Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 15, 2007
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
file number 001-32514
DIAMONDROCK
HOSPITALITY COMPANY
(Exact
Name of Registrant as Specified in Its Charter)
|
|
|
Maryland
|
|
20-1180098
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
6903
Rockledge Drive, Suite 800, Bethesda, Maryland
|
|
20817
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(240)
744-1150
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) 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, and (2) has been subject to such filing requirements for
the past 90 days. x Yes
¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes
x No
The
registrant had 94,680,827 shares of its $0.01 par value common stock outstanding
as of July 25, 2007.
Table
of Contents
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|
|
Page No.
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|
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item 1.
|
Financial
Statements (unaudited):
|
|
|
|
Condensed
Consolidated Balance Sheets- June 15, 2007 and December 31,
2006
|
|
1
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations
For
the Fiscal Quarters ended June 15, 2007 and June 16, 2006 and the
Periods
from January 1, 2007 to June 15, 2007 and January 1, 2006 to June
16,
2006
|
|
2
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
For
the Periods from January 1, 2007 to June 15, 2007 and January 1,
2006 to
June 16, 2006
|
|
3
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
5
|
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
|
|
12
|
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
27
|
|
|
|
|
Item 4.
|
Controls
and Procedures
|
|
27
|
PART
II. OTHER INFORMATION AND
SIGNATURE
|
Item 1.
|
Legal
Proceedings
|
|
28
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
28
|
|
|
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
28
|
|
|
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
|
28
|
|
|
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
|
28
|
|
|
|
|
Item 5.
|
Other
Information
|
|
28
|
|
|
|
|
Item 6.
|
Exhibits
|
|
29
|
Item
I. Financial Statements
DIAMONDROCK
HOSPITALITY COMPANY
CONDENSED
CONSOLIDATED BALANCE SHEETS
June
15, 2007 and December 31, 2006
(in
thousands, except share amounts)
|
|
June
15, 2007
|
|
December
31, 2006
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
$
|
2,082,219
|
|
$
|
1,761,748
|
|
Less:
accumulated depreciation
|
|
|
(109,095
|
)
|
|
(75,322
|
)
|
|
|
|
1,973,124
|
|
|
1,686,426
|
|
|
|
|
|
|
|
|
|
Deferred
financing costs, net
|
|
|
4,528
|
|
|
3,764
|
|
Restricted
cash
|
|
|
28,628
|
|
|
28,595
|
|
Due
from hotel managers
|
|
|
70,381
|
|
|
57,753
|
|
Favorable
lease assets, net
|
|
|
42,477
|
|
|
10,060
|
|
Prepaid
and other assets
|
|
|
12,636
|
|
|
12,676
|
|
Cash
and cash equivalents
|
|
|
23,266
|
|
|
19,691
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,155,040
|
|
$
|
1,818,965
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt,
at face amount
|
|
$
|
865,944
|
|
$
|
841,151
|
|
Debt
premium
|
|
|
2,545
|
|
|
2,620
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
868,489
|
|
|
843,771
|
|
|
|
|
|
|
|
|
|
Deferred
income related to key money
|
|
|
11,332
|
|
|
11,495
|
|
Unfavorable
contract liabilities, net
|
|
|
87,049
|
|
|
87,843
|
|
Due
to hotel managers
|
|
|
37,899
|
|
|
34,545
|
|
Dividends
declared and unpaid
|
|
|
22,947
|
|
|
13,871
|
|
Accounts
payable and accrued expenses
|
|
|
41,174
|
|
|
42,512
|
|
|
|
|
|
|
|
|
|
Total
other liabilities
|
|
|
200,401
|
|
|
190,266
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 10,000,000 shares authorized; no shares issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.01 par value; 200,000,000 shares authorized; 94,534,132
and
76,191,632 shares issued and outstanding at June 15, 2007 and December
31,
2006, respectively
|
|
|
945
|
|
|
762
|
|
Additional
paid-in capital
|
|
|
1,146,545
|
|
|
826,918
|
|
Accumulated
deficit
|
|
|
(61,340
|
)
|
|
(42,752
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
1,086,150
|
|
|
784,928
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,155,040
|
|
$
|
1,818,965
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
DIAMONDROCK
HOSPITALITY COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the Fiscal Quarters Ended June 15, 2007 and June 16, 2006 and
the
Periods from January 1, 2007 to June 15, 2007 and January 1, 2006 to June 16,
2006
(in
thousands, except per share amounts)
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended June 16, 2006
|
|
Period
from
January
1, 2007 to June 15, 2007
|
|
Period
from
January
1, 2006 to June 16, 2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
115,681
|
|
$
|
81,273
|
|
$
|
201,796
|
|
$
|
135,788
|
|
Food
and beverage
|
|
|
54,340
|
|
|
36,676
|
|
|
95,843
|
|
|
60,745
|
|
Other
|
|
|
9,523
|
|
|
7,018
|
|
|
15,640
|
|
|
11,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
179,544
|
|
|
124,967
|
|
|
313,279
|
|
|
208,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
25,452
|
|
|
18,134
|
|
|
45,835
|
|
|
30,969
|
|
Food
and beverage
|
|
|
35,771
|
|
|
23,420
|
|
|
64,277
|
|
|
40,309
|
|
Management
fees
|
|
|
7,934
|
|
|
4,780
|
|
|
13,166
|
|
|
7,697
|
|
Other
