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Section 1: 10-K (10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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)
Maryland
251811499
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
44 Hersha Drive, Harrisburg, PA
17102
(Address of Registrant’s Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (717) 236-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A Common Shares of Beneficial Interest,
par value $.01 per share
New York Stock Exchange
6.875% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share
New York Stock Exchange
6.50% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share
6.50% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share
New York Stock Exchange
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes x No
Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No

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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).
x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging Growth Company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use 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 x No
The aggregate market value of the outstanding Class A common shares held by nonaffiliates of the registrant, computed by reference to the closing sale price at which Class A common shares were last sold on June 30, 2018, was approximately $811.3 million.
As of February 26, 2019, the number of Class A common shares outstanding was 39,184,952 and there were no Class B common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s last fiscal year pursuant to Regulation 14A, are incorporated herein by reference into Part II, Item 5 and Part III.


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HERSHA HOSPITALITY TRUST
Table of Contents
Item No.
 
Form 10-K
Page
 
 
 
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
 
PART I
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
 
 
ITEM 15.

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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Unless the context otherwise requires, references in this report to: (1) “we,” “us,” “our,” the “Company” and “Hersha” mean Hersha Hospitality Trust and its consolidated subsidiaries, including Hersha Hospitality Limited Partnership, taken as a whole; (2) “HHLP” and “our operating partnership” mean Hersha Hospitality Limited Partnership; and (3) “common shares” mean our Class A common shares of beneficial interest, $0.01 par value per share.
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 (“Exchange Act”), 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 report including, but not limited to those discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” 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 raise capital on attractive terms or at all;
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 at 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;
impacts on our business of a prolonged government shutdown;
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;
business interruptions due to cyber-attacks;
financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;
the degree and nature of our competition;
increased interest rates and operating costs;
ability to complete development and redevelopment projects;
risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;
availability of and our ability to retain qualified personnel;

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our ability to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code;
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 this Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Risk Factors” and in other reports we file with the U.S. Securities and Exchange Commission (“SEC”) from time to time.
These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.
All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
໿
໿

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PART I
Item 1.
Business
OVERVIEW
Hersha Hospitality Trust is a self-advised Maryland real estate investment trust that was organized in 1998 and completed its initial public offering in January of 1999. Our common shares are traded on the New York Stock Exchange under the symbol “HT.” We invest primarily in institutional grade hotels in major urban gateway markets including New York, Washington, DC, Boston, Philadelphia, South Florida and select markets on the West Coast. Our primary strategy is to continue to own high quality luxury, upscale, upper midscale and extended-stay hotels in metropolitan markets with high barriers to entry and independent boutique hotels in markets with similar characteristics. We have operated and intend to continue to operate so as to qualify as a REIT for federal income tax purposes.
We strive to create value through our ability to source capital and identify high growth acquisition targets.  We seek acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners and operators. Through our due diligence process, we select those acquisition targets where we believe selective capital improvements and intensive management will increase the hotel’s ability to attract key demand segments, enhance hotel operations and increase long-term value. To drive sustainable shareholder value, we also seek to recycle capital from stabilized assets in markets with lower forecasted growth rates. Capital from these types of transactions is intended to be and has been redeployed into high growth acquisitions, share buybacks and reduction of debt.
As of December 31, 2018, our portfolio consisted of 38 wholly owned limited and full service properties with a total of 6,104 rooms, 1 hotel owned through a consolidated joint venture with a total of 115 rooms, and interests in 9 limited service properties owned through joint venture investments with a total of 1,425 rooms. These 48 properties, with a total of 7,644 rooms, are located in California, Connecticut, Delaware, District of Columbia, Florida, Maryland, Massachusetts, New York, Pennsylvania, and Washington and operate under leading brands owned by Marriott International, Inc. (“Marriott”), Hilton Worldwide, Inc. (“Hilton”), InterContinental Hotels Group (“IHG”), Hyatt Corporation (“Hyatt”), and Pan Pacific Hotels and Resorts (“Pan Pacific”). In addition, some of our hotels operate as independent hotels.
We are structured as an umbrella partnership REIT, or UPREIT, and we own our hotels and our investments in joint ventures through our operating partnership, Hersha Hospitality Limited Partnership (the "Partnership"), for which we serve as the sole general partner. As of December 31, 2018, we owned an approximate 91.3%  partnership interest in our operating partnership including all of the general partnership interest.
The majority of our wholly-owned hotels are managed by Hersha Hospitality Management, L.P. (“HHMLP”), a privately held, qualified management company owned by certain of our trustees and executive officers and other unaffiliated third party investors. Other third party qualified management companies manage certain hotels that we own through joint venture interests. We lease our wholly-owned hotels to 44 New England Management Company (“44 New England”), our wholly-owned taxable REIT subsidiary (“TRS”), or one of its wholly owned subsidiaries. Each of the hotels that we own through a joint venture investment is leased to another TRS that is owned by the respective joint venture or an entity owned in part by 44 New England.
Our principal executive office is located at 44 Hersha Drive, Harrisburg, Pennsylvania 17102. Our telephone number is (717) 236-4400. Our website address is www.hersha.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this report.
AVAILABLE INFORMATION
We make available free of charge through our website (www.hersha.com) our code of ethics, corporate governance guidelines and the charters of the committees of our Board of Trustees (Acquisition Committee, Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Risk Sub-Committee of the Audit Committee). We also make available through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. All reports that we have filed with the SEC including this annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, can also be obtained free of charge from the SEC’s website at www.sec.gov.

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INVESTMENT IN HOTEL PROPERTIES
Our operating strategy focuses on increasing hotel performance for our portfolio. The key elements of this strategy are:
working together with our hotel management companies to increase revenue per available room, or RevPAR, and to maximize the average daily rate, or ADR, and occupancy levels at each of our hotels through active property-level management, including intensive marketing efforts to tour groups, corporate and government extended stay customers and other wholesale customers and expanded yield management programs, which are calculated to better match room rates to room demand; and
maximizing our hotel-level earnings by managing hotel-level costs and positioning our hotels to capitalize on increased demand in the high quality, upper-upscale, upscale and extended-stay lodging segments, which we believe can be expected to follow from improving economic conditions, and maximizing our operating margins.
ACQUISITIONS
We selectively acquire high quality branded luxury upper-upscale, upscale, upper-midscale and extended-stay hotels in metropolitan markets with high barriers-to-entry and independent boutique hotels in similar markets. Through our due diligence process, we select those acquisition targets where we believe selective capital improvements and intensive management will increase the hotel’s ability to attract key demand segments, enhance hotel operations and increase long-term value. In executing our disciplined acquisition program, we will consider acquiring hotels that meet the following additional criteria:
nationally-franchised hotels operating under popular brand families, such as Marriott, Hilton, IHG, Hyatt, Accor, and Four Seasons;
hotels in locations with significant barriers-to-entry, such as high development costs, limited availability of land and lengthy entitlement processes;
hotels in our target markets where we can realize operating efficiencies and economies of scale; and
independent boutique hotels in similar markets.
All asset acquisitions are comprehensively reviewed by the Acquisition Committee of our Board of Trustees, which consists solely of independent trustees.
Since our initial public offering in January 1999 and through December 31, 2018, we have acquired, wholly or through joint ventures, a total of 120 hotels, including 28 hotels acquired from entities controlled by certain of our trustees and executive officers. Of the 28 acquisitions from entities controlled by certain of our trustees and executive officers, 25 were newly constructed or substantially renovated by these entities prior to our acquisition. We utilize our relationships with entities that are developing or substantially renovating hotels, including entities controlled by certain of our trustees and executive officers, to identify future hotel acquisitions that we believe may be attractive to us. We intend to continue to acquire hotels from entities controlled by certain of our trustees and executive officers if approved by a majority of our independent trustees in accordance with our related party transaction policy.
DISPOSITIONS
We evaluate our hotels and the markets in which they operate on a periodic basis to determine if these hotels continue to satisfy our investment criteria. We may sell hotels opportunistically based upon management’s forecast and review of the cash flow potential of each hotel and re-deploy the proceeds into debt reduction, acquisitions of hotels and share buybacks. We utilize several criteria to determine the long-term potential of our hotels. Hotels are identified for sale based upon management’s forecast of the strength of each hotel’s cash flows, its ability to remain accretive to our portfolio, and the expectations for the market in which the hotel operates. Our decision to sell a hotel is often predicated upon the size of the hotel, strength of the franchise, property condition and related costs to renovate the property, strength of market demand generators, projected supply of hotel rooms in the market, probability of increased valuation and geographic profile of the hotel. All asset sales are comprehensively reviewed by the Acquisition Committee of our Board of Trustees. Since our initial public offering in 1999 through December 31, 2018, we have sold a total of 78 hotels, including certain hotels contributed to joint ventures in which we maintain an ownership interest.
For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Note 2, “Investment in Hotel Properties”.

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FINANCING
We intend to finance our long-term growth with common and preferred equity issuances and debt financing with staggered maturities. Our debt includes unsecured debt in the aggregate of $951 million which is comprised of a $457 million senior unsecured credit facility (which includes a $207 million unsecured term loan and $250 million unsecured revolving line of credit), and two unsecured term loans totaling $493.9 million.  Our debt also includes secured mortgage debt on our hotel properties.  We intend to use our revolving line of credit capacity to pay down mortgage debt, repurchase common shares subject to market conditions, and fund future acquisitions, as well as for capital improvements and working capital requirements. Subject to market conditions, we intend to repay amounts outstanding under the revolving line of credit portion of our credit facility from time to time with proceeds from periodic common and preferred equity issuances, long-term debt financings and cash flows from operations. When purchasing hotel properties, we may issue common and preferred limited partnership interests in our operating partnership as full or partial consideration to sellers.
FRANCHISE AGREEMENTS
Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems. Most of our hotels operate under franchise licenses from national hotel franchisors, including:
໿
Franchisor
 
Franchises
Marriott International
 
Ritz-Carlton, Marriott, Residence Inn by Marriott, Courtyard by Marriott, TownePlace Suites, Sheraton Hotels
Hilton Hotels Corporation
 
Hilton Hotels, Hilton Garden Inn, Hampton Inn
IHG
 
Holiday Inn, Holiday Inn Express, Holiday Inn Express & Suites, Candlewood Suites
Hyatt Hotels Corporation
 
Hyatt House, Hyatt Place, Hyatt
Pan Pacific Hotel Group
 
Pan Pacific
We anticipate a majority of the hotels in which we invest will be operated pursuant to franchise licenses.
The franchise licenses generally specify certain management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. The franchise licenses generally obligate our lessees to comply with the franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided by our lessees, display of signage, and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. In general, the franchise licenses require us to pay the franchisor a fee typically ranging between 6.0% and 9.3% of such hotel’s revenues annually.
PROPERTY MANAGEMENT
We work closely with our hotel management companies to operate our hotels and increase hotel performance for our portfolio.
Through our TRS and our investment in joint ventures, we have retained the following management companies to operate our hotels as of December 31, 2018:
໿

 
Wholly Owned
 
Joint Ventures
 
Total
Manager
 
Hotels
 
Rooms
 
Hotels
 
Rooms
 
Hotels
 
Rooms
Hersha Hospitality Management, L.P.
 
37

 
6,018

 
7

 
1,087

 
44

 
7,105

South Bay Boston Management, Inc.
 

 

 
2

 
338

 
2

 
338

Marriott Management
 
1

 
86

 
1

 
115

 
2

 
201

Total
 
38

 
6,104

 
10

 
1,540

 
48

 
7,644

Each management agreement provides for a set term and is subject to early termination upon the occurrence of defaults and certain other events described therein. As required under the REIT qualification rules, all managers, including HHMLP, must qualify as an “eligible independent contractor” during the term of the management agreements.

