AUTHORIZATION OF INDEMNIFICATION AND EXPENSES PAYABLE IN ADVANCE. Any indemnification or payment or reimbursement of the expenses permitted by these Bylaws to any present or former Trustee or officer shall be furnished in accordance with the procedures provided for indemnification or payment or reimbursement of expenses, as the case may be, under Section 2-418 of the MGCL for directors of Maryland corporations.
Notwithstanding anything contained in this Article X to the contrary, except for proceedings to enforce rights to indemnification or advancement of expenses (which shall be governed by Section 3 of this Article X), the Trust shall not be obligated to indemnify or advance
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any Trustee, officer, employee or agent in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized by the Board of Trustees.
Section 8. INSURANCE. The Trust may purchase and maintain insurance on behalf of any person who is or was a Trustee, officer, employee or agent of the Trust or is or was serving at the request of the Trust as a director, trustee, officer, manager, partner, employee or agent of another real estate investment trust, corporation, partnership, limited liability company, joint venture, trust or other enterprise against any liability asserted against or incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Trust would have the power or the obligation to indemnify such person against such liability under the provisions of this Article X.
Section 9. SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article X to Trustees and officers of the Trust shall be contract rights, be deemed to have vested upon such person taking office, continue as to a person who has ceased to be a Trustee or officer and shall inure to the benefit of the heirs, executors and administrators of such person. Each person who is or becomes a Trustee or officer of the Trust shall be deemed to have served or to have continued to serve in such capacity in reliance upon the indemnification and advancement of expenses provided for in this Article X. Any repeal, amendment or modification of the foregoing provisions of this Article X shall not adversely affect any right or protection hereunder of any present or former Trustee or officer in respect of any act or omission occurring prior to the time of such repeal, amendment or modification.
ARTICLE XI
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Declaration of Trust, these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by applicable law, these Bylaws or the Declaration of Trust. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
ARTICLE XII
AMENDMENT OF BYLAWS
The Board of Trustees shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws; provided, however, that any amendment to
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or repeal of Section 6(b) of Article III and to the provisions of Article IV relating to requirements that Independent Trustees serve on certain committees shall require the affirmative vote of at least 80% of the members of the Board of Trustees, including a majority of the Independent Trustees, or the affirmative vote of not less than two-thirds of shareholders entitled to vote thereon.
ARTICLE XIII
MISCELLANEOUS
Section 1. FISCAL AND TAXABLE YEARS. Unless otherwise determined by a resolution of the Board of Trustees, the fiscal and taxable years of the Trust shall begin on January 1 and end on December 31.
Section 2. CONTROL SHARE ACQUISITION ACT. Notwithstanding any other provision contained herein or in the Declaration of Trust or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of Shares. This Section 2 of Article XIII may be amended or repealed, in whole or in part, at any time, whether before or after an acquisition of control Shares and, upon such repeal, may, to the extent provided by any successor bylaw and permitted under Maryland law, apply to any prior or subsequent control share acquisition.
Section 3. SEVERABILITY. If any provision of the Bylaws shall be held invalid or unenforceable in any respect, such holding shall apply only to the extent of any such invalidity or unenforceability and shall not in any manner affect, impair or render invalid or unenforceable any other provision of the Bylaws in any jurisdiction.
Section 4. DECLARATION OF TRUST. All references to the Declaration of Trust shall include any amendments and supplements thereto.
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Amendment No. 1
to the Amended and Restated Bylaws of
Hersha Hospitality Trust
WHEREAS , Hersha Hospitality Trust (the “Company”) is governed, in part, by the Amended and Bylaws of the Company (the “Bylaws”), and
WHEREAS , pursuant to and in accordance with Article XII of the Bylaws, the Board of Trustees of the Company has authorized, approved and adopted this amendment to be effective as of March 31, 2017.