hotel expenses
|
|
|
54,649
|
|
|
40,066
|
|
|
99,021
|
|
|
68,973
|
|
Depreciation
and amortization
|
|
|
17,643
|
|
|
12,078
|
|
|
33,704
|
|
|
21,125
|
|
Corporate
expenses
|
|
|
3,274
|
|
|
2,646
|
|
|
6,422
|
|
|
5,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
144,723
|
|
|
101,124
|
|
|
262,425
|
|
|
174,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
34,821
|
|
|
23,843
|
|
|
50,854
|
|
|
33,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expenses (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(671
|
)
|
|
(1,207
|
)
|
|
(1,268
|
)
|
|
(1,391
|
)
|
Interest
expense
|
|
|
11,884
|
|
|
9,324
|
|
|
23,379
|
|
|
15,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
11,213
|
|
|
8,117
|
|
|
22,111
|
|
|
13,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
23,608
|
|
|
15,726
|
|
|
28,743
|
|
|
20,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(3,095
|
)
|
|
(1,829
|
)
|
|
(1,440
|
)
|
|
(1,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,513
|
|
$
|
13,897
|
|
$
|
27,303
|
|
$
|
18,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.21
|
|
$
|
0.20
|
|
$
|
0.29
|
|
$
|
0.30
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
DIAMONDROCK
HOSPITALITY COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Periods from January 1, 2007 to June 15, 2007 and January 1, 2006 to June
16, 2006
(in
thousands)
|
|
Period
from
January
1, 2007 to June 15, 2007
|
|
Period
from
January
1, 2006 to June 16, 2006
|
|
Cash
flows from operating activities:
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
income
|
|
$
|
27,303
|
|
$
|
18,263
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate depreciation
|
|
|
33,704
|
|
|
21,125
|
|
Corporate
asset depreciation as corporate expenses
|
|
|
79
|
|
|
74
|
|
Non-cash
ground rent
|
|
|
3,594
|
|
|
3,412
|
|
Non-cash
financing costs as interest
|
|
|
349
|
|
|
516
|
|
Market
value adjustment to interest rate caps
|
|
|
-
|
|
|
16
|
|
Amortization
of debt premium and unfavorable contract liabilities
|
|
|
(868
|
)
|
|
(503
|
)
|
Amortization
of deferred income
|
|
|
(164
|
)
|
|
(135
|
)
|
Stock-based
compensation
|
|
|
2,097
|
|
|
1,157
|
|
Yield
support received
|
|
|
1,741
|
|
|
-
|
|
Non-cash
yield support recognized
|
|
|
(189
|
)
|
|
(1,613
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
(460
|
)
|
|
(270
|
)
|
Restricted
cash
|
|
|
530
|
|
|
(3,125
|
)
|
Due
to/from hotel managers
|
|
|
(10,650
|
)
|
|
(4,350
|
)
|
Accounts
payable and accrued expenses
|
|
|
(3,630
|
)
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
53,436
|
|
|
34,383
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Hotel
acquisitions
|
|
|
(331,325
|
)
|
|
(145,566
|
)
|
Hotel
capital expenditures
|
|
|
(22,549
|
)
|
|
(25,960
|
)
|
Change
in restricted cash
|
|
|
(564
|
)
|
|
3,600
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(354,438
|
)
|
|
(167,926
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repayments
of credit facilities
|
|
|
(35,000
|
)
|
|
(33,000
|
)
|
Draws
on credit facilities
|
|
|
61,500
|
|
|
24,000
|
|
Proceeds
from mortgage debt
|
|
|
-
|
|
|
271,000
|
|
Repayments
of mortgage debt
|
|
|
-
|
|
|
(325,500
|
)
|
Proceeds
from short-term loan
|
|
|
-
|
|
|
79,500
|
|
Scheduled
mortgage debt principal payments
|
|
|
(1,707
|
)
|
|
(1,607
|
)
|
Payment
of financing costs
|
|
|
(1,113
|
)
|
|
(1,272
|
)
|
Proceeds
from sale of common stock
|
|
|
317,935
|
|
|
239,230
|
|
Payment
of costs related to sale of common stock
|
|
|
(380
|
)
|
|
(1,041
|
)
|
Payment
of dividends
|
|
|
(36,658
|
)
|
|
(18,318
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
$
|
304,577
|
|
$
|
232,992
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
DIAMONDROCK
HOSPITALITY COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For
the Periods from January 1, 2007 to June 15, 2007 and January 1, 2006 to June
16, 2006
(in
thousands)
|
|
Period
from
January
1, 2007 to June 15, 2007
|
|
Period
from
January
1, 2006 to June 16, 2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
increase in cash and cash equivalents
|
|
$
|
3,575
|
|
$
|
99,449
|
|
Cash
and cash equivalents, beginning of period
|
|
|
19,691
|
|
|
9,432
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
23,266
|
|
$
|
108,881
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
24,716
|
|
$
|
14,808
|
|
Cash
paid for income taxes
|
|
$
|
340
|
|
$
|
926
|
|
Capitalized
interest
|
|
$
|
-
|
|
$
|
221
|
|
|
|
|
|
|
|
|
|
Non
Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption
of mortgage debt
|
|
$
|
-
|
|
$
|
220,000
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
DIAMONDROCK
HOSPITALITY COMPANY
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
DiamondRock
Hospitality Company (the “Company”) is a lodging focused real estate company
that commenced operations in July of 2004. As of June 15, 2007, the Company
owned twenty-one hotels, comprising 9,804 rooms, located in the following
markets: Atlanta, Georgia (4); Austin, Texas; Boston, Massachusetts; Chicago,
Illinois (2); Fort Worth, Texas; Lexington, Kentucky; Los Angeles, California
(2); New York, New York (2); Northern California; Oak Brook, Illinois; Orlando,
Florida; Salt Lake City, Utah; Washington D.C.; St. Thomas, U.S. Virgin Islands;
and Vail, Colorado.