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Under the management agreements, the manager generally pays the operating expenses of our hotels. All operating expenses or other expenses incurred by the manager in performing its authorized duties are reimbursed or borne by our applicable TRS to the extent the operating expenses or other expenses are incurred within the limits of the applicable approved hotel operating budget. Our managers are not obligated to advance any of their own funds for operating expenses of a hotel or to incur any liability in connection with operating a hotel.
For their services, the managers receive a base management fee, and if a hotel meets and exceeds certain thresholds, an additional incentive management fee. For the year ended December 31, 2018, these thresholds were met for one management agreement and incentive management fees of $98 thousand were earned. The base management fee for a hotel is due monthly and is generally equal to 3% of the gross revenues associated with that hotel for the related month.
CAPITAL IMPROVEMENTS, RENOVATION AND REFURBISHMENT
Under certain loan agreements, we have established capital reserves for our hotels to maintain the hotels in a condition that complies with their respective requirements. These capital reserves typically range from 3% to 5% of each hotel’s gross revenues. In addition, we may upgrade hotels in our portfolio in order to capitalize on opportunities to increase revenue, and, as deemed necessary by our management, to seek to meet competitive conditions and preserve asset quality. We will also renovate hotels when we believe the investment in renovations will provide an attractive return to us through increased revenues and profitability and is in the best interests of our shareholders. We maintain a capital expenditures policy by which replacements and renovations are monitored to determine whether they qualify as capital improvements. All items that are deemed to be repairs and maintenance costs are expensed and recorded in Hotel Operating Expenses in the Consolidated Statements of Operations.
OPERATING PRACTICES
Our hotel managers utilize centralized accounting and data processing systems, which facilitate financial statement and budget preparation, payroll management, quality control and other support functions for the on-site hotel management team. Our hotel managers also provide centralized control over purchasing and project management (which can create economies of scale in purchasing) while emphasizing local discretion within specific guidelines.
DISTRIBUTIONS
We have made 80 consecutive quarterly distributions to the holders of our common shares since our initial public offering in January 1999 and intend to continue to make regular quarterly distributions to our shareholders as approved by our Board of Trustees.
The following table sets forth distribution information for the last two calendar years.
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Common Shares
 
 
 
 
 
 
Quarter to which Distribution Relates
 
Record Date
 
Payment Date
 
Class A Common Shares and Common Units Per Share and Per Unit Distribution Amount
2018
 
 
 
 
 
 
Fourth Quarter
 
1/5/2019
 
1/15/2019
 
$
0.28

Third Quarter
 
10/1/2018
 
10/15/2018
 
0.28

Second Quarter
 
6/29/2018
 
7/13/2018
 
0.28

First Quarter
 
3/29/2018
 
4/13/2018
 
0.28


 
 
 
 
 
 
2017
 
 
 
 
 
 
Fourth Quarter
 
1/5/2018
 
1/16/2018
 
$
0.28

Third Quarter
 
9/29/2017
 
10/13/2017
 
0.28

Second Quarter
 
6/30/2017
 
7/17/2017
 
0.28

First Quarter
 
3/31/2017
 
4/17/2017
 
0.28



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Preferred Shares
 
 
 
 
 
 
 
 
 
 
Quarter to which Distribution Relates
 
Record Date
 
Payment Date
 
Series C Preferred
Per Share Distribution Amount
 
Series D Preferred
Per Share Distribution Amount
 
Series E Preferred
Per Share Distribution Amount
2018
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
1/1/2019
 
1/15/2019
 
$
0.4297

 
$
0.4063

 
$
0.4063

Third Quarter
 
10/1/2018
 
10/15/2018
 
0.4297

 
0.4063

 
$
0.4063

Second Quarter
 
7/1/2018
 
7/16/2018
 
0.4297

 
0.4063

 
$
0.4063

First Quarter
 
4/1/2018
 
4/16/2018
 
0.4297

 
0.4063

 
$
0.4063

 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
Fourth Quarter
 
1/1/2018
 
1/16/2018
 
$
0.4297

 
$
0.4063

 
$
0.4063

Third Quarter
 
10/1/2017
 
10/17/2017
 
0.4297

 
0.4063

 
0.4063

Second Quarter
 
7/1/2017
 
7/15/2017
 
0.4297

 
0.4063

 
0.4063

First Quarter
 
4/1/2017
 
4/15/2017
 
0.4297

 
0.4063

 
0.4063


Our Board of Trustees will determine the amount of our future distributions in its sole discretion and its decision will depend on a number of factors, including the amount of funds from operations, our partnership’s financial condition, debt service requirements, capital expenditure requirements for our hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors as the trustees deem relevant. Our ability to make distributions will depend on the profitability of and cash flow available from our hotels. There can be no assurance we will continue to pay distributions at the rates above or any other rate. Additionally, we may, if necessary and allowable, pay taxable distributions of our shares or debt securities to meet the distribution requirements. There are no assurances we will be able to continue to make quarterly distributions at the current rate.
SEASONALITY
Our hotels’ operations historically have been seasonal in nature, reflecting lower revenues and occupancy rates during the first quarter of each year when compared to the remaining three quarters. This seasonality causes fluctuations in our quarterly operating revenues, profitability, and cash flow.
COMPETITION
The U.S. hotel industry is highly competitive. Our hotels compete with other hotels for guests in each of their markets on the basis of several factors, including, among others, location, quality of accommodations, convenience, brand affiliation, room rates, service levels and amenities, and level of customer service. In addition to traditional hotels, our properties also compete with non-traditional accommodations for travelers such as online room sharing services. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels operated under premium brands in the focused-service and full-service segments. We believe that hotels, such as our hotels, that are affiliated with leading national brand families, such as the Marriott, Hilton, Hyatt, IHG, or Pan Pacific will enjoy the competitive advantages associated with operating under such brands. Increased competition could harm our occupancy and revenues and may require us to provide additional amenities or make capital improvements that we otherwise would not have to make, which may materially and adversely affect our operating results and liquidity.
The upper-upscale and upscale limited service segments of the hotel business are highly competitive.  There are many competitors in our markets and new hotels are routinely being constructed. Additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms.

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We also compete for hotel acquisitions with entities that have investment objectives similar to ours. We face competition for the acquisition of hotels from institutional pension funds, private equity funds, REITs, hotel companies and others who are engaged in the acquisition of hotels. Some of these competitors have substantially greater financial and operational resources and access to capital than we have and may have greater knowledge of the markets in which we seek to invest. This competition may reduce the number of suitable investment opportunities offered to us, increase the bargaining power of property owners seeking to sell to us and decrease the attractiveness of the terms on which we may acquire our targeted hotel investments, including the cost thereof, making it more difficult for us to acquire new properties on attractive terms.
EMPLOYEES
As of December 31, 2018, we had 54 employees who were principally engaged in managing the affairs of the Company unrelated to property operations.  We believe that our relations with our employees are satisfactory.
TAX STATUS
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 1999. As long as we qualify for taxation as a REIT, we generally will not be subject to federal income tax on the portion of our income that is currently distributed to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax (including any applicable alternative minimum tax for the years prior to 2018) on our taxable income at regular corporate tax rates.  Additionally, we will generally be unable to qualify as a REIT for four years following the year in which qualification is lost.  Even if we qualify for taxation as a REIT, we will be subject to certain state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.
We own interests in several TRSs. We may own up to 100% of the stock of a TRS. A TRS is a taxable corporation that may lease hotels from our operating partnership and its subsidiaries under certain circumstances. Overall, no more than 20% of the value of our assets may consist of securities of one or more TRS. In addition, no more than 25% of our gross income for any year may consist of dividends from one or more TRS and income from certain non-real estate related sources.
A TRS is permitted to lease hotels from us as long as the hotels are operated on behalf of the TRS by a third party manager that qualifies as an "eligible independent contractor." To qualify for that treatment, the manager must satisfy the following requirements:
1.
such manager is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS;
2.
such manager does not own, directly or indirectly, more than 35% of our shares;
3.
no more than 35% of such manager is owned, directly or indirectly, by one or more persons owning 35% or more of our shares; and
4.
we do not, directly or indirectly, derive any income from such manager.
The deductibility of interest paid or accrued by a TRS to us is limited to assure that the TRS is subject to an appropriate level of corporate taxation, and in certain circumstances, other limitations on deductions of interest may apply. A 100% excise tax is imposed on transactions between a TRS and us that are not on an arm’s-length basis.
Additional Material U.S. Federal Income Tax Consequences

The following is a summary of certain additional material U.S. federal income tax consequences with respect to the ownership of our shares. This summary supplements and should be read together with “Federal Income Tax Consequences Of Our Status As A REIT” in the prospectus dated February 28, 2017 and filed as part of our registration statement on Form S-3ASR (No. 333-216317).

The Tax Cuts and Jobs Act made many significant changes to the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their shareholders. As of January 1, 2018, (1) the federal income tax rate applicable to corporations is reduced to 21%, (2) the highest marginal individual income tax rate is reduced to 37%, (3) the corporate alternative minimum tax is repealed, (4) the backup withholding rate for U.S. shareholders is reduced to 24%, and (5) the maximum rate of withholding with respect to our distributions to non-U.S. shareholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests is also reduced from 35% to 21%. In addition, under proposed Treasury regulations, withholding under the Foreign Account Tax Compliance Act (“FATCA”) will not apply to proceeds from the sale of our capital shares by non-U.S. shareholders. FATCA withholding continues to apply to our dividends paid to non-U.S. shareholders if those shareholders do not meet certain disclosure requirements.


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REGULATION
General
Our hotels are subject to various U.S. federal, state and local laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of our hotels has the necessary permits and approvals to operate its business.
Americans with Disabilities Act
Our hotels must comply with applicable provisions of the Americans with Disabilities Act of 1993, or ADA, to the extent that such hotels are "public accommodations" as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our hotels where such removal is readily achievable. We believe that our hotels are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, non-compliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our hotels and to make alterations as appropriate in this respect.
Environmental Matters
Under various laws relating to the protection of the environment, a current or previous owner or operator (including tenants) of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property and may be required to investigate and clean up such contamination at that property or emanating from that property. These costs could be substantial and liability under these laws may attach without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the liability may be joint and several. The presence of contamination or the failure to remediate contamination at our hotels may expose us to third-party liability or materially and adversely affect our ability to sell, lease or develop the real estate or to incur debt using the real estate as collateral.
Our hotels are subject to various federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew and waste management. Our hotels incur costs to comply with these laws and regulations and could be subject to fines and penalties for non-compliance.
Environmental laws require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, third parties may seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.
Some of our hotels may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation. The presence of significant mold or other airborne contaminants at any of our hotels could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected hotel or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from guests or employees at our hotels and others if property damage or health concerns arise.
INSURANCE
We require comprehensive insurance to be maintained by our hotel management companies, including HHMLP, on each of our hotels, including liability and fire and extended coverage in amounts sufficient to permit the replacement of the hotel in the event of a total loss, subject to applicable deductibles. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes and acts of terrorism that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impracticable to use insurance proceeds to replace the applicable hotel after such applicable hotel has been damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to the applicable hotel. If any of these or similar events occur, it may reduce the return from the attached property and the value of our investment.

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FINANCIAL INFORMATION ABOUT SEGMENTS
We allocate resources and assess operating performance based on individual hotels and consider each one of our hotels to be an operating segment.  No operating segment, individually, meets the threshold for a reportable segment as defined within ASC Topic 280 – Segment Reporting, nor do they fully satisfy the requisite aggregation criteria therein.  As a result, the Company does not present separate operating segment information within the Notes to the Consolidated Financial Statements. See “Note 1 - Organization and Summary of Significant Accounting Policies” in Item 8 of this Annual Report on Form 10-K for segment financial information.


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Item 1A.
Risk Factors
You should carefully consider the following risks, together with the other information included in this Annual Report on Form 10-K. If any of the following risks actually occur, our business, financial condition or results of operations may suffer. As a result, the trading price of our securities could decline, and you may lose all or part of any investment you have in our securities.
Risks Related to the Economy and Credit Markets
Difficult economic conditions may adversely affect the hotel industry.
The performance of the hotel industry has historically been linked to key macroeconomic indicators, such as GDP growth, employment, corporate earnings and investment, and travel demand.  If the U.S. economy should falter for any reason and there is an extended period of economic weakness, a recession or depression, our revenues and profitability could be adversely affected.
Economic conditions may reduce demand for hotel properties and adversely affect the Company’s profitability.
The performance of the lodging industry is highly cyclical and has traditionally been closely linked with the performance of the general economy and, specifically, growth in the U.S. gross domestic product, employment, and investment and travel demand. The Company cannot predict the pace or duration of the global economic cycle or the cycles of the lodging industry. In the event conditions in the industry deteriorate or do not continue to see sustained improvement, or there is an extended period of economic weakness, the Company’s occupancy rates, revenues and profitability could be adversely affected. In addition, other macroeconomic factors, such as consumer confidence and conditions which negatively shape public perception of travel, may have a negative effect on the lodging industry and may adversely affect the Company’s business. Furthermore, some of the Company’s hotels are classified as upper upscale or upscale. In an economic downturn, these types of hotels may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. This characteristic may result from the fact that upper upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may seek to reduce travel costs by limiting travel or seeking to reduce costs on their trips. In addition, in periods of weak demand, as may occur during a general economic recession, profitability is negatively affected by the relatively high fixed costs of operating upper upscale and upscale hotels. Consequently, any uncertainty in the general economic environment could adversely affect the Company’s business. 
A recession could result in declines in our average daily room rates, occupancy and RevPAR, and thereby have a material adverse effect on our results of operations.
The performance of the hotel industry has traditionally been closely linked with the general economy. During the recession of 2008 and 2009, overall travel was reduced, which had a significant effect on our results of operations. While operating results have subsequently improved, there can be no assurance that any increases in hotel revenues or earnings at our properties will continue for any number of reasons, including, but not limited to, slower growth in the economy, changes in unemployment, underemployment, administration policies and changes in travel patterns. A stall in the economic recovery or a resurgent recession would have a material adverse effect on our results of operations. While we believe the U.S. economy continues on a trajectory of slow, steady growth, other economies around the world, including Europe, Canada, Japan and China, have demonstrated sluggish, stagnant or slowing growth in recent quarters.  It remains to be seen what effect, if any, the slowing in these economies will have on us.  If a property’s occupancy or room rates drop to the point where its revenues are insufficient to cover its operating expenses, then we would be required to spend additional funds for that property’s operating expenses.
In addition, if operating results decline at our hotels secured by mortgage debt, there may not be sufficient operating profit from the hotel to cover the debt service on the mortgage. In such a case, we may be forced to choose from a number of unfavorable options, including using corporate cash, drawing on our revolving credit facility, selling the hotel on disadvantageous terms, including at an unattractive price, or defaulting on the mortgage debt and permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions to our shareholders.
Disruptions in the financial markets could adversely affect our ability to obtain sufficient third-party financing for our capital needs, including expansion, acquisition and other activities, on favorable terms or at all, which could materially and adversely affect us.