NOW, THEREFORE, BE IT RESOLVED THAT :
1. AMENDMENT
The Bylaws are hereby amended by deleting Article XII of the Bylaws in its entirety and substituting the following in lieu thereof :
Article XII
AMENDMENT OF BYLAWS
“The Board of Trustees shall have the power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws; provided , however , that any amendment to or repeal of Section 6(b) of Article III and to any provisions of Article IV relating to requirements that Independent Trustees serve on certain committees shall require the affirmative vote of at least 80% of the members of the Board of Trustees, including a majority of the Independent Trustees.
In addition, these Bylaws may also be adopted, altered or repealed, and new Bylaws may be made, pursuant to a binding proposal that is (a) submitted to the shareholders for approval at a duly called annual meeting or special meeting of shareholders by (i) the Board of Trustees or (ii) a shareholder who provides to the Trust a timely notice of such proposal that satisfies the notice procedures and all other relevant provisions of Sections 3 and 14 of Article II and who is, at the time such notice is delivered to the Trust and as of such meeting, a shareholder that satisfies the ownership and other eligibility requirements of Sections 3 and 14 of Article II and Rule 14a-8 under the Exchange Act, and (b) approved by the affirmative vote of the holders of a majority of the Shares then outstanding and entitled to vote on such proposal.”
2. NO FURTHER AMENDMENT
Except as herein amended, the provisions of the Bylaws shall remain in full force and effect. The Bylaws were amended and restated by the Board of Trustees effective as of February 10, 2012 and further amended by this Amendment No. 1 thereto, adopted as of March 31, 2017.
EXHIBIT 3.2
ARTICLES OF AMENDMENT
Hersha Hospitality Trust , a Maryland real estate investment trust (the “ Trust ”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST : T he declaration of trust of the Trust (the “ Declaration ”) is hereby amended by deleting therefrom in its entirety the first two sentences of Section 1 of Article VI and inserting in lieu thereof two new sentences to read as follows:
The beneficial interest of the Trust shall be divided into shares of beneficial interest (the “Shares”). The Trust has authority to issue: (i) 105,000,000 common shares of beneficial interest, $0.01 par value per share (“Common Shares”), of which 104,000,000 will be Priority Class A Common Shares (the “Priority Common Shares”) and 1,000,000 will be Class B Common Shares (the “Class B Common Shares”); and (ii) 29,000,000 preferred shares of beneficial interest, $0.01 par value per share (“Preferred Shares”).
SECOND : The total number of shares of beneficial interest which the Trust had authority to issue immediately prior to the foregoing amendment of the Declaration was (i) 91,000,000 common shares of beneficial interest, $0.01 par value per share, consisting of 90,000,000 Priority Class A Common Shares and 1,000,000 Class B Common Shares; and (ii) 29,000,000 preferred shares of beneficial interest, $0.01 par value per share, of which 3,000,000 shares are classified as 6.875% Series C Cumulative Redeemable Preferred Shares, 8,050,000 shares are classified as 6.50% Series D Cumulative Redeemable Preferred Shares and 4,600,000 shares are classified as 6.50% Series E Cumulative Redeemable Preferred Shares . The aggregate par value of all authorized shares of beneficial interest having par value was $1,200,000.
THIRD : The total number of shares of beneficial interest which the Trust has authority to issue pursuant to the foregoing amendment of the Declaration is 105,000,000 common shares of beneficial interest, $0.01 par value per share, consisting of 104,000,000 Priority Class A Common Shares and 1,000,000 Class B Common Shares; and (ii) 29,000,000 preferred shares of beneficial interest, $0.01 par value per share, of which 3,000,000 shares are classified as 6.875% Series C Cumulative Redeemable Preferred Shares, 8,050,000 shares are classified as 6.50% Series D Cumulative Redeemable Preferred Shares and 4,600,000 shares are classified as 6.50% Series E Cumulative Redeemable Preferred Shares . The aggregate par value of all authorized shares of beneficial interest having par value is $ 1,340,000 .
FOURTH : The amendment to the Declaration as set forth above has been duly approved by the Board of Trustees of the Trust as required by law. Pursuant to Section 8-203(a)(8) of the Maryland REIT Law and Section 1 of Article VI of the Declaration, no shareholder approval was required.