The
Company conducts its business through a traditional umbrella partnership REIT,
or UPREIT, in which the Company’s hotel properties are owned by its operating
partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of
the
Company’s operating partnership. The Company is the sole general partner of its
operating partnership and currently owns, either directly or indirectly, all
of
the limited partnership units of the operating partnership.
2. Summary
of Significant Accounting Policies
Basis
of Presentation
Certain
information and footnote disclosures normally included in financial statements
presented in accordance with U.S. generally accepted accounting principles,
or
GAAP, have been condensed or omitted in the accompanying unaudited condensed
consolidated financial statements. The Company believes the disclosures made
are
adequate to prevent the information presented from being misleading. However,
the unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto as
of
and for the year ended December 31, 2006, included in the Company’s Annual
Report on Form 10-K dated February 28, 2007.
In
the
Company’s opinion, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments necessary to present fairly the Company’s
financial position as of June 15, 2007, and the results of the Company’s
operations for the fiscal quarters ended June 15, 2007 and June 16, 2006, and
for the periods from January 1, 2007 to June 15, 2007, and January 1, 2006
to
June 16, 2006, respectively, and cash flows for the periods from January 1,
2007
to June 15, 2007, and January 1, 2006 to June 16, 2006, respectively. Interim
results are not necessarily indicative of full-year performance because of
the
impact of seasonal and short-term variations and the timing of the Company’s
acquisitions.
The
Company’s financial statements include all of the accounts of the Company and
its subsidiaries in accordance with U.S. generally accepted accounting
principles. All intercompany accounts and transactions have been eliminated
in
consolidation.
Reporting
Periods
The
results reported in the Company’s condensed consolidated statements of
operations are based on results of its hotels reported by hotel managers. The
Company’s hotel managers use different reporting periods. Marriott
International, the manager of most of the Company’s properties, uses a fiscal
year ending on the Friday closest to December 31 and reports twelve weeks of
operations for each of the first three quarters and sixteen or seventeen weeks
for the fourth quarter of the year for its domestic managed hotels. In contrast,
Marriott, for its non-domestic hotels (including Frenchman’s Reef), Vail
Resorts, manager of the Vail Marriott, Noble Management Group, LLC, manager
of
the Westin Atlanta North at Perimeter, Hilton Hotels Corporation, manager of
the
Conrad Chicago, and Westin
Hotel Management, L.P, manager of the Westin
Boston
Waterfront Hotel report results on a monthly basis. Additionally, the Company,
as a REIT, is required by U.S. federal tax laws to report results on a calendar
year basis. As a result, the Company has adopted the reporting periods used
by
Marriott International for its domestic hotels, except that the fiscal year
always ends on December 31 to comply with REIT rules. The first three fiscal
quarters end on the same day as Marriott International’s fiscal quarters but the
fourth quarter ends on December 31 and the full year results, as reported in
the
statement of operations, always include the same number of days as the calendar
year.
Two
consequences of the reporting cycle the Company has adopted are: (1) quarterly
start dates will usually differ between years, except for the first quarter
which always commences on January 1, and (2) the first and fourth quarters
of
operations and year-to-date operations may not include the same number of days
as reflected in prior years.
While
the
reporting calendar the Company adopted is more closely aligned with the
reporting calendar used by the manager of most of its properties, one final
consequence of the calendar is the Company is unable to report any results
for
Frenchman’s Reef, Vail Marriott, Westin Atlanta North at Perimeter, Conrad
Chicago, or Westin Boston Waterfront Hotel for the month of operations that
ends
after its fiscal quarter-end because neither Westin Hotel Management, L.P.,
Hilton Hotels Corporation, Noble Management Group, LLC, Vail Resorts nor
Marriott International make mid-month results available. As a result, the
quarterly results of operations include results from Frenchman’s Reef, the Vail
Marriott, the Westin Atlanta North at Perimeter, the Conrad Chicago, and the
Westin Boston Waterfront Hotel as follows: first quarter (January, February),
second quarter (March to May), third quarter (June to August) and fourth quarter
(September to December). While this does not affect full-year results, it does
affect the reporting of quarterly results.
Revenue
Recognition
Revenues
from operations of the hotels are recognized when the services are provided.
Revenues consist of room sales, golf sales, food and beverage sales, and other
hotel department revenues, such as telephone and gift shop sales.
Earnings
Per Share
Basic
earnings per share is calculated by dividing net income, adjusted for dividends
on unvested stock grants, by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income, adjusted for dividends on unvested stock grants, by the
weighted-average number of common shares outstanding during the period plus
other potentially dilutive securities such as stock grants or shares issuable
in
the event of conversion of operating partnership units. No adjustment is made
for shares that are anti-dilutive during a period.
Stock-based
Compensation
The
Company accounts for stock-based employee compensation using the fair value
based method of accounting under Statement of Financial Accounting Standards
No. 123 (revised 2004) ("SFAS 123R"), Share-Based
Payment.
The
Company records the cost of awards with service conditions based on the
grant-date fair value of the award. That cost is recognized over the period
during which an employee is required to provide service in exchange for the
award. No compensation cost is recognized for equity instruments for which
employees do not render the requisite service.
No
awards with performance-based or market-based conditions have been
issued.
Key
Money
Key
money
received in conjunction with entering into hotel management agreements is
deferred and amortized over the term of the hotel management agreement. Key
money is classified as deferred income on the accompanying condensed
consolidated balance sheets and amortized against management fees on the
accompanying condensed consolidated statements of operations.
Yield
Support
Marriott
has provided the Company with operating cash flow guarantees for certain hotels
to fund shortfalls of actual hotel operating income compared to a negotiated
target net operating income. The Company refers to these guarantees as "Yield
Support." Yield Support received is recognized over the period earned if the
Yield Support is not refundable and there is reasonable uncertainty of receipt
at inception of the management agreement. Yield Support is recorded as an offset
to base management fees.
Straight-Line
Rent
The
Company records rent expense on leases that provide for minimum rental payments
that increase in pre-established amounts over the remaining term of the lease
on
a straight-line basis as required by U.S. generally accepted accounting
principles.
Income
Taxes
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109
(“FIN
48”) on January 1, 2007. FIN 48 did not have a material impact on the Company’s
results of operations, financial position or cash flows. The Company had no
accruals for tax uncertainties as of June 15, 2007 and December 31, 2006. As
of
June 15, 2007, all of the Company’s federal income tax returns and state tax
returns for the jurisdictions in which the Company’s hotels are located remain
subject to examination by the respective jurisdiction tax
authorities.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Property
and Equipment
Property
and equipment as of June 15, 2007 (unaudited) and December 31, 2006 consists
of
the following (in thousands):
|
|
June
15, 2007
|
|
December
31, 2006
|
|
Land
|
|
$
|
223,490
|
|
$
|
223,490
|
|
Land
improvements
|
|
|
8,292
|
|
|
5,594
|
|
Buildings
|
|
|
1,650,445
|
|
|
1,375,143
|
|
Furniture,
fixtures and equipment
|
|
|
196,811
|
|
|
149,842
|
|
Corporate
office equipment and CIP
|
|
|
3,181
|
|
|
7,679
|
|
|
|
|
|
|
|
|
|
|
|
|
2,082,219
|
|
|
1,761,748
|
|
Less:
accumulated depreciation
|
|
|
(109,095
|
)
|
|
(75,322
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,973,124
|
|
$
|
1,686,426
|
|
4. Capital
Stock
Common
Shares
The
Company is authorized to issue up to 200,000,000 shares of common stock, $.01
par value per share. The Company’s authorized number of shares of common stock
increased from 100,000,000 to 200,000,000 in the first fiscal quarter of 2007.
Each outstanding share of common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders. Holders of the Company’s common
stock are entitled to receive dividends out of assets legally available for
the
payment of dividends when authorized by the Company’s board of directors.
The
Company completed an additional follow-on offering of its common stock during
the first fiscal quarter of 2007. The Company sold 18,342,500 shares of common
stock, including the underwriters’ over-allotment of 2,392,500 shares, at an
offering price of $18.15 per share. The net proceeds to the Company, after
deduction of offering costs, were $317.6 million. The Company used the net
proceeds of this offering to complete the acquisition of the Westin Boston
Waterfront Hotel.
Preferred
Shares
The
Company is authorized to issue up to 10,000,000 shares of preferred stock,
$.01
par value per share. The Company’s board of directors is required to set for
each class or series of preferred stock the terms, preferences, conversion
or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications, and terms or conditions of redemption. As of
June
15, 2007 and December 31, 2006, there were no shares of preferred stock
outstanding.
5. Stock
Incentive Plan
As
of
June 15, 2007, the Company has issued or committed to issue 1,413,854 shares
of
common stock under the 2004 Stock Option and Incentive Plan, as amended,
including 659,306 shares of unvested restricted common stock and a commitment
to
issue 418,780 units of deferred common stock.
As
of
June 15, 2007, the Company’s officers and employees have been awarded 1,142,139
shares of restricted common stock. The aggregate fair value of these awards
on
the respective grant dates was $14.2 million. The weighted-average grant-date
fair value of these awards was $12.44 per share. As of June 15, 2007, 482,833
of
these awards have vested. The remaining share awards will vest as follows:
314,787 shares during 2007, 146,880 shares during 2008, 131,713 shares during
2009 and 65,926 shares during 2010. None of the recipients were required to
pay
for such shares of common stock. The Company awarded 197,779 shares of
restricted common stock to the Company’s officers and employees during the first
fiscal quarter of 2007. The aggregate fair value of these awards was $3.6
million, and the weighted average grant date fair value of these awards was
$18.00 per share. As of June 15, 2007, the Company’s independent directors have
been awarded 40,288 shares of common stock. Shares issued to the Company’s
independent directors were fully vested upon issuance. Shares issued to the
Company’s officers and employees vest over a three-year period from the date of
the grant. As of June 15, 2007, the unrecognized compensation cost related
to
the share awards was $5.6 million and the weighted- average period over which
the unrecognized compensation expense will be recorded is approximately 28
months.
At
the
time of its initial public offering, the Company made a commitment to issue
382,500 shares of deferred stock units to the Company’s senior executive
officers. These deferred stock units are fully vested and represent the promise
of the Company to issue a number of shares of the Company’s common stock to each
senior executive officer upon the earlier of (i) a change of control or (ii)
five years after the date of grant, which was the initial public offering
completion date (the “Deferral Period”). However, if an executive’s service with
the Company is terminated for “cause” prior to the expiration of the Deferral
Period, all deferred stock unit awards will be forfeited. The executive officers
are restricted from transferring these shares until the fifth anniversary of
the
initial public offering completion date. As of June 15, 2007, the Company has
a
commitment to issue 418,780 shares under this plan. The share commitment
increased from 382,500 to 418,780 since the Company’s initial public offering
because dividends are not paid out but instead are effectively reinvested at
the
dividend payment date’s closing price of our common stock. No expense has been
recognized during the period from January 1, 2007 to June 15, 2007 for these
awards.
In
total,
for the periods from January 1, 2007 to June 15, 2007, and January 1, 2006
to
June 16, 2006, the Company recorded $2.1 million and $1.2 million, respectively,
and $1.1 million and $0.6 million during the fiscal quarters ended June 15,
2007
and June 16, 2006, respectively, of stock-based compensation expense, which
is
included in corporate expenses in the accompanying condensed consolidated
statements of operations.
6.
Earnings Per Share
Basic
earnings per share is calculated by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income available to
common shareholders, that has been adjusted for dilutive securities, by the
weighted-average number of common shares outstanding including dilutive
securities. No effect is shown for securities that are
anti-dilutive.
The
following is a reconciliation of the calculation of basic and diluted earnings
per share (in thousands, except share and per share data):
Basic
Earnings per Share Calculation:
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended
June
16, 2006
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,513
|
|
$
|
13,897
|
|
$
|
27,303
|
|
$
|
18,263
|
|
Dividends
on unvested restricted common stock
|
|
|
(158
|
)
|
|
(135
|
)
|
|
(241
|
)
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after dividends on unvested restricted
common stock
|
|
$
|
20,355
|
|
$
|
13,762
|
|
$
|
27,062
|
|
$
|
17,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding—basic
|
|
|
94,946,628
|
|
|
69,383,184
|
|
|
93,089,822
|
|
|
60,349,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.21
|
|
$
|
0.20
|
|
$
|
0.29
|
|
$
|
0.30
|
|
Diluted
Earnings per Share Calculation:
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended June 16, 2006
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,513
|
|
$
|
13,897
|
|
$
|
27,303
|
|
$
|
18,263
|
|
Dividends
on unvested restricted common stock
|
|
|
(158
|
)
|
|
(135
|
)
|
|
(241
|
)
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after dividends on unvested restricted
common stock
|
|
$
|
20,355
|
|
$
|
13,762
|
|
$
|
27,062
|
|
$
|
17,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding—basic
|
|
|
94,946,628
|
|
|
69,383,184
|
|
|
93,089,822
|
|
|
60,349,939
|
|
Unvested
restricted common stock
|
|
|
345,214
|
|
|
536,207
|
|
|
372,846
|
|
|
499,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding—diluted
|
|
|
95,291,842
|
|
|
69,919,391
|
|
|
93,462,668
|
|
|
60,849,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.21
|
|
$
|
0.20
|
|
$
|
0.29
|
|
$
|
0.30
|
|
7. Debt
The
Company has incurred limited recourse, property specific mortgage debt in
conjunction with certain of the Company’s hotels. In the event of default, the
lender may only foreclose on the pledged assets; however, in the event of fraud,
misapplication of funds and other customary recourse provisions, the lender
may
seek payment from the Company. As of June 15, 2007, twelve of our twenty-one
hotel properties were secured by mortgage debt. The Company’s mortgage debt
contains certain property specific covenants and restrictions, including minimum
debt service coverage ratios that trigger cash management provisions as well
as
restrictions on incurring additional debt without lender consent. As of June
15,
2007, the Company was in compliance with the financial covenants of our mortgage
debt.
The
following table sets forth information regarding the Company’s debt as of June
15, 2007 (unaudited), in thousands:
Property
|
|
Principal
Balance
|
|
Interest
Rate
|
|
|
|
|
|
|
|
Courtyard
Manhattan / Midtown East
|
|
$
|
42,735
|
|
|
5.195
|
%
|
Marriott
Salt Lake City Downtown
|
|
|
36,293
|
|
|
5.50
|
%
|
Courtyard
Manhattan / Fifth Avenue
|
|
|
51,000
|
|
|
6.48
|
%
|
Marriott
Griffin Gate Resort
|
|
|
29,473
|
|
|
5.11
|
%
|
Bethesda
Marriott Suites
|
|
|
18,443
|
|
|
7.69
|
%
|
Renaissance
Worthington
|
|
|
57,400
|
|
|
5.40
|
%
|
Frenchman’s Reef & Morning Star
Marriott Beach Resort
|
|
|
62,500
|
|
|
5.44
|
%
|
Marriott
Los Angeles Airport
|
|
|
82,600
|
|
|
5.30
|
%
|
Orlando
Airport Marriott
|
|
|
59,000
|
|
|
5.68
|
%
|
Chicago
Marriott Downtown Magnificent Mile
|
|
|
220,000
|
|
|
5.975
|
%
|
Renaissance
Austin
|
|
|
83,000
|
|
|
5.507
|
%
|
Renaissance
Waverly
|
|
|
97,000
|
|
|
5.503
|
%
|
Senior
unsecured credit facility
|
|
|
26,500
|
|
|
LIBOR
+ 0.95 (6.27% as of June 15, 2007
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
865,944
|
|
|
|
|
Weighted-Average
Interest Rate
|
|
|
|
|
|
5.7
|
%
|
The
Company was party to a three-year, $75.0 million senior secured revolving credit
facility from Wachovia Bank, National Association, as administrative agent
under
the credit facility, and Citicorp North America, Inc. and Bank of America,
N.A.,
as co-syndication agents under the credit facility (the “Former Facility”). On
February 28, 2007, the Company amended and restated the Former Facility to
expand it into a $200.0 million unsecured credit facility (the “New Facility”).
Interest
was paid on the periodic advances under the Former Facility at varying rates,
based upon either LIBOR or the applicable prime rate, plus an agreed upon
additional margin amount. The interest rate depended upon our level of
outstanding indebtedness in relation to the value of our assets from time to
time, as follows:
|
|
Leverage
Ratio
|
|
|
|
70% or greater
|
|
65% to 70%
|
|
less than 65%
|
|
Prime
rate margin
|
|
|
1.25
|
%
|
|
1.00
|
%
|
|
0.75
|
%
|
LIBOR
margin
|
|
|
2.00
|
%
|
|
1.75
|
%
|
|
1.45
|
%
|
In
addition to the interest payable on amounts outstanding under the Former
Facility, the Company was required to pay an annual fee equal to 0.35% of the
unused portion of the Former Facility.
The
New
Facility has a term of 48 months. The Company may extend the maturity date
of
the New Facility for an additional year upon the payment of applicable fees
and
the satisfaction of certain other customary conditions. The Company also has
the
right to increase the amount of the New Facility to $500.0 million with the
lenders’ approval.
Interest
is paid on the periodic advances under the New Facility at varying rates, based
upon either LIBOR or the alternate base rate, plus an agreed upon additional
margin amount. The interest rate depends upon our level of outstanding
indebtedness in relation to the value of our assets from time to time, as
follows:
|
|
Leverage
Ratio
|
|
|
|
60% or greater
|
|
55% to 60%
|
|
50% to 55%
|
|
less than 50%
|
|
Alternate
base rate margin
|
|
|
0.65
|
%
|
|
0.45
|
%
|
|
0.25
|
%
|
|
0.00
|
%
|
LIBOR
margin
|
|
|
1.55
|
%
|
|
1.45
|
%
|
|
1.25
|
%
|
|
0.95
|
%
|
In
addition to the interest payable on amounts outstanding under the New Facility,
the Company is required to pay a fee equal to 0.20% of the unused portion of
the
New Facility if the unused portion of the New Facility is greater than 50%
and
0.125% if the unused portion of the new Facility is less than 50%. As of June
15, 2007, the Company had $26.5 million outstanding under the New Facility
with
a capacity to borrow an additional $173.5 million. On June 21, 2007, the Company
drew an additional $11.5 million under the New Facility. On July 23, 2007,
the
Company repaid $3.0 million on the New Facility. As of June 15, 2007, the
Company was in compliance with all financial covenants of the New Facility.
8. Acquisition
On
January 31, 2007, the Company acquired a leasehold interest in the 793 room
Westin Boston Waterfront Hotel. In addition to the Westin Boston Waterfront
Hotel, the acquisition, which closed on February 8, 2007, included a leasehold
interest in 100,000 square feet of retail space, and an option to acquire a
leasehold interest in a parcel of land with development rights to build a 320
to
350 room hotel. The contractual purchase price for the Westin Boston Waterfront
Hotel, the leasehold interest in the retail space and the option to acquire
a
leasehold interest in a parcel of land was $330.3 million. The Company allotted
purchase consideration to favorable lease assets related to the favorable lease
terms of the hotel ground lease and the option to assume the current lease
terms
under the land option. The hotel and retail space are subject to a favorable
ground lease that expires in 2099. The Company reviewed the terms of the ground
leases in conjunction with the hotel purchase accounting and concluded that
the
terms of both ground leases were below current market and recorded a $20.0
million favorable lease asset for the ground lease related to the land under
the
existing hotel and a $12.8 million favorable lease asset for the ground lease
related to the undeveloped parcel of land at the acquisition date. The hotel
remains a Westin-branded property and continues to be managed by Starwood under
a twenty-year management agreement. The management agreement provides for a
base
management fee of 2.5% of the hotel’s gross revenues and an incentive fee of 20%
of hotel operating profits above an owner’s priority defined in the management
agreement.
The
preliminary purchase price allocation, including transaction costs, of the
Westin Boston Waterfront Hotel to the acquired assets and liabilities, which
may
be adjusted if any of the assumptions underlying the purchase accounting change
and when additional information is obtained, is as follows (in thousands):
Land
improvements
|
|
$
|
2,706
|
|
Building
|
|
|
273,755
|
|
Furniture,
fixtures and equipment
|
|
|
21,400
|
|
|
|
|
|
|
Total
fixed assets
|
|
|
297,861
|
|
|
|
|
|
|
Favorable
lease assets
|
|
|
32,750
|
|
Other
assets, net
|
|
|
714
|
|
|
|
|
|
|
Purchase
Price
|
|
$
|
331,325
|
|
Acquired
properties are included in the Company’s results of operations from the date of
acquisition. The following unaudited pro forma results of operations reflect
the
Company’s acquisitions as if they had occurred on the first day of the fiscal
period presented. In the Company’s opinion, all significant adjustments
necessary to reflect the effects of the acquisitions have been made;
however, a preliminary allocation of the purchase price to land improvements
and
buildings was made, and the Company will finalize the allocation after all
information is obtained.
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended June 16, 2006
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
179,544
|
|
$
|
150,213
|
|
$
|
316,366
|
|
$
|
270,936
|
|
Net
income
|
|
|
20,513
|
|
|
16,510
|
|
|
26,276
|
|
|
17,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Basic and Diluted
|
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
0.28
|
|
$
|
0.18
|
|
9.
Dividends
During
the first fiscal quarter of 2007, the Company’s board of directors declared a
cash dividend of $0.24 per share of the Company common stock. The dividend
was
paid on April 2, 2007 to all stockholders of record as of March 23, 2007. During
the second fiscal quarter of 2007, the Company’s board of directors declared a
cash dividend of $0.24 per share of the Company common stock. The dividend
was
paid on June 22, 2007 to all stockholders of record as of June 15, 2007.
10. Commitments
and Contingencies
Litigation
The
Company is not involved in any material litigation nor, to its knowledge, is
any
material litigation threatened against the Company. The Company is involved
in
routine litigation arising out of the ordinary course of business, all of which
is expected to be covered by insurance and none of which is expected to have
a
material impact on its financial condition or results of operations.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
This
report contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995
and
includes this statement for purposes of complying with these safe harbor
provisions. These forward-looking statements are generally identifiable by
use
of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project”
or similar expressions, whether in the negative or affirmative. Forward-looking
statements are based on management’s current expectations and assumptions and
are not guarantees of future performance. Factors that may cause actual results
to differ materially from current expectations include, but are not limited
to,
the risk factors discussed herein and other factors discussed from time to
time
in our periodic filings with the Securities and Exchange Commission.
Accordingly, there is no assurance that the Company’s expectations will be
realized. Except as otherwise required by the federal securities laws, the
Company disclaims any obligations or undertaking to publicly release any updates
or revisions to any forward-looking statement contained in this report to
reflect events, circumstances or changes in expectations after the date of
this
report.
Overview
We
are a
lodging focused real estate company. We are committed to maximizing shareholder
value through investing in premium full-service hotels and, to a lesser extent,
premium urban select-service hotels. As of June 15, 2007, we owned twenty-one
hotels comprising 9,804 rooms. These hotels are geographically diversified
across major markets in the United States.
We
adhere
to three basic principles:
· |
high
quality urban and resort focused real
estate;
|
· |
conservative
capital structure; and
|
· |
thoughtful
asset management.
|
High
Quality Urban and Resort Focused Real Estate
We
own
and seek to acquire premium hotels and resorts in North America. Since our
formation in May 2004, we have acquired 21 properties, with purchase prices
aggregating over $2 billion. These hotels and resorts are all categorized as
upper upscale as defined by Smith Travel Research and are generally located
in
high barrier to entry markets with multiple demand generators.
Our
properties are concentrated in five key gateway cities (New York City, Los
Angeles, Chicago, Boston and Atlanta) and in destination resorts (such as the
U.S. Virgin Islands and Vail, Colorado). We believe that these gateway cities
and destination resorts are high growth markets because they are attractive
business and leisure destinations. We also believe that these locations are
better insulated from new supply due to relatively high barriers to entry and
expensive construction costs.
We
believe that the higher quality lodging assets create more dynamic cash flow
growth and superior long-term capital appreciation.
Conservative
Capital Structure
We
are
committed to maintaining a conservative and flexible capital structure with
prudent leverage levels. We have taken advantage of the low interest rate
environment by fixing our debt rates for an extended period of time. Depending
on the outlook for interest rates in the future we maintain the flexibility
to
modify these strategies.
As
of
June 15, 2007, 96.9% of our debt carried fixed interest rates, with a
weighted-average interest rate of 5.7%, and a weighted-average maturity of
8.2
years. As of June 15, 2007, we had $865.9 million of debt outstanding,
representing a net debt-to-enterprise value ratio of 32.3%. Enterprise value
is
calculated as our market capitalization plus net debt.
We
prefer
a relatively simple but efficient capital structure. We have not invested in
joint ventures and have not issued any operating partnership units or preferred
stock. We endeavor to structure our hotel acquisitions so that they will not
overly complicate our capital structure; however, we will consider a more
complex transaction if we believe that the projected returns to our stockholders
will significantly exceed the returns that would otherwise be available.
Thoughtful
Asset Management
We
believe that we are able to create significant value in our portfolio by
utilizing our management’s extensive experience and our innovative asset
management strategies.
Our
senior management team has established a broad network of hotel industry
contacts and relationships, including relationships with hotel owners,
financiers, operators, project managers and contractors and other key industry
participants.
Our
philosophy is to negotiate management agreements that give us the right to
exert
significant influence over the management of our properties, annual budgets
and
all capital expenditures, and then to use those rights to continually monitor
and improve the performance of our properties. We cooperatively partner with
the
managers of our hotels in an attempt to increase operating results and long-term
asset values at our hotels. In addition to working directly with the personnel
at our hotels, our senior management team also has long-standing professional
relationships with our hotel managers’ senior executives, and we work directly
with these senior executives to improve the performance of our
portfolio.
We
believe we can create significant value in our portfolio through innovative
asset management strategies such as rebranding, renovating and repositioning.
We
are committed to regularly evaluating our portfolio to determine if we can
employ these value-added strategies at our hotels. During 2006 and the period
from January 1, 2007 to June 15, 2007, we completed a significant amount of
capital reinvestment in our hotels - completing projects that ranged from room
renovations (Courtyard Manhattan/Midtown East, Los Angeles Airport Marriott,
Bethesda Marriott Suites, Orlando Airport Marriott and Frenchman’s Reef &
Morning Star Marriott Beach Resort) to total renovation and repositioning of
the
hotel (Torrance Marriott and the Oak Brook Hills Marriott Resort). In connection
with our planned renovations and repositionings, our senior management team
and
our asset managers are committed to completing our renovations on time, on
budget and with minimum disruption at our hotels. We are optimistic that, when
completed, our renovations will enable us to achieve higher rates and greater
demand for our hotels.
A
core of
our asset management strategy is to leverage national hotel brands. We strongly
believe in the value of powerful national brands because we believe that they
are able to produce incremental revenue and profits compared to similar
unbranded hotels. Dominant national hotel brands typically have very strong
reservation and reward systems and sales organizations, as a result, all of
our
hotels are operated under a brand owned by one of the top three national brand
companies (Marriott, Starwood or Hilton) and all but two of the hotels are
operated by the brand company directly. Generally, we are interested in
acquiring only those hotels that are operated under a nationally recognized
brand or can be converted into a branded hotel.
Key
Indicators of Financial Condition and Operating
Performance
We
use a
variety of operating and other information to evaluate the financial condition
and operating performance of our business. These key indicators include
financial information that is prepared in accordance with GAAP, as well as
other
financial information that is not prepared in accordance with GAAP. In addition,
we use other information that may not be financial in nature, including
statistical information and comparative data. We use this information to measure
the performance of individual hotels, groups of hotels and/or our business
as a
whole. We periodically compare historical information to our internal budgets
as
well as industry-wide information. These key indicators include:
Occupancy,
ADR and RevPAR are commonly used measures within the hotel industry to evaluate
operating performance. RevPAR, which is calculated as the product of ADR and
occupancy percentage, is an important statistic for monitoring operating
performance at the individual hotel level and across our business as a whole.
We
evaluate individual hotel RevPAR performance on an absolute basis with
comparisons to budget and prior periods, as well as on a company-wide and
regional basis. ADR and RevPAR include only room revenue. Room revenue comprised
approximately 64% of our total revenues for the fiscal quarter ended June 15,
2007, and is dictated by demand, as measured by occupancy percentage, pricing,
as measured by ADR, and our available supply of hotel rooms.
Our
ADR,
occupancy percentage and RevPAR performance may be impacted by macroeconomic
factors such as regional and local employment growth, personal income and
corporate earnings, office vacancy rates and business relocation decisions,
airport and other business and leisure travel, new hotel construction and the
pricing strategies of competitors. In addition, our ADR, occupancy percentage
and RevPAR performance is dependent on the continued success of Marriott and
its
brands as well as the Westin and Conrad brands.
We
also
use EBITDA and FFO as measures of the financial performance of our business.
See
"Non-GAAP Financial Matters."
Our
Hotels
The
following table sets forth certain operating information for each of our hotels
for the period from January 1, 2007 to June 15, 2007. This information includes
periods prior to our acquisition of theses hotels unless otherwise
indicated:
Property
|
|
Location
|
|
Number
of
Rooms
|
|
Average
Occupancy
(%)
|
|
|
ADR($)
|
|
RevPAR($)
|
|
%
Change
from
2006
RevPAR
|
|
Chicago
Marriott
|
|
|
Chicago,
Illinois
|
|
|
1,198
|
|
|
76.3
|
%
|
|
$
|
199.89
|
|
$
|
152.57
|
|
|
9.8
|
%
|
Los
Angeles Airport Marriott
|
|
|
Los
Angeles, California
|
|
|
1,004
|
|
|
79.7
|
|
|
|
119.18
|
|
|
94.97
|
|
|
3.0
|
|
Westin
Boston Waterfront Hotel (2)
|
|
|
Boston,
Massachusetts
|
|
|
793
|
|
|
67.6
|
|
|
|
195.77
|
|
|
132.29
|
|
|
N/A
|
|
Renaissance
Waverly Hotel
|
|
|
Atlanta,
Georgia
|
|
|
521
|
|
|
70.7
|
|
|
|
147.01
|
|
|
103.97
|
|
|
(2.9
|
)
|
Salt
Lake City Marriott Downtown
|
|
|
Salt
Lake City, Utah
|
|
|
510
|
|
|
71.9
|
|
|
|
134.05
|
|
|
96.35
|
|
|
5.2
|
|
Renaissance
Worthington
|
|
|
Fort
Worth, Texas
|
|
|
504
|
|
|
78.9
|
|
|
|
175.79
|
|
|
138.75
|
|
|
3.6
|
|
Frenchman's
Reef & Morning Star Marriott Beach Resort (1)
|
|
|
St.
Thomas, U.S. Virgin Islands