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In the recession of 2008 and 2009 and some recent years, the U.S. stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing, even for companies which otherwise are qualified to obtain financing. Continued volatility and uncertainty in the stock and credit markets in the U.S. and abroad may negatively impact our ability to access additional financing for our capital needs, including expansion, acquisition activities and other purposes, on favorable terms or at all, which may negatively affect our business. Additionally, due to this uncertainty, we may in the future be unable to refinance or extend our debt, or the terms of any refinancing may not be as favorable as the terms of our existing debt. If we are not successful in refinancing our debt when it becomes due, we may be forced to dispose of hotels on disadvantageous terms, which might adversely affect our ability to service other debt and to meet our other obligations. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of new equity capital or the incurrence of additional secured or unsecured debt, which could materially and adversely affect us.
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR after 2021 may affect our financial results.
The chief executive of the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, has recently announced that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom or elsewhere. Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. The U.S. Federal Reserve, in conjunction with the Alternative Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements, backed by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in 2018. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate and SOFR a secured lending rate, and SOFR is an overnight rate and LIBOR reflects term rates at different maturities. These and other differences create the potential for basis risk between the two rates. The impact of any basis risk between LIBOR and SOFR may negatively affect our operating results. Any of these alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could have a material adverse effect on results.
Any changes announced by the FCA, including the FCA Announcement, other regulators or any other successor governance or oversight body, or future changes adopted by such body, in the method pursuant to which the LIBOR rates are determined may result in a sudden or prolonged increase or decrease in the reported LIBOR rates. If that were to occur, the level of interest payments we incur may change. In addition, although certain of our LIBOR based obligations provide for alternative methods of calculating the interest rate payable on certain of our obligations if LIBOR is not reported, which include requesting certain rates from major reference banks in London or New York, or alternatively using LIBOR for the immediately preceding interest period or using the initial interest rate, as applicable, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher than, lower than or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR rate was available in its current form.
RISKS RELATED TO THE HOTEL INDUSTRY
Our hotels are subject to general hotel industry operating risks, which may impact our ability to make distributions to shareholders.
Our hotels are subject to all operating risks common to the hotel industry. The hotel industry has experienced volatility in the past, as have our hotels, and there can be no assurance that such volatility will not occur in the future. These risks include, among other things: competition from other hotels; over-building in the hotel industry that could adversely affect hotel revenues and hotel values; increases in operating costs due to inflation and other factors, which may not be offset by increased room rates; reduction in business and commercial travel and tourism, including as a result of legislation or executive policies; strikes and other labor disturbances of hotel employees; increases in energy costs and other expenses of travel; civil unrest; adverse effects of general and local economic conditions; and adverse political conditions. These factors could reduce revenues of the hotels and adversely affect our ability to make distributions to our shareholders.

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The value of our hotels depends on conditions beyond our control.
Our hotels are subject to varying degrees of risk generally incident to the ownership of hotels. The underlying value of our hotels, our income and ability to make distributions to our shareholders are dependent upon the operation of the hotels in a manner sufficient to maintain or increase revenues in excess of operating expenses. Hotel revenues may be adversely affected by adverse changes in national economic conditions, adverse changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, competition from other hotels, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, particularly in older structures, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of terrorism, acts of God, including earthquakes, hurricanes and other natural disasters, acts of war, adverse changes in zoning laws, and other factors that are beyond our control. In particular, general and local economic conditions may be adversely affected by terrorist incidents, such as those in New York, Washington, D.C. and Boston; cities where many of our hotels are located. Our management is unable to determine the long-term impact, if any, of these incidents or of any acts of war or terrorism in the United States or worldwide, on the U.S. economy, on us or our hotels or on the market price of our securities.
Our investments are concentrated in a single segment of the hotel industry.
Our primary business strategy is to continue to acquire high quality, upper-upscale, and upscale limited service and extended-stay hotels in metropolitan markets with high barriers to entry including New York, Washington DC, Boston, Philadelphia, South Florida, select markets on the West Coast, and other markets with similar characteristics. We are subject to risks inherent in concentrating investments in a single industry and in a specific market segment within that industry. The adverse effect on amounts available for distribution to shareholders resulting from a downturn in the hotel industry in general or the mid-scale segment in particular could be more pronounced than if we had diversified our investments outside of the hotel industry or in additional hotel market segments.
Operating costs and capital expenditures for hotel renovation may be greater than anticipated and may adversely impact distributions to shareholders.
Hotels generally have an ongoing need for renovations and other capital improvements, particularly in older structures, including periodic replacement of furniture, fixtures and equipment. Under the terms of our management agreements, we generally are obligated to pay the cost of expenditures for items that are classified as capital items under GAAP that are necessary for the continued operation of our hotels.
If these expenses exceed our expectations, the additional cost could have an adverse effect on amounts available for distribution to shareholders. In addition, we may acquire hotels in the future that require significant renovation. Renovation of hotels involves certain risks, including the possibility of environmental problems, construction cost overruns and delays, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from hotels.
The hotel industry is highly competitive.
The hotel industry is highly competitive. Our hotels compete with other existing and new hotels in their geographic markets. In addition to traditional hotels, our properties also compete with non-traditional accommodations for travelers such as online room sharing services. Many of our competitors have substantially greater marketing and financial resources than we do. Effective marketing by our competitors may reduce our hotel revenue and adversely impact our ability to make distributions to our shareholders.
Risks of operating hotels under franchise licenses, which may be terminated or not renewed, may impact our ability to make distributions to shareholders.
The continuation of our franchise licenses is subject to specified operating standards and other terms and conditions. All of the franchisors of our hotels periodically inspect our hotels to confirm adherence to their operating standards. The failure to maintain such standards or to adhere to such other terms and conditions could result in the loss or cancellation of the applicable franchise license. It is possible that a franchisor could condition the continuation of a franchise license on the completion of capital improvements that our trustees determine are too expensive or otherwise not economically feasible in light of general economic conditions, the operating results or prospects of the affected hotel. In that event, our trustees may elect to allow the franchise license to lapse or be terminated.

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There can be no assurance that a franchisor will renew a franchise license at each option period. If a franchisor terminates a franchise license, we may be unable to obtain a suitable replacement franchise, or to successfully operate the hotel independent of a franchise license. The loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the related hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Our loss of a franchise license for one or more of the hotels could have a material adverse effect on our partnership’s revenues and our amounts available for distribution to shareholders.
The hotel industry is seasonal in nature.
The hotel industry is seasonal in nature. Generally, in certain markets we operate, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. Revenues for hotels and resorts in tourist areas generally are substantially greater during tourist season than other times of the year. Our hotels’ operations historically reflect this trend in these markets. As a result, our results of operations may vary on a quarterly basis, impairing comparability of operating data and financial performance on a quarter to quarter basis.
The cyclical nature of the hotel industry may cause fluctuations in our operating performance, which could have a material adverse effect on us.
The hotel industry historically has been highly cyclical in nature. Fluctuations in lodging demand and, therefore, operating performance, are caused largely by general economic and local market conditions, which subsequently affect levels of business and leisure travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect the hotel industry's performance, and overbuilding has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. We can provide no assurances regarding whether, or the extent to which, lodging demand will rebound or whether any such rebound will be sustained. An adverse change in lodging fundamentals could result in returns that are substantially below our expectations or result in losses, which could have a material adverse effect on us.
The increasing use of Internet travel intermediaries by consumers may materially and adversely affect our profitability.
Although a majority of rooms sold on the Internet are sold through websites maintained by the hotel franchisors and managers, some of our hotel rooms will be booked through Internet travel intermediaries. These Internet travel intermediaries may purchase rooms at a negotiated discount from participating hotels, which could result in lower room rates than the franchisor or manager otherwise could have obtained. As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us and any hotel management companies that we engage. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality, such as "three-star downtown hotel," at the expense of brand identification or quality of product or service. If consumers develop brand loyalties to Internet reservations systems rather than to the brands under which our hotels are franchised, the value of our hotels could deteriorate and our business could be materially and adversely affected. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be materially and adversely affected.
The need for business-related travel and, thus, demand for rooms in our hotels may be materially and adversely affected by the increased use of business-related technology.
The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, demand for our hotel rooms may decrease and we could be materially and adversely affected.
Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.
Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries in prior years, often disproportionately to the effect on the overall economy. The impact that terrorist attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be determined but any such attacks or the threat of such attacks could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and our results of operations and financial condition.

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The outbreak of widespread contagious disease could reduce travel and adversely affect hotel demand.
The widespread outbreak of infectious or contagious disease, such as influenza, measles, mumps and Zika virus, in the U.S. could reduce travel and adversely affect the hotel industry generally and our business in particular.
RISKS RELATED TO OUR BUSINESS AND OPERATIONS
We face risks associated with the use of debt, including refinancing risk.
At December 31, 2018, we had outstanding long-term debt of approximately $1.1 billion. We may borrow additional amounts from the same or other lenders in the future. Any future repurchases of our own shares may require additional borrowings. Some of these additional borrowings may be secured by our hotels. Our declaration of trust (as amended and restated, our “Declaration of Trust”) does not limit the amount of indebtedness we may incur. We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our hotels to foreclosure. Our indebtedness contains various financial and non-financial events of default covenants customarily found in financing arrangements. Our mortgages 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 from the applicable hotels.
We have a substantial amount of debt that will mature within the next two to five years. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital or sales of properties, we may be forced to use operating income to repay such indebtedness, which would have a material adverse effect on our cash available for distribution in years when significant “balloon” payments come due. In some such cases, we may lose the applicable hotels to foreclosure. This risk is particularly significant. See Item 7A of this Annual Report on Form 10-K for a detailed schedule of debt principal repayments.
We face high levels of competition for the acquisition of hotel properties and other assets, which may impede our ability to make future acquisitions or may increase the cost of these acquisitions.
We face competition for investment opportunities in high quality, upper-upscale, and upscale limited service and extended-stay hotels from entities organized for purposes substantially similar to our objectives, as well as other purchasers of hotels. We compete for such investment opportunities with entities that have substantially greater financial resources than we do, including access to capital or better relationships with franchisors, sellers or lenders. Our competitors may generally be able to accept more risk than we can manage prudently and may be able to borrow the funds needed to acquire hotels on more favorable terms. Competition may generally reduce the number of suitable investment opportunities offered to us and increase the bargaining power of property owners seeking to sell.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our shareholders could lose confidence in our financial results, which could harm our business and the value of our common shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner.
We do not operate our hotels and, as a result, we do not have complete control over implementation of our strategic decisions.

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In order for us to satisfy certain REIT qualification rules, we cannot directly or indirectly operate or manage any of our hotels. Instead, we must engage an independent management company to operate our hotels. As of December 31, 2018, our TRSs and our joint venture partnerships have engaged independent management companies as the property managers for all of our wholly owned hotels leased to our TRSs and the respective hotels for the joint ventures, as required by the REIT qualification rules. The management companies operating the hotels make and implement strategic business decisions with respect to these hotels, such as decisions with respect to the repositioning of a franchise or food and beverage operations and other similar decisions. Decisions made by the management companies operating the hotels may not be in the best interests of a particular hotel or of the Company. Accordingly, we cannot assure you that the management companies will operate our hotels in a manner that is in our best interests. In addition, the financial condition of the management companies could impact their future ability to operate our hotels.
Our acquisitions may not achieve expected performance, which may harm our financial condition and operating results.
We anticipate that acquisitions will largely be financed with the net proceeds of securities offerings and through externally generated funds such as borrowings under our revolving credit facility and other secured and unsecured debt financing. Acquisitions entail risks that investments will fail to perform in accordance with expectations and that estimates of the cost of improvements necessary to acquire and market properties will prove inaccurate, as well as general investment risks associated with any new real estate investment. As a result, we may not be able to generate enough cash from these hotels to make debt service payments or pay operating expenses.
Acquisition of hotels with limited operating history may not achieve desired results.
From time to time our acquisitions may consist of newly-developed hotels. Newly-developed or newly-renovated hotels do not have the operating history that would allow our management to make pricing decisions in acquiring these hotels based on historical performance. The purchase prices of these hotels are based upon management’s expectations as to the operating results of such hotels, subjecting us to risks that such hotels may not achieve anticipated operating results or may not achieve these results within anticipated time frames. As a result, we may not be able to generate enough cash flow from these hotels to make debt payments or pay operating expenses. In addition, room revenues may be less than that required to provide us with our anticipated return on investment. In either case, the amounts available for distribution to our shareholders could be reduced.
We may be unable to integrate acquired hotels into our operations or otherwise manage our planned growth, which may adversely affect our operating results.
We cannot assure you that we or our management companies will be able to adapt our management, administrative, accounting and operational systems and arrangements, or hire and retain sufficient operational staff to successfully integrate these investments into our portfolio and manage any future acquisitions of additional assets without operational disruptions or unanticipated costs. Acquisition of hotels generates additional operating expenses that we will be required to pay. As we acquire additional hotels, we will be subject to the operational risks associated with owning new lodging properties. Our failure to integrate successfully any future acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to shareholders or make other payments in respect of securities issued by us.
Most of our hotels are located in major gateway urban markets in the United States with many are located in the area from Washington, DC to Boston, MA, which may increase the effect of any regional or local economic conditions.
Most of our hotels are located in major gateway urban markets in the United States, with many located in the area from Washington, DC to Boston, MA. As a result, regional or localized adverse events or conditions, such as an economic recession, in any of these major gateway urban markets could have a significant adverse effect on our operations, and ultimately on the amounts available for distribution to shareholders.
Our ownership of hotels in the New York City market exposes us to concentration risk, which may lead to increased volatility in our results of operations.
For the year ended December 31, 2018, our consolidated portfolio of hotels in New York City accounted for approximately 23% of our hotel operating revenues. The operations of our consolidated portfolio of hotels in New York City will have a material impact on our overall results of operations. Concentration risk with respect to our ownership of hotels in the New York City market may lead to increased volatility in our overall results of operations. Our overall results of operations may be adversely affected and our ability to pay distributions to our shareholders could be negatively impacted in the event:

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downturns in lodging fundamentals are more severe or prolonged in New York City compared to the United States as a whole;
negative economic conditions are more severe or prolonged in New York City compared to other areas, due to concentration of the financial industry in New York or otherwise;
as new hotel supply enters the New York City market, this could impact our ability to grow ADR and RevPar as a result of the new supply; or
New York City is impacted by other unforeseen events beyond our control, including, among others, terrorist attacks and travel related health concerns including pandemics and epidemics.
Acquired properties may be located in new markets where we may face risks associated with investing in an unfamiliar market.
We may acquire properties in markets that are new to us. When we acquire properties located in new markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. We work to mitigate such risks through extensive diligence and research and associations with experienced service providers. However, there can be no guarantee that all such risks will be eliminated.
We own a limited number of hotels and significant adverse changes at one hotel may impact our ability to make distributions to shareholders.
As of December 31, 2018, our portfolio consisted of 38 wholly-owned limited and full service properties, 1 property within a consolidated joint venture investment, and joint venture investments in 9 hotels with a combined total of 7,644 rooms. However, certain larger hotels or hotels in certain locations disproportionately impact our performance. Accordingly, significant adverse changes in the operations of any one of these hotels could have a material adverse effect on our financial performance and on our ability to make expected distributions to our shareholders.
We focus on acquiring hotels operating under a limited number of franchise brands, which creates greater risk as the investments are more concentrated.
We place particular emphasis in our acquisition strategy on hotels similar to our current hotels. We invest in hotels operating under a few select franchises and therefore will be subject to risks inherent in concentrating investments in a particular franchise brand, which could have an adverse effect on amounts available for distribution to shareholders. These risks include, among others, the risk of a reduction in hotel revenues following any adverse publicity related to a specific franchise brand or the failure of the franchisor to maintain a certain brand.
We depend on key personnel.
We depend on the services of our existing senior management team, including Jay H. Shah, Neil H. Shah, Ashish R. Parikh and Michael R. Gillespie, to carry out our business and investment strategies. As we expand, we will continue to need to attract and retain qualified additional senior management. We have employment agreements with certain of our senior management; however, the employment agreements may be terminated under certain circumstances. The termination of an employment agreement and the loss of the services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

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Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial conditions and disputes between us and our co-venturers.
As of December 31, 2018, we had several joint ventures in which we shared ownership and decision-making power with one or more parties. Joint venture investments involve risks that may not be present with other methods of ownership, including the possibility: that our partner might become insolvent, refuse to make capital contributions when due or otherwise fail to meet its obligations, which may result in certain liabilities to us for guarantees and other commitments; that our partner might at any time have economic or other business interests or goals that are or become inconsistent with our interests or goals; that we could become engaged in a dispute with our partner, which could require us to expend additional resources to resolve such disputes and could have an adverse impact on the operations and profitability of the joint venture; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests.  Our joint venture partners must agree in order for the applicable joint venture to take, or in some cases, may have control over whether the applicable joint venture will take, specific major actions, such as budget approvals, acquisitions, sales of assets, debt financing, executing lease agreements, and vendor approvals. Under these joint venture arrangements, any disagreements between us and our partners may result in delayed decisions. Our inability to take unilateral actions that we believe are in our best interests may result in missed opportunities and an ineffective allocation of resources and could have an adverse effect on the financial performance of the joint venture and our operating results.
We engage in hedging transactions to limit our exposure to fluctuations in interest rates, which can result in recognizing interest expense at rates higher than the stated rates within our floating rate debt.
We enter into hedging transactions intended to protect us from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions may include entering into interest rate swaps, caps, and floors, options to purchase such items, and futures and forward contracts. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition, particularly in a declining rate environment. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or could adversely affect our operating results because, among other things:
Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
The duration of the hedge may not match the duration of the related liability;
The party at risk in the hedging transaction may default on its obligation to pay;
The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
The value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value.
Hedging transactions may reduce our shareholders’ equity.
Hedging involves risk and typically involves costs, including transaction costs, which may reduce returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distribution to shareholders. The REIT qualification rules may also limit our ability to enter into hedging transactions. We generally intend to hedge as much of our interest rate risk as our management determines is in our best interests given the cost of such hedging transactions and the requirements applicable to REITs. If we are unable to hedge effectively because of the cost of such hedging transactions or the limitations imposed by the REIT rules, we will face greater interest risk exposure than may be commercially prudent.

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We and our hotel managers rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We and our hotel managers rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We and our hotel managers purchase some of our information technology from vendors, on whom our systems depend. We and our hotel managers rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts. Although we and our hotel managers have taken steps we believe are necessary to protect the security of our information systems and the data maintained in those systems, it is possible that the safety and security measures taken will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. In November 2018, Marriott announced a data security incident involving a guest reservation database. Security breaches such as the one that occurred at Marriott and, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO REAL ESTATE INVESTMENT GENERALLY
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in operating, economic and other conditions will be limited. No assurances can be given that the fair market value of any of our hotels will not decrease in the future.
If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose investment capital and anticipated profits.
We require comprehensive insurance to be maintained on each of the our hotels, including liability and fire and extended coverage in amounts sufficient to permit the replacement of the hotel in the event of a total loss, subject to applicable deductibles. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes and acts of terrorism that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impracticable to use insurance proceeds to replace the applicable hotel after such applicable hotel has been damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to the applicable hotel. If any of these or similar events occur, it may reduce the return from the attached property and the value of our investment.
Real estate is subject to property taxes.
Each hotel is subject to real and personal property taxes. The real and personal property taxes on hotel properties in which we invest may increase as property tax rates change and as the properties are assessed or reassessed by taxing authorities. Many state and local governments are facing budget deficits that have led many of them, and may in the future lead others to, increase assessments and/or taxes. If property taxes increase, our operating results may be negatively affected.
Environmental matters could adversely affect our results.
Operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of future legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of complying with environmental laws could materially adversely affect amounts available for distribution to shareholders. Phase I environmental assessments have been obtained on all of our hotels. Nevertheless, it is possible that these reports do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware.

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Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of mold to which hotel guests or employees could be exposed at any of our properties could require us to undertake a remediation program to contain or remove the mold from the affected property, which could be costly. In addition, exposure to mold by guests or employees, management company employees or others could expose us to liability if property damage or health concerns arise.
Costs associated with complying with the ADA may adversely affect our financial condition and operating results.
Under the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While we believe that our hotels are substantially in compliance with these requirements, a determination that we are not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies affecting the use and operation of the hotels, including changes to building codes and fire and life-safety codes, may occur. If we were required to make substantial modifications at the hotels to comply with the ADA or other changes in governmental rules and regulations, our ability to make expected distributions to our shareholders could be adversely affected.
RISKS RELATED TO CONFLICTS OF INTEREST
Due to conflicts of interest, many of our existing agreements may not have been negotiated on an arm’s-length basis and may not be in our best interest.
Some of our officers and trustees have ownership interests in HHMLP and in entities with which we have entered into transactions, including hotel acquisitions and dispositions and certain financings. Consequently, the terms of our agreements with those entities, including hotel contribution or purchase agreements, the Option Agreement (as defined below) between our operating partnership and some of the trustees and officers and our property management agreements with HHMLP, while intended to be negotiated on an arm’s-length basis, may not have been and may not be in the best interest of all our shareholders. We have policies in place to encourage agreements to be negotiated on an arm’s-length basis. Transactions with related persons must be approved by a majority of the Company’s independent trustees. The Board of Trustees’ policy requires any independent trustee with a direct or indirect interest in the transaction to excuse himself or herself from any consideration of the related person transaction in which he or she has an interest.
Conflicts of interest with HHMLP may result in decisions that do not reflect our best interests.
We have entered into an option agreement (as amended, the “Option Agreement”) with each of our officers and certain 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.
The following officers and trustees own collectively approximately 75%  of  HHMLP: Hasu P. Shah, Jay H. Shah, and Neil H. Shah. Conflicts of interest may arise with respect to the ongoing operation of our hotels including, but not limited to, the enforcement of the contribution and purchase agreements, the Option Agreement and our property management agreements with HHMLP. These officers and trustees also make decisions for our company with respect to property management. Consequently, these officers and trustees may not act solely in the best interests of our shareholders relating to property management by HHMLP.
Conflicts of interest relating to sales or refinancing of hotels acquired from some of our trustees and officers may lead to decisions that are not in our best interest.
Some of our non-independent trustees and officers have unrealized gains associated with their interests in the hotels we have acquired from them and, as a result, any sale of these hotels or refinancing or prepayment of principal on the indebtedness assumed by us in purchasing these hotels may cause adverse tax consequences to such trustees and officers. Therefore, our interests and the interests of these individuals may be different in connection with the disposition or refinancing of these hotels.

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Hotels owned or acquired by some of our trustees and officers may hinder these individuals from spending adequate time on our business.
Some of our trustees and officers own hotels and may develop or acquire new hotels, subject to certain limitations. Such ownership, development or acquisition activities may materially affect the amount of time these officers and trustees devote to our affairs. Some of our trustees and officers operate hotels that are not owned by us, which may materially affect the amount of time that they devote to managing our hotels. Pursuant to the Option Agreement we have an option to acquire any hotels developed by our officers and trustees.
RISKS RELATING TO OUR STRUCTURE
There are no assurances of our ability to make distributions in the future.
We intend to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. However, our ability to pay dividends may be adversely affected by the risk factors described in this annual report. All distributions will be made at the discretion of our Board of Trustees and will depend upon our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Trustees may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.
An increase in market interest rates may have an adverse effect on the market price of our securities.
One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to shareholders, and not from the market value or underlying appraised value of the properties or investments themselves. The market price of our preferred shares is based in large part on prevailing interest rates. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares and preferred shares. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common shares could decrease because potential investors may require a higher dividend yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.
Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.
Our Board of Trustees has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of December 31, 2018, 3,000,000 Series C Preferred Shares, 7,701,700 Series D Preferred Shares and 4,001,514 Series E Preferred Shares were issued and outstanding. Holders of our outstanding preferred shares are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of our preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of our preferred shares have the right to elect two additional trustees to our Board of Trustees whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive.
Future offerings of equity securities, which would dilute our existing shareholders and may be senior to our common shares for the purposes of dividend distributions, may adversely affect the market price of our common shares.
In the future, we may attempt to increase our capital resources by making additional offerings of equity securities, including classes of preferred or common shares. Upon liquidation, holders of our preferred shares and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Our preferred shares could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common shares and diluting their share holdings in us.

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We may change our distribution policy in the future.
In the past we have reduced the quarterly distributions paid to our shareholders, and we may reduce or eliminate the quarterly distribution paid to our shareholders in the future. The decision to declare and pay distributions on our common shares in the future, as well as the timing, amount and composition of any such future distributions, will be at the sole discretion of our board of trustees and will depend on our earnings, funds from operations, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness and preferred shares, the annual distribution requirements under the REIT provisions of the Code, state law and such other factors as our board of trustees deems relevant. Any change in our distribution policy could have a material adverse effect on the market price of our common shares.
The market price of our securities could be volatile and could decline, resulting in a substantial or complete loss of your investment in our securities.
The stock markets have experienced significant price and volume fluctuations in the recent past. As a result, the market price of our securities has been and could be similarly volatile in the future, and investors in our securities may experience a decrease in the value of their investments, including decreases unrelated to our operating performance or prospects. The market price of our securities could be subject to wide fluctuations in response to a number of factors, including:
our operating performance and the performance of other similar companies;
actual or anticipated differences in our operating results;
changes in our revenues or earnings estimates or recommendations by securities analysts; publication of research reports about us or our industry by securities analysts;
additions and departures of key personnel;
strategic decisions by us or our competitors, such as mergers and acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;
the passage of legislation or other regulatory developments or executive policies that adversely affect us or our industry;
speculation in the press or investment community; actions by institutional shareholders;
changes in accounting principles;
terrorist acts; and
general market conditions, including factors unrelated to our performance.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.
Future sales of our common shares, preferred shares, or securities convertible into or exchangeable or exercisable for our common shares could depress the market price of our common shares.
We cannot predict whether future sales of our common shares, preferred shares, or securities convertible into or exchangeable or exercisable for our common shares or the availability of these securities for resale in the open market will decrease the market price of our common shares. Sales of a substantial number of these securities in the public market, including sales upon the redemption of Common Units held by the limited partners of our operating partnership, (other than us and our subsidiaries) or the perception that these sales might occur, may cause the market price of our common shares to decline and you could lose all or a portion of your investment.
Future issuances of our common shares, preferred shares, or other securities convertible into or exchangeable or exercisable for our common shares, including, without limitation, common units of beneficial interest in our Operating Partnership (“Common Units”), in connection with property, portfolio or business acquisitions and issuances of equity-based awards to participants in our equity incentive plans, could have an adverse effect on the market price of our common shares. Future issuances of these securities also could adversely affect the terms upon which we obtain additional capital through the sale of equity securities. In addition, future sales or issuances of our common shares may be dilutive to existing shareholders.
Our Board of Trustees may authorize the issuance of additional shares that may cause dilution or prevent a transaction that is in the best interests of our shareholders.
Our Declaration of Trust authorizes the Board of Trustees, without shareholder approval, to:
amend the Declaration of Trust to increase or decrease the aggregate number of shares of beneficial interest or the number of shares of beneficial interest of any class or series that we have the authority to issue;
cause us to issue additional authorized but unissued common shares or preferred shares; or

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classify or reclassify any unissued common or preferred shares and to set the preferences, rights and other terms of such classified or reclassified shares, including the issuance of additional common shares or preferred shares that have preference rights over the common shares with respect to dividends, liquidation, voting and other matters.
Any one of these events could cause dilution to our common shareholders, delay, deter or prevent a transaction or a change in control that might involve a premium price for the common shares or otherwise not be viewed in the best interest of holders of common shares.
Our Declaration of Trust contains a provision that creates staggered terms for our Board of Trustees.
Our Board of Trustees is divided into two classes, the terms of which expire every two years. Trustees of each class are elected for two-year terms upon the expiration of their current terms and each year one class of trustees will be elected by the shareholders. The staggered terms of trustees may delay, deter or prevent a tender offer, a change in control of us or other transaction, even though such a transaction might be viewed in the best interest of the shareholders.
Certain provisions of Maryland law may discourage a third party from acquiring us.
Under the Maryland General Corporation Law, as amended (MGCL), as applicable to REITs, certain “business combinations” (including certain issuances of equity securities) between a Maryland REIT and any person who beneficially owns ten percent or more of the voting power of the trust’s shares, or an affiliate thereof, are prohibited for five years after the most recent date on which such shareholder acquired at least ten percent of the voting power of the trust’s shares. Thereafter, any such business combination must be approved by two super-majority shareholder votes unless, among other conditions, the trust’s common shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its common shares. These provisions could delay, deter or prevent a change of control or other transaction in which holders of our equity securities might receive a premium for their shares above then-current market prices or which such shareholders otherwise might believe to be in their best interests.  Although our bylaws contain a provision exempting acquisitions of our shares from the control share acquisition legislation referenced above, there can be no assurance that this provision will not be amended or eliminated at any time in the future.
Our Board of Trustees may change our investment and operational policies without a vote of the common shareholders.
Our major policies, including our policies with respect to acquisitions, financing, growth, operations, debt limitation and distributions, are determined by our Board of Trustees. The Trustees may amend or revise these and other policies from time to time without a vote of the holders of the common shares.
Our Board of Trustees and management make decisions on our behalf, and shareholders have limited management rights.
Under Maryland law, generally, a trustee’s actions will be upheld if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinary prudent person in a like position would use under similar circumstances.  Our shareholders have no right or power to take part in our management except through the exercise of voting rights on certain specified matters. The Board of Trustees is responsible for our management and strategic business direction, and our management is responsible for our day-to-day operations. Certain policies of our Board of Trustees may not be consistent with the short-term best interests of our shareholders.

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RISKS RELATED TO OUR TAX STATUS
If we fail to maintain our qualification as a REIT, our dividends will not be deductible to us, and our income will be subject to taxation, which would reduce the cash available for distribution to our shareholders.
We have operated and intend to continue to operate so as to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing REITs are limited. Our continued qualification as a REIT will depend on our continuing ability to meet various requirements concerning, among other things, the ownership of our outstanding shares of beneficial interest, the nature of our assets, the sources of our income, and the amount of our distributions to our shareholders. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year and did not qualify for certain statutory relief provisions, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax for taxable years prior to 2018) on our taxable income at regular corporate rates. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of, and trading prices for, our shares. Unless entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, amounts available for distribution to shareholders would be reduced for each of the years involved. Although we currently intend to continue to operate in a manner so as to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Trustees, with the consent of holders of two-thirds of the outstanding shares, to revoke our REIT election.
To maintain our qualification as a REIT and avoid corporate income tax and excise tax, we must distribute annually a certain percentage of our REIT taxable income, which could require us to raise capital on terms or sell properties at prices or at times that are unfavorable.

In order to maintain our qualification as a REIT, each year we must distribute to our shareholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our actual distributions in any year are less than the sum of:
85% of our REIT ordinary income for that year;
95% of our REIT capital gain net income for that year; and
100% of our undistributed taxable income required to be distributed from prior years.
We have distributed, and intend to continue to distribute, our taxable income to our shareholders in a manner intended to satisfy the 90% distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow or raise capital on terms we regard as unfavorable, or sell assets at prices or at times we regard as unfavorable to distribute out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in a particular year. In the past we have borrowed, and in the future we may borrow, to pay distributions to our shareholders and the limited partners of our operating partnership. Such borrowings subject us to risks from borrowing as described herein. Additionally, we may, if necessary and allowable, pay taxable dividends of our shares or debt securities to meet the distribution requirements.
If the leases of our hotels to our TRSs are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
To maintain our qualification as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our operating partnership by our TRSs pursuant to the lease of our hotels constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.

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Our ownership of our TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm's-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from hotel operations pursuant to hotel management contracts. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation, and in certain circumstances, other limitations on the deductibility of interest may apply. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.
Our TRSs are subject to applicable federal, foreign, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us but is not required to be distributed to us. We believe that the aggregate value of the stock and securities of our TRSs is and will continue to be less than 20% of the value of our total assets (including our TRS stock and securities). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition, we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm's-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.
If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We lease our hotels to our TRSs. A TRS will not be treated as a “related party tenant,” and will not be treated as directly operating a lodging facility, which is prohibited, to the extent the TRS leases properties from us that are managed by an “eligible independent contractor.”
We believe that the rent paid by our TRSs is qualifying income for purposes of the REIT gross income tests and that our TRSs qualify to be treated as taxable REIT subsidiaries for federal income tax purposes, but there can be no assurance that the Internal Revenue Service, or the IRS, will not challenge this treatment or that a court would not sustain such a challenge. If the IRS successfully challenged this treatment, we would likely fail to satisfy the asset tests applicable to REITs and substantially all of our income would fail to qualify for the gross income tests. If we failed to satisfy either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless certain relief provisions applied.
If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT. Each of the hotel management companies that enters into a management contract with our TRSs must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRSs to be qualifying income for our REIT income test requirements. Among other requirements, in order to qualify as an eligible independent contractor a manager must not own more than 35% of our outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the manager, taking into account only owners of more than 5% of our shares and, with respect to ownership interests in such managers that are publicly traded, only holders of more than 5% of such ownership interests. Complex ownership attribution rules apply for purposes of these 35% thresholds. Although we intend to continue to monitor ownership of our shares by our hotel managers and their owners, there can be no assurance that these ownership levels will not be exceeded.
The federal income tax laws governing REITs are complex.
We intend to continue to operate in a manner so as to maintain our qualification as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we will be successful in operating so we can continue to qualify as a REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT.

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Complying with REIT requirements may force us to sell otherwise attractive investments.
To maintain our qualification as a REIT, we must satisfy certain requirements with respect to the character of our assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter (by, possibly, selling assets notwithstanding their prospects as an investment) to avoid losing our REIT status. If we fail to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, we may be able to preserve our REIT status if (a) the failure was due to reasonable cause and not to willful neglect, (b) we dispose of the assets causing the failure within six months after the last day of the quarter in which we identified the failure, (c) we file a schedule with the IRS, describing each asset that caused the failure, and (d) we pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets. As a result, we may be required to liquidate otherwise attractive investments.
The prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets that would be treated as sales for federal income tax purposes.
A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.
We may pay taxable dividends partly in shares and partly in cash, in which case shareholders may sell our shares to pay tax on such dividends, placing downward pressure on the market price of our shares.
We may make taxable dividends that are payable partly in cash and partly in shares. Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, as long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the share distribution as a dividend (to the extent applicable rules treat such distribution as being made out of our earnings and profits).  If in the future we choose to pay dividends in our own shares, our shareholders may be required to pay tax in excess of the cash that they receive. If a U.S. shareholder sells the shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in shares. If we pay dividends in our own shares and a significant number of our shareholders sell our shares in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our shares.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to qualified dividend income payable to certain non-corporate U.S. holders is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced qualified dividend rates. For taxable years beginning after December 31, 2018 and before January 1, 2026, under the Tax Cuts and Jobs Act, or TCJA, non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to qualified dividend income does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends and the reduced corporate tax rate (currently 21%) could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our shares.

29



Our share ownership limitation may prevent certain transfers of our shares.
In order to maintain our qualification as a REIT, not more than 50% in value of our outstanding shares of beneficial interest may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). Our Declaration of Trust prohibits direct or indirect ownership (taking into account applicable ownership provisions of the Code) of more than (a) 9.9% of the aggregate number of outstanding common shares of any class or series or (b) 9.9% of the aggregate number of outstanding preferred shares of any class or series of outstanding preferred shares by any shareholder or group, or the Ownership Limitation. Generally, the shares of beneficial interest owned by related owners will be aggregated for purposes of the Ownership Limitation. The Board of Trustees, upon receipt of advice of counsel or other evidence satisfactory to the Board of Trustees, in its sole and absolute discretion, may exempt a shareholder from the Ownership Limitation. The Ownership Limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of shares might receive a premium for their shares over the then prevailing market price or which such holders might believe to be otherwise in their best interests. Any transfer of shares of beneficial interest that would violate the Ownership Limitation, cause us to have fewer than 100 shareholders, cause us to be “closely held” within the meaning of Section 856(h) of the Code or cause us to own, directly or indirectly, 10% or more of the ownership interest in any tenant (other than a TRS) will be void, the intended transferee of such shares will be deemed never to have had an interest in such shares, and such shares will be designated “shares-in-trust.” Further, we will be deemed to have been offered shares-in-trust for purchase at the lesser of the market price (as defined in the Declaration of Trust) on the date we accept the offer and the price per share in the transaction that created such shares-in-trust (or, in the case of a gift, devise or non-transfer event (as defined in the Declaration of Trust), the market price on the date of such gift, devise or non-transfer event). Therefore, the holder of shares of beneficial interest in excess of the Ownership Limitation will experience a financial loss when such shares are purchased by us, if the market price falls between the date of purchase and the date of redemption.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our shares.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. The TCJA significantly changed the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their shareholders. Technical corrections or other amendments to the TCJA or additional administrative guidance interpreting the TCJA may be forthcoming at any time. We cannot predict the long-term effect of the TCJA or any future law changes on REITs and their shareholders. We and our shareholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

Item 1B.
Unresolved Staff Comments
None.

30



Item 2.
Properties
The following table sets forth certain information with respect to the 38 hotels we wholly owned and 1 hotel owned within our consolidated joint venture as of December 31, 2018, all of which are consolidated on the Company’s financial statements.
Market
 
Name
 
Location
 
Year Opened
 
Number of Rooms

 
 
 
 
 
 
 
 
Boston Urban and Metro
 
The Envoy, Boston Seaport
 
Boston, MA
 
2015
 
136


 
The Boxer, Boston
 
Boston, MA
 
2004
 
80


 
Courtyard by Marriott Brookline
 
Brookline/Boston, MA (1)
 
2003
 
188

 
 
Holiday Inn Express Cambridge
 
Cambridge, MA
 
1997
 
112


 
Mystic Marriott Hotel & Spa
 
Groton, CT
 
2001
 
285


 
 
 
 
 
 
 
 
California - Washington
 
The Ambrose Hotel, Santa Monica
 
Santa Monica, CA
 
2015
 
77


 
The Sanctuary Beach Resort
 
Monterey Bay, CA
 
2014
 
60


 
The Hotel Milo, Santa Barbara
 
Santa Barbara, CA (1)
 
2001
 
122


 
Courtyard by Marriott Los Angeles Westside
 
Los Angeles, CA
 
2008
 
260


 
Courtyard by Marriott Downtown San Diego
 
San Diego, CA
 
1999
 
245


 
Courtyard by Marriott Sunnyvale
 
Sunnyvale, CA
 
2014
 
145

 
 
TownePlace Suites Sunnyvale
 
Sunnyvale, CA (1)
 
2003
 
94


 
The Pan Pacific Hotel Seattle
 
Seattle, WA
 
2006
 
153


 
 
 
 
 
 
 
 
NYC Urban
 
Hyatt Union Square
 
Union Square, New York, NY
 
2013
 
178


 
Duane Street Hotel
 
TriBeCa, New York, NY
 
2008
 
43

 
 
Hilton Garden Inn Manhattan Midtown East
 
Midtown East, New York, NY
 
2014
 
206


 
Hilton Garden Inn TriBeCa
 
TriBeCa, New York, NY
 
2009
 
151


 
Hampton Inn Seaport
 
Seaport, New York, NY
 
2006
 
65


 
Holiday Inn Express Chelsea
 
Madison Square Garden, New York, NY
 
2006
 
228


 
Hilton Garden Inn JFK
 
JFK Airport, New York, NY (1)
 
2005
 
192


 
Gate Hotel JFK Airport
 
JFK Airport, New York, NY (1)
 
2008
 
150


 
Nu Hotel, Brooklyn
 
Brooklyn, New York, NY
 
2008
 
93

 
 
 
 
 
 
 
 
 
NY-NJ Metro
 
Hyatt House White Plains
 
White Plains, NY
 
2000
 
187


 
 
 
 
 
 
 
 
Philadelphia
 
The Rittenhouse Hotel
 
Philadelphia, PA
 
2004
 
118


 
Philadelphia Westin
 
Philadelphia, PA
 
1990
 
294


 
Hampton Inn Center City/ Convention Center
 
Philadelphia, PA
 
2001
 
250


 
Sheraton Wilmington South
 
New Castle, DE
 
2011
 
192


31



Market
 
Name
 
Location
 
Year Opened
 
Number of Rooms

 
 
 
 
 
 
 
 
South Florida
 
Cadillac Hotel & Beach Club
 
Miami, FL
 
2004
 
357

 
 
The Ritz-Carlton, Coconut Grove
 
Coconut Grove, FL
 
2002
 
115


 
The Blue Moon Hotel, Miami Beach
 
Miami, FL
 
2013
 
75


 
The Winter Haven Hotel, Miami Beach
 
Miami, FL
 
2013
 
70


 
Residence Inn Miami Coconut Grove
 
Coconut Grove, FL
 
2000
 
140


 
Parrot Key Hotel & Villas
 
Key West, FL
 
2013
 
148


 
 
 
 
 
 
 
 
Washington D.C.
 
The Ritz-Carlton, Georgetown
 
Georgetown, DC
 
2014
 
86

 
 
The St. Gregory Hotel, Dupont Circle
 
Washington, DC
 
2014
 
155


 
The Capitol Hill Hotel
 
Washington, DC
 
2007
 
153


 
Hilton Garden Inn M Street
 
Washington, DC
 
2014
 
238


 
Hampton Inn Washington, D.C.
 
Washington, DC
 
2005
 
228


 
Annapolis Waterfront Hotel
 
Annapolis, MD (1)
 
1968
 
150


 
 
 
 
 
 
 
 

 
 
 
TOTAL ROOMS
 
6,219

(1) Our interests in these hotels are subject to ground leases which, in most cases, require monthly rental payment as determined by the applicable ground lease agreement. These ground lease agreements typically have initial terms of 99 years and all have a remaining term of at least 45 years.
The following table sets forth certain information with respect to the 9 hotels we owned through unconsolidated joint ventures with third parties as of December 31, 2018.
Market
 
Name
 
Location
 
Year Opened
 
Number of Rooms
 
HHLP Ownership
in Asset

 
 
 
 
 
 
 
 
 
 
Boston
 
Courtyard
 
South Boston, MA (1)
 
2005
 
164

 
50.0
%

 
Holiday Inn Express
 
South Boston, MA (1)
 
1998
 
174

 
50.0
%

 
 
 
 
 
 
 
 
 
 
NYC Urban
 
Hampton Inn Manhattan/ Times Square South
 
Times Square, New York, NY
 
2009
 
184

 
31.2
%

 
Hampton Inn Manhattan- Chelsea
 
Chelsea/Manhattan, New York, NY
 
2003
 
144

 
31.2
%

 
Hampton Inn Manhattan- Madison Sqaure Garden
 
Herald Square, New York, NY
 
2005
 
136

 
31.2
%

 
Holiday Inn New York City- Wall Street
 
Wall Street, New York, NY
 
2010
 
113

 
31.2
%

 
Holiday Inn Express New York City Times Sqaure
 
Times Square, New York, NY
 
2009
 
210

 
31.2
%

 
Holiday Inn Express Wall Street
 
Water Street, New York, NY
 
2010
 
112

 
31.2
%
 
 
Candlewood Suites New York City- Times Square
 
Times Square, New York, NY
 
2009
 
188

 
31.2
%

 
 
 
 
 
 
 
 
 
 

 
 
 
TOTAL ROOMS
 
 
 
1,237

 
 

 
 
 
 
 
 
 
 
 
 
(1) The joint ventures interests in these hotels are subject to ground leases which, in most cases, require monthly rental payment as determined by the applicable ground lease agreements. These ground lease agreements typically have terms of 60 years and all have a remaining term of at least 44 years.



32



Item 3.
Legal Proceedings
We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
Item 4.
Mine Safety Disclosures
Not applicable.

33



PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares trade on the New York Stock Exchange under the symbol “HT.”
SHAREHOLDER INFORMATION
At December 31, 2018 we had approximately 126 shareholders of record of our common shares. Common Units (which are redeemable by holders for cash or, at our option, for common shares on a one for one basis, subject to certain limitations) were held by approximately 32 entities and persons, including our company.
Our Declaration of Trust, subject to certain exceptions, provides that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.9% of the number of outstanding common shares of any class or series of common shares or the number of outstanding preferred shares of any class or series of preferred shares. For this purpose, a person includes a “group” and a “beneficial owner” as those terms are used for purposes of Section 13(d)(3) of the Exchange Act. Any transfer of common or preferred shares that would result in any person owning, directly or indirectly, common or preferred shares in excess of the ownership limitation, result in the common and preferred shares being owned by fewer than 100 persons (determined without reference to any rules of attribution), result in our being “closely held” within the meaning of Section 856(h) of the Code, or cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant (other than a TRS) of our or our operating partnership’s real property, within the meaning of Section 856(d)(2)(B) of the Code, will be null and void, and the intended transferee will acquire no rights in such common or preferred shares.
Any person who acquires or attempts to acquire common or preferred shares in violation of the foregoing restrictions, or any person who owned common or preferred shares that were transferred to a trust, will be required to give written notice immediately to us of such event and provide us with such other information as we may request in order to determine the effect, if any, of such transfer on our status as a REIT.
In addition, our trustees, upon receipt of advice of counsel or other evidence satisfactory to the trustees, in their sole and absolute discretion, may, in their sole and absolute discretion, exempt a person from the ownership limitation under certain circumstances. The foregoing restrictions continue to apply until the trustees determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT and there is an affirmative vote of two-thirds of the number of common and preferred shares entitled to vote on such matter at a regular or special meeting of our shareholders.
All certificates representing common or preferred shares bear a legend referring to the restrictions described above.
The restrictions on ownership and transfer described above could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of some, or a majority, of our common shares might receive a premium for their shares over the then-prevailing market price or which such holders might believe to be otherwise in their best interest.
EQUITY COMPENSATION PLAN
See Part III, Item 12, for a description of securities authorized for issuance under our Amended and Restated 2012 Equity Incentive Plan.
DISTRIBUTION INFORMATION
Future distributions, if any, will be at the discretion of our Board of Trustees and will depend on our actual cash flow, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as we may deem relevant. Our ability to make distributions will depend on our receipt of distributions from our operating partnership and lease payments from our lessees with respect to the hotels. We rely on the profitability and cashflows of our hotels to generate sufficient cash flow for distributions. Additionally, we may, if necessary and allowable, pay taxable dividends of our shares or debt securities to meet the distribution requirements.

34



SHARE PERFORMANCE GRAPH
The following graph compares the yearly change in our cumulative total shareholder return on our common shares for the period beginning December 31, 2013 and ending December 31, 2018, with the yearly changes in the Standard & Poor’s 500 Stock Index (the S&P 500 Index), the Russell 2000 Index, and the SNL Hotel REIT Index for the same period, assuming a base share price of $100.00 for our common shares, the S&P 500 Index, the Russell 2000 Index and the Hotel REIT Index for comparative purposes. The Hotel REIT Index is comprised of publicly traded REITs which focus on investments in hotel properties. Total shareholder return equals appreciation in stock price plus dividends paid and assumes that all dividends are reinvested. The performance graph is not indicative of future investment performance. We do not make or endorse any predictions as to future share price performance.

2013
 
2014
 
2015
 
2016
 
2017
 
2018
Hersha Hospitality Trust
$
100.00

 
$
131.43

 
$
106.53

 
$
110.19

 
$
95.32

 
$
101.71

S&P 500
100.00

 
113.69

 
115.26

 
129.05

 
157.22

 
150.33

Russell 2000
100.00

 
104.90

 
100.27

 
121.60

 
139.39

 
124.02

MSCI US REIT Index
100.00

 
130.40

 
133.69

 
145.21

 
152.66

 
145.78

SNL Hotel REIT Index
100.00

 
131.99

 
102.11

 
126.55

 
134.49

 
116.38

396895216_stockperformancechart2018.jpg

35



Unregistered Sales of Equity Securities and Use of Proceeds
A summary of our common share repurchases during the year ended December 31, 2018 is set forth in the table below. All such common shares were repurchased pursuant to open market transactions.
In December 2017, our Board of Trustees authorized a share repurchase program which allowed us to repurchase from time to time up to an aggregate of $100 million of our outstanding common shares.  The program commenced on January 1, 2018 and expired on December 31, 2018.
In December 2018, our Board of Trustees authorized a new share repurchase program which allows us to repurchase from time to time up to an aggregate of $50 million of our outstanding common shares.  The new program commenced on January 1, 2019 and will expire on December 31, 2019.
Issuer Purchases of Common Shares
 
 
 
 
 
 
 
 
 
 
 
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands)
(1)
 
 
 
 
 
 
 
 
 
 
January 1 to January 31, 2018
 

 
$

 

 
$
100,000

 
February 1 to February 28, 2018
 
286,527

 
17.08

 
286,527

 
95,107

 
March 1 to March 31, 2018
 
349,063

 
16.98

 
635,590

 
89,179

 
April 1 to April 30, 2018
 

 

 

 
89,179

 
May 1 to May 31, 2018
 

 

 

 
89,179

 
June 1 to June 30, 2018
 

 

 

 
89,179

 
July 1 to July 31, 2018
 

 

 

 
89,179

 
August 1 to August 31, 2018
 

 

 

 
89,179

 
September 1 to September 30, 2018
 

 

 

 
89,179

 
October 1 to October 31, 2018
 

 

 

 
89,179

 
November 1 to November 30, 2018
 

 

 

 
89,179

 
December 1 to December 31, 2018
 

 

 

 
89,179

 
(1) This amount represents the approximate dollar value of shares able to be repurchased under the plan that expired on December 31, 2018.  As discussed above, a new $50 million share repurchase plan was authorized by our Board of Trustees, commencing January 1, 2019.

36



Item 6.
Selected Financial Data
The following sets forth selected financial and operating data on a historical consolidated basis. The following data should be read in conjunction with the financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.   As a result of the early adoption on January 1, 2014 of ASU Update No. 2014-08, we do not expect to classify most of our hotel dispositions as discontinued operations.  For purposes of this table below, the operating results of certain real estate assets which have been sold prior to the adoption of ASU Update No. 2014-08 are included in discontinued operations for all periods presented.
HERSHA HOSPITALITY TRUST
SELECTED FINANCIAL DATA
(In thousands, except share and per share data)
໿

2018
 
2017
 
2016
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
 
 
Hotel Operating Revenues
$
493,678

 
$
497,140

 
$
466,370

 
$
470,272

 
$
417,226

Other Revenues
1,385

 
1,097

 
259

 
113

 
180

Total Revenue
495,063

 
498,237

 
466,629

 
470,385

 
417,406

Operating Expenses:
 
 
 
 
 
 
 
 
 
Hotel Operating Expenses
298,849

 
295,050

 
262,956

 
254,313

 
227,324

Hotel Ground Rent
4,228

 
3,460

 
3,600

 
3,137

 
2,433

Real Estate and Personal Property Taxes and Property Insurance
35,194

 
32,300

 
32,157

 
34,518

 
30,342

General and Administrative (including Share Based Payments of $11,436, $9,286, $8,048, $6,523, $6,028)
26,881

 
23,553

 
24,444

 
20,515

 
20,363

Acquisition and Terminated Transaction Costs
29

 
2,203

 
2,560

 
1,119

 
2,472

Loss from Impairment of Assets

 
4,082

 

 

 

Depreciation and Amortization
89,831

 
83,752

 
75,390

 
74,390

 
69,167

(Gain) Loss in Excess of Estimated Insurance Recoveries
(12,649
)
 
4,268

 

 

 
(4,604
)
Contingent Consideration

 

 

 

 
2,000

Total Operating Expenses
442,363

 
448,668

 
401,107

 
387,992

 
349,497

Operating Income
52,700

 
49,569

 
65,522

 
82,393

 
67,909

Interest Income
114

 
271

 
362

 
193

 
805

Interest Expense
(48,491
)
 
(42,662
)
 
(44,352
)
 
(43,557
)
 
(43,357
)
Other Expense
(901
)
 
(771
)
 
(961
)
 
(367
)
 
(485
)
Gain on Disposition of Hotel Properties
4,148

 
90,350

 
115,839

 

 
7,195

Gain on Hotel Acquisitions, net

 

 

 

 
12,667

Development Loan Recovery

 

 

 

 
22,494

Lease Buyout

 
268

 
(16,831
)
 

 

Loss on Debt Extinguishment
(22
)
 
(590
)
 
(1,187
)
 
(561
)
 
(670
)
Income before Income (Loss) from Unconsolidated Joint Venture Investments and Discontinued Operations
7,548

 
96,435

 
118,392

 
38,101

 
66,558

Income (Loss) from Unconsolidated Joint Ventures
1,084

 
(2,473
)
 
(1,823
)
 
965

 
693

Gain from Remeasurement of Investment in Unconsolidated Joint Ventures

 
16,240

 

 

 


37



HERSHA HOSPITALITY TRUST
SELECTED FINANCIAL DATA
(In thousands, except share and per share data)
໿

2018
 
2017
 
2016
 
2015
 
2014
Income (Loss) from Unconsolidated Joint Venture Investments
1,084

 
13,767

 
(1,823
)
 
965

 
693

Income Before Income Taxes
8,632

 
110,202

 
116,569

 
39,066

 
67,251

Income Tax (Expense) Benefit
(267
)
 
(5,262
)
 
4,888

 
3,141

 
2,685

Income from Continuing Operations
8,365

 
104,940

 
121,457

 
42,207

 
69,936

Discontinued Operations:
 
 
 
 
 
 
 
 
 
Loss on Disposition of Hotel Properties

 

 

 

 
(128
)
Impairment of Assets Held for Sale

 

 

 

 
(1,800
)
Income from Discontinued Operations

 

 

 

 
263

Loss from Discontinued Operations

 

 

 

 
(1,665
)
Net Income
8,365

 
104,940

 
121,457

 
42,207

 
68,271

Loss (Income) Allocated to Noncontrolling Interests- Common Units
916

 
(5,072
)
 
(4,477
)
 
(411
)
 
(1,016
)
Loss Allocated to Noncontrolling Interests- Consolidated Joint Ventures
709

 

 

 

 

Preferred Distributions
(24,174
)
 
(24,169
)
 
(17,380
)
 
(14,356
)
 
(14,356
)
Extinguishment of Issuance Costs Upon Redemption of Preferred Shares

 

 
(4,021
)
 

 

Net (Loss) Income applicable to Common Shareholders
(14,184
)
 
75,699

 
$
95,579

 
$
27,440

 
$
52,899


 
 
 
 
 
 
 
 
 
Basic (Loss) Income from Continuing Operations applicable to Common Shareholders
$
(0.38
)
 
$
1.82

 
$
2.21

 
$
0.56

 
$
1.08

Diluted (Loss) Income from Continuing Operations applicable to Common Shareholders (1)
(0.38
)
 
1.79

 
2.18

 
0.56

 
1.07

Dividends declared per Common Share
1.12

 
1.12

 
1.32

 
1.12

 
1.04


 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Net investment in hotel properties
$
2,026,659

 
$
2,009,572

 
$
1,767,570

 
$
1,831,119

 
$
1,745,483

Assets Held for Sale

 
15,987

 
98,473

 

 

Noncontrolling Interests Common Units
62,010

 
54,286

 
44,321

 
31,876

 
29,082

Noncontrolling Interests Consolidated Variable Interest Entity

 

 

 
(1,760
)
 
(1,075
)
Shareholder's equity
892,805

 
833,868

 
835,418

 
678,039

 
829,381

Total assets
2,138,630

 
2,138,336

 
2,155,536

 
1,962,649

 
1,855,539

Total debt
1,093,031

 
1,093,013

 
1,051,899

 
1,169,964

 
918,923

Liabilities related to Assets Held for Sale

 

 
51,428

 

 

Other Data
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
114,822

 
$
107,123

 
$
81,567

 
$
121,831

 
$
111,622

Net cash (used in) provided by investing activities
$
(17,965
)
 
$
(99,663
)
 
$
144,704

 
$
(141,660
)
 
$
(188,229
)
Net cash (used in) provided by financing activities
$
(81,660
)
 
$
(176,511
)
 
$
(78,793
)
 
$
28,372

 
$
53,072

Weighted average shares outstanding
 
 
 
 
 
 
 
 
 
Basic
39,383,763

 
41,423,804

 
42,957,199

 
47,786,811

 
49,777,302

Diluted (1)
39,383,763

 
42,056,431

 
43,530,731

 
48,369,658

 
50,307,506

(1) Income allocated to noncontrolling interest in HHLP has been excluded from the numerator and Common Units have been omitted from the denominator for the purpose of computing diluted earnings per share because the effect of including these amounts in the numerator and denominator would have no impact.

38



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements appearing in this Item 7 are forward-looking statements within the meaning of the federal securities laws. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. See “Cautionary Factors That May Affect Future Results” for additional information regarding our forward-looking statements.
BACKGROUND
As of December 31, 2018, we owned interests in 48 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles, Miami and select markets on the West Coast including 38 wholly-owned hotels, 1 hotel through our interest in a consolidated joint venture, 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, as defined under the REIT rules, to manage the hotels. As of December 31, 2018, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. Each TRS directly receives all revenue from, and funds all expenses relating to, hotel operations of the hotels that it leases. Each TRS is also subject to income tax on its earnings.
OVERVIEW
We believe the repositioning of our portfolio better enables us to capitalize on further improvement in lodging fundamentals. During 2018, we continued to see improvements in ADR and RevPAR, led by hotels in most of our key markets, with our New York City properties showing the strongest outperformance. Despite our improved revenue fundamentals, operating margins remained relatively flat for 2018 as weakness in the Washington D.C. market offset some of the gains we realized in our overall performance. While we continue to explore acquisition opportunities in coastal gateway urban centers and select resort destinations, we remain focused on operating efficiencies within our portfolio and asset repositioning opportunities to drive earnings and cash flow growth over the next year to de-lever our balance sheet. In addition, we will continue to look for attractive opportunities to divest certain properties at favorable prices, potentially redeploying capital in markets the offer higher growth, reducing our leverage, or opportunistically repurchasing our common shares.
We expect continued stability and improvement in consumer and commercial spending and lodging demand in our markets during 2019.  During the third quarter of 2017 we experienced business interruptions for our hotels located in South Florida due to Hurricane Irma.  The Courtyard Cadillac Hotel in Miami, FL closed following the storm due to the hurricane damage, and as a result, we accelerated our plan to convert this hotel to an Autograph Collection. This hotel remained closed until August 2018, at which time it reopened as the Cadillac Hotel and Beach Club, an Autograph Collection hotel. The Parrot Key Hotel & Villas in Key West, FL had been closed for repairs and renovations since September 2017, and was fully operational beginning in December 2018. The remainder of our South Florida hotels were repaired and fully operational during the fourth quarter of 2017.  As a result of Hurricane Irma, for the year ended December 31, 2017, we recorded an impairment loss of $4.3 million which represents our estimate of property damage and remediation costs incurred up to our insurance policy deductibles.  During 2018, we received a total of $24,246 in net insurance proceeds, which resulted in a net gain of $12,649 after applying proceeds to receivables and other costs.
Industry wide Revenue per Available Room ("RevPAR") continued growing during 2018, as the U.S. economy expanded by approximately 3% for 2018. The economic outlook for 2019 shows the U.S. economy growing at a slower pace than 2018 driven by lower overall global growth and rising political uncertainty. However, the manner in which the economy will continue to grow, if at all, is not predictable and we have no way of predicting how any new government policies will affect the markets in which we operate or the tourism industry in general. 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 “Item 1A. Risk Factors” and other documents that we may file with the SEC in the future.

39



SUMMARY OF OPERATING RESULTS
The following tables outline operating results for the Company’s portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the three years ended December 31, 2018, 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 years ended December 31, 2018 and 2017, there are 37 and 38 comparable consolidated hotels, respectively. 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 year ended December 31, 2018 compared to the year ended December 31, 2017, and the year ended December 31, 2017 compared to the year ended December 31, 2016 for our comparable hotels. 
For the comparison of December 31, 2018 to December 31, 2017, comparable hotel operating results contain results from our consolidated hotels owned as of December 31, 2018, excluding: (1) The Courtyard Cadillac Hotel and the The Parrot Key Hotel & Villas because both hotels were not been operating for the fourth quarter of 2017 and a significant portion of 2018 while the damage from Hurricane Irma was repaired; and (2) the results of all hotels sold during the years ended December 31, 2018 and 2017.  The comparison of December 31, 2018 to December 31, 2017 includes results as reported by the prior owners for the following hotels acquired during 2018 and 2017:
The Ritz-Carlton –Coconut Grove, FL (acquired 2/1/2017)
The Pan Pacific Hotel – Seattle, WA (acquired 2/21/2017)
The Westin – Philadelphia, PA (acquired 6/29/2017)
The Annapolis Waterfront Hotel – Annapolis, MD (acquired 3/28/18)

For the comparison of December 31, 2017 to December 31, 2016, comparable hotel operating results contain results from our consolidated hotels owned as of December 31, 2017, excluding: (1) The Courtyard Cadillac Hotel and the The Parrot Key Hotel & Villas because both hotels have not been operating for the fourth quarter of 2017 while the damage from Hurricane Irma was repaired; (2) The Hyatt House Gaithersburg which ceased operations during December 2017 in anticipation of a sale of the property during the first quarter of 2018; and (3) the results of all hotels sold during the years ended December 31, 2017 and 2016.  The comparison of December 31, 2017 to December 31, 2016 includes results as reported by the prior owners for the following hotels acquired during 2017 and 2016:

Sanctuary Resort – Monterey, CA (acquired 1/28/2016)
Hilton Garden Inn M Street – Washington, DC (acquired 3/9/2016)
The Envoy Hotel – Boston, MA (acquired 7/21/2016)
Courtyard – Sunnyvale, CA (acquired 10/20/2016)
The Ambrose – Santa Monica, CA (acquired 12/1/2016)
Mystic Marriott Hotel & Spa – Groton, CT (acquired 1/3/2017)
The Ritz-Carlton – Coconut Grove, FL (acquired 2/1/2017)
The Pan Pacific Hotel – Seattle, WA (acquired 2/21/2017)
Philadelphia Westin – Philadelphia, PA (acquired 6/29/2017)

40



COMPARABLE CONSOLIDATED HOTELS:
 
 
 
 
 
 
 
 
 
 
 

(Includes 37 hotels in both years)
 
(Includes 38 hotels in both years)

Year Ended 2018
 
Year Ended 2017
 
2018 vs. 2017 % Variance
 
Year Ended 2017
 
Year Ended 2016
 
2017 vs. 2016 % Variance

(dollars in thousands except ADR and RevPAR)
Occupancy
82.3
%
 
83.1
%
 
-80 bps
 
83.9
%
 
82.6
%
 
125 bps
Average Daily Rate (ADR)
$
227.61

 
$
221.58

 
2.7%
 
$
219.70

 
$
218.08

 
0.7%
Revenue Per Available Room (RevPAR)
$
187.35

 
$
184.15

 
1.7%
 
$
184.23

 
$
180.14

 
2.3%

 
 
 
 
 
 
 
 
 
 
 
Room Revenues
$
389,067

 
$
382,120

 
1.8%
 
$
383,311

 
$
376,574

 
1.8%
Hotel Operating Revenues
$
483,037

 
$
469,714

 
2.8%
 
$
470,287

 
$
459,489

 
2.4%
RevPAR for the year ended December 31, 2018 increased 1.7% for our comparable consolidated hotels when compared to 2017. The 1.7% increase in 2018 is down slightly from the 2.3% comparable hotel growth experienced in 2017.  The Company experienced stronger RevPAR growth from comparable consolidated hotels located in South Florida, Boston, and on the West Coast, which experienced RevPAR growth of 5.2%, 3.5%, and 4.6%, respectively, for 2018 when compared to 2017.  The Company also achieved RevPAR growth of 5.6% for our New York City hotels for the year ended December 31, 2018, which continues to outperform relative to market results for New York City.
COMPARABLE UNCONSOLIDATED JOINT VENTURES:
 
 
 
 
 
 
 
 
 
 
 

(Includes 9 hotels in both years)
 
(Includes 9 hotels in both years)

Year Ended 2018
 
Year Ended 2017
 
2018 vs. 2017 % Variance
 
Year Ended 2017
 
Year Ended 2016
 
2017 vs. 2016 % Variance

(dollars in thousands except ADR and RevPAR)
Occupancy
92.8
%
 
90.5
%
 
228 bps
 
90.5
%
 
89.5
%
 
102 bps
Average Daily Rate (ADR)
$
207.68

 
$
206.21

 
0.7%
 
$
206.21

 
$
206.45

 
-0.1%
Revenue Per Available Room (RevPAR)
$
192.69

 
$
186.63

 
3.3%
 
$
186.63

 
$
184.72

 
1.0%

 
 
 
 
 
 
 
 
 
 
 
Room Revenues
$
98,123

 
$
93,254

 
5.2%
 
$
93,254

 
$
92,557

 
0.8%
Total Revenues
$
100,438

 
$
95,219

 
5.5%
 
$
95,219

 
$
95,239

 
—%
The majority of our occupancy results were the result of the Cindat properties, which experienced occupancy growth of 215 basis points for the year ended December 31, 2018.  The properties within our unconsolidated joint ventures, on a comparable basis, generated 3.3% and 1.0% RevPAR growth for the years ended December 31, 2018 and 2017, respectively.  The increases in RevPAR for 2018 are driven by hotel properties located in New York City within the Cindat joint venture, which had increased RevPAR growth of 4.3% for the year ended December 31, 2018 when compared to the same period in 2017.  The growth in RevPAR can be attributed to the completion of property renovations during 2017, and a change in our revenue management and group mix strategies for the properties.

41



COMPARISON OF THE YEAR ENDED DECEMBER 31, 2018 TO DECEMBER 31, 2017
(dollars in thousands)
Revenue
Our total revenues for the years ended December 31, 2018 and 2017 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the years ended December 31, 2018 and 2017. 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 decreased $3,462 or 0.70%, to $493,678 for the year ended December 31, 2018 compared to $497,140 for the same period in 2017. This decrease in hotel operating revenues can be explained by the following table:
Hotel Operating Revenue for the year ended December 31, 2017
 
$
497,140

Incremental Revenue Additions from Acquisitions (1/1/2017 - 12/31/2018):
 
 

The Ritz-Carlton – Coconut Grove, FL
$
2,401

 

The Pan Pacific Hotel- Seattle, WA
$
2,462

 

The Westin- Philadelphia, PA
$
15,876

 

The Annapolis Waterfront Hotel- Annapolis, MD
$
9,573

 

Total Incremental Revenue from Acquisitions
 
30,312

Revenue Reductions from Dispositions (1/1/2017 - 12/31/2018):
 
 

Residence Inn - Greenbelt, MD
$
(35
)
 

Courtyard - Alexandria, VA
$
(17
)
 

Hyatt House - Scottsdale, AZ
$
(4,346
)
 

Hyatt House - Pleasant Hill, CA
$
(3,511
)
 

Hyatt House - Pleasanton, CA
$
(3,740
)
 

Holiday Inn Express - Chester, NY
$
(2,579
)
 
 
Hyatt House - Gaithersburg, MD
$
(4,201
)
 
 
Hampton Inn Pearl Street - New York, NY
$
(5,124
)
 
 
Residence Inn, Tysons Corner, VA
$
(626
)
 

Total Revenue Reductions from Dispositions
 
(24,179
)
Revenue Reduction due to Hurricane Impacted Hotel Closures
 
(18,322
)
Change in Hotel Operating Revenue for Remaining Hotels
 
8,727

Hotel Operating Revenue for the year ended December 31, 2018
 
$
493,678

As noted in the table above, our properties, exclusive of recently acquired and disposed hotels, experienced a $9,595 decrease in hotel operating revenue. This decrease is attributable to the Cadillac Hotel and Beach Club and the Parrot Key Hotel & Villas, both of which were closed for a significant portion of 2018. The Cadillac Hotel and Beach Club was damaged during Hurricane Irma in 2017 while it was branded as a Courtyard by Marriott. As a result of the hurricane damage, we accelerated our plan to convert this hotel to an Autograph Collection hotel causing it to be closed until the end of the third quarter of 2018. The Parrot Key Hotel & Villas incurred significant damage during Hurricane Irma in 2017, remaining closed for repairs until it re-opened during the fourth quarter of 2018. Collectively, these two hotels accounted for a decrease in hotel operating revenue for the year ended December 31, 2018 of $18,322. The remaining hotels in our portfolio contributed a net increase in revenue of $8,727 for the year ended December 31, 2018 when compared to 2017.

42



Expenses
Total hotel operating expenses increased 1.29% to approximately $298,849 for the year ended December 31, 2018 from $295,050 for the year ended December 31, 2017. This increase in hotel operating expenses can be explained by the following table:
Hotel Operating Expenses for the year ended December 31, 2017
 
$
295,050

Incremental Expense Additions from Acquisitions (1/1/2017 - 12/31/2018):
 
 

The Ritz-Carlton - Coconut Grove, FL
$
2,374

 

The Pan Pacific Hotel - Seattle, WA
$
1,612

 

The Westin - Philadelphia, PA
$
9,038

 
 
The Annapolis Waterfront Hotel- Annapolis, MD
$
4,594

 

Total Incremental Expenses from Acquisitions
 
17,618

Expense Reductions from Dispositions (1/1/2017 - 12/31/2018):
 
 

Residence Inn - Greenbelt, MD
$
(21
)
 

Courtyard - Alexandria, VA
$
(48
)
 
 
Hyatt House - Scottsdale, AZ
$
(2,086
)
 
 
Hyatt House - Pleasant Hill, CA
$
(1,807
)
 
 
Hyatt House - Pleasanton, CA
$
(1,862
)
 
 
Holiday Inn Express - Chester, NY
$
(1,755
)
 
 
Hyatt House - Gaithersburg, MD
$
(3,053
)
 
 
Hampton Inn Pearl Street - New York, NY
$
(2,639
)
 
 
Residence Inn, Tysons Corner, VA
$
(373
)
 
 
Total Expense Reductions from Dispositions
 
(13,644
)
Expense Reductions due to Hurricane Impacted Hotel Closures
 
(4,508
)
Change in Hotel Operating Expenses for Remaining Hotels
 
4,333

Hotel Operating Expenses for the year ended December 31, 2018
 
$
298,849

As noted in the table above, our properties, exclusive of recently acquired and disposed hotels, experienced a $175 decrease in hotel operating expenses. This decrease is attributable to the Cadillac Hotel and Beach Club and the Parrot Key Hotel & Villas, which collectively accounted for a decrease in hotel operating expenses for the year ended December 31, 2018 of $4,508, due to their respective closures related to Hurricane Irma. The remaining hotels in our portfolio contributed a net increase in expenses of $4,333 for the year ended December 31, 2018 when compared to 2017.
Depreciation and amortization increased by 7.3%, or $6,079, to $89,831 for the year ended December 31, 2018 from $83,752 for the year ended December 31, 2017. The increase was a result of depreciation and amortization recorded on the hotels recently acquired or newly renovated. Real estate and personal property tax and property insurance increased $2,894, or 9.0%, for the year ended December 31, 2018 when compared to the same period in 2017. The main causes of this increase can be attributed to the following: (1) an approximate $650 increase in insurance costs related to our hotels located in South Florida; (2) a $1,100 increase in real estate and personal property tax related to hotels acquired since January 1, 2017; (3) a $1,184 decrease in real estate and personal property tax related to hotels sold since January 1, 2017; and (4) an increase of $1,972 related to property value reassessments and stabilization. The remaining increase is due to normal operating business activity. We typically experience increases in tax assessments and tax rates as the economy improves which are offset by reductions of expense resulting from successful real estate tax appeals.

43



General and administrative expense increased by approximately $3,328 to $26,881 for the year ended December 31, 2018 from $23,553 for the year ended December 31, 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. Expense related to share based compensation increased $2,150 when comparing the year ended December 31, 2018 to the same period in 2017. This increase in share based compensation expense is primarily related to the election by our executive officers to receive share awards in lieu of cash bonuses earned during the year ended December 31, 2018. Please refer to “Note 8 – Share Based Payments” of the notes to the consolidated financial statements for more information about our stock based compensation.
Prior to January 1, 2018, acquisition and terminated deal costs typically consisted of transfer taxes, legal fees, and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Based on the updated accounting literature that defines purchases of businesses versus the purchase of assets, the majority of our acquisitions subsequent to 2017 will be viewed as the purchase of assets, which will result in the acquisition costs related to asset purchases being included in the purchase price of the asset. As a result, the expenses recorded to this line item during 2018 of $29 related to terminated deal costs, which is not comparable to the $2,203 of expenses recorded during 2017, which mostly related to hotel acquisitions.
Gains / Losses on Insurance Recoveries
During the year ended December 31, 2018, the Company recorded insurance recoveries in excess of property losses in the amount of $12,649, while we recognized a loss in excess of insurance recoveries of $4,268 during the comparable period in 2017.  During the year ended December 31, 2018 the Company received a total of $25,295 in insurance proceeds, which was offset by a total of $12,646 in funds applied to previously recorded insurance receivables, additional remediation expenses, and expenses due to franchisors based on business interruption settlements.
Operating Income
Operating income for the year ended December 31, 2018 was $52,700 compared to operating income of $49,569 during the same period in 2017. Operating income was negatively impacted by decreased hotel operating revenue, increased costs in areas such as hotel operating expenses, real estate taxes and property insurance, depreciation and amortization,and general and administrative expenses.  These items negatively affecting operating income were offset by gains from insurance recoveries and decreases in acquisition and terminated transaction costs. Additionally, the year ended December 31, 2017 contained a loss on impairment of assets of $4,082 while 2018 contained no such impairment loss.
Interest Expense
Interest expense increased $5,829 from $42,662 for the year ended December 31, 2017 to $48,491 for year ended December 31, 2018. The balance of our borrowings, excluding discounts and deferred costs, have increased by $2,289 in total between December 31, 2017 and December 31, 2018, as we originated a mortgage on the Annapolis Waterfront Hotel of $28,000 which was partially offset by mortgage debt paydowns of $1,611 and net paydowns on our Credit Facility of $24,100 since December 31, 2017.  The increase in interest expense when comparing the year ended December 31, 2018 to the corresponding period in 2017 can be explained by: (1) an increase in interest expense from the credit facility which contributed $4,011 incrementally; (2) an increase in interest expense from our notes payable due to variable rates increasing, resulting in an increase in expense of $511; and (3) the new mortgage debt on the Annapolis Waterfront Hotel that contributed $1,018 in expense during 2018. The remaining increase in interest expense is due to the increase in interest rates on our unhedged variable rate mortgages.
Gain on Disposition of Hotel Properties
During the year ended December 31, 2018, the Company recorded a gain of $4,148 related to the sales of the Hyatt House, Gaithersburg, MD, the Hampton Inn Seaport, New York, NY, and the Residence Inn, Tysons Corner, VA.  This is compared to a gain on sale recognized during the year ended December 31, 2017 of $90,350 related to the sales of the Residence Inn, Greenbelt, MD, Courtyard, Alexandria, VA, Hyatt House, Scottsdale, AZ, the Hyatt House, Pleasanton, CA, Hyatt House, Pleasant Hill, CA, and Holiday Inn Express, Chester, NY.

44



Unconsolidated Joint Venture Investments
The income (loss) from unconsolidated joint ventures consists of our interest in the operating results of the properties we own in joint ventures. Income from our unconsolidated joint ventures increased by $3,557 to income of $1,084 for the year ended December 31, 2018 compared to a loss of $2,473 during the same period in 2017, primarily due to the loss we recognized on our equity interest in the Cindat joint venture during 2017, for which we recognized no income or losses during 2018. 
During the year ended December 31, 2017, we recognized a $16,240 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. We recognized no similar gain in 2018.
Income Tax Expense
During the year ended December 31, 2018, the Company recorded an income tax expense of $267 compared to $5,262 for the year ended December 31, 2017.  The large decrease in income tax expense is partially attributable to the change in the statutory tax rate applicable to the Company as a result of the recent changes in tax regulations, the Tax Cuts & Jobs Act, which reduced our federal tax rate from 34% in 2017 to 21% for periods thereafter. This decrease in the tax rate required the Company to remeasure our net deferred tax asset resulting in increased income tax expense of $4,601 that was recognized during the year ended December 31, 2017 with no comparable adjustment in 2018.
Net (Loss) Income Applicable to Common Shareholders
Net loss applicable to common shareholders for the year ended December 31, 2018 was $14,184 compared to income of $75,699 during the same period in 2017.  This decrease in net income was primarily caused by: (1) a lower net gain on hotel dispositions of $86,202; (2) decreased income from unconsolidated joint ventures of $12,683; and (3) increased interest expense of $5,829. Partially offsetting these items were: (1) a decrease of $4,995 in income tax expense; and (2) $6,697 in additional loss allocated to minority interest holders.
Comprehensive (Loss) Income Applicable to Common Shareholders
Comprehensive loss applicable to common shareholders for the year ended December 31, 2018 was $13,706 compared to comprehensive income of $78,075 for the same period in 2017. This change can be attributed to the items affecting Net Income Applicable to Common Shareholders as more fully described above. For the year ended December 31, 2018, we recorded comprehensive income of $8,881 compared to $107,476 of comprehensive income for the year ended December 31, 2017

45



COMPARISON OF THE YEAR ENDED DECEMBER 31, 2017 TO DECEMBER 31, 2016
(dollars in thousands)
Revenue
Our total revenues for the years ended December 31, 2017 and 2016 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the years ended December 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 $30,770 or 6.6%, to $497,140 for the year ended December 31, 2017 compared to $466,370 for the same period in 2016. This increase in hotel operating revenues can be explained by the following table:

Hotel Operating Revenue for the year ended December 31, 2016
 
$
466,370

Incremental Revenue Additions from Acquisitions (1/1/2016 - 12/31/2017):
 
 
 
Sanctuary Resort – Monterey, CA
$
1,119

 
 
Hilton Garden Inn M Street – Washington, DC
2,640

 
 
The Envoy - Boston, MA
11,624

 
 
Courtyard - Sunnyvale, CA
9,094

 
 
The Ambrose - Santa Monica, CA
6,775

 
 
Mystic Marriott Hotel & Spa - Groton, CT
21,248

 
 
The Ritz-Carlton - Coconut Grove, FL
13,376

 
 
The Pan Pacific Hotel - Seattle, WA
13,127

 
 
The Westin - Philadelphia
14,382

 
 
Total Incremental Revenue from Acquisitions
 
93,385

Revenue Reductions from Dispositions (1/1/2016 - 12/31/2017):
 
 
 
Cindat Hotel Portfolio (7 hotels)
(18,109
)
 
 
Hyatt Place - King of Prussia, PA
(1,460
)
 
 
Hawthorn Suites - Franklin, MA
(2,117
)
 
 
Residence Inn - Framingham, MA
(4,770
)
 
 
Residence Inn - Norwood, MA
(3,669
)
 
 
Residence Inn - Greenbelt, MD
(6,394
)
 
 
Courtyard - Alexandria, VA
(7,414
)
 
 
Hyatt House - Scottsdale, AZ
(3,211
)
 
 
Hyatt House - Pleasant Hill, CA
(5,059
)
 
 
Hyatt House - Pleasanton, CA
(4,806
)
 
 
Holiday Inn Express - Chester, NY
(352
)
 
 
Total Revenue Reductions from Dispositions