The undersigned officer of the Trust acknowledges these Articles of Amendment to be the trust act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned officer acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Trust has caused th ese Articles of Amendment to be executed in its name and on its behalf by its Chief Financial Officer and Assistant Secretary and attested to by its Treasurer and Corporate Secretary on this 26th day of April, 2017.
ATTEST: HERSHA HOSPITALITY TRUST
/s/ David L. Desfor _______________ ____ By: /s/ Ashish R. Parikh ___________ (SEAL)
Name: David L. Desfor Name: Ashish R. Parikh
Title: Tre asurer and Corporate Secretary Title: Chief Financial Officer and Assistant
Secretary
[ Signature Page to Articles of Amendment ]
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EXHIBIT 3.3
ARTICLES SUPPLEMENTARY
Pursuant to Section 8-203 of
Title 8 of the Corporations and Associations Article
of the Annotated Code of Maryland
Hersha Hospitality Trust, a Maryland real estate investment trust (the “ Trust ”), hereby certifies to the State Department of Assessments and Taxation of the State of Maryland (“ SDAT ”) that:
FIRST: Pursuant to the authority expressly vested in the Board of Trustees (the “ Board of Trustees ”) of the Trust by Article VI of its Declaration of Trust (which, as hereafter restated or amended from time to time, are together with these Articles Supplementary herein referred to as the “ Declaration ”), the Board of Trustees has duly reclassified and designated (i) 1,000,000 authorized but unissued preferred shares of beneficial interest, par value $0.01 per share, as shares of 6.50% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (the “ Series D Preferred Shares ”), with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of the Series D Preferred Shares set forth in the Declaration, and (ii) 1,000,000 authorized but unissued preferred shares of beneficial interest, par value $0.01 per share, as shares of 6.50% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (the “ Series E Preferred Shares ”), with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of the Series E Preferred Shares set forth in the Declaration.
SECOND: After giving effect to the classification and designation of the additional Series D Preferred Shares and Series E Preferred Shares set forth herein, the Trust has authority to issue (i) 9,050,000 Series D Preferred Shares and (ii) 5,600,000 Series E Preferred Shares.
THIRD: The Series D Preferred Shares and Series E Preferred Shares have been classified and designated by the Board of Trustees under the authority contained in the Declaration.
FOURTH: These Articles Supplementary have been approved by the Board of Trustees in the manner and by the vote required by law.
FIFTH: The undersigned Chief Financial Officer acknowledges these Articles Supplementary to be the trust act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned Chief Financial Officer acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
[Signature page follows.]
IN WITNESS WHEREOF, the Trust has caused these Articles Supplementary to be executed on behalf of the Trust by its Chief Financial Officer and attested to by its Assistant Secretary this 26 th day of April, 2017.
By: /s/ Ashish R. Parikh
Name: Ashish R. Parikh
Title: Chief Financial Officer
Attest:
By: /s/ Michael R. Gillespie
Name: Michael R. Gillespie
Title: Assistant Secretary
Articles Supplementary
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Exhibit 31.1
CERTIFICATION
I, Jay H. Shah, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31 , 201 7 of Hersha Hospitality Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: April 26 , 2017 |
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/s/ Jay H. Shah |
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Jay H. Shah |
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Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION
I, Ashish R. Parikh, certify that:
1. I have reviewed this Quarterly Report on For m 10-Q for the period ended March 31 , 201 7 of Hersha Hospitality Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information: and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: April 26 , 201 7 |
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/s/ Ashish R. Parikh |
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Ashish R. Parikh |
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Chief Financial Officer |
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Hersha Hospitality Trust (the “Company”) for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay H. Shah, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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April 26 , 201 7 |
/s/ Jay H. Shah |
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Jay H. Shah |
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Chief Executive Officer |
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Hersha Hospitality Trust (the “Company”) for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ashish R. Parikh, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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April 26 , 201 7 |
/s/ Ashish R. Parikh |
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Ashish R. Parikh |
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Chief Financial Officer |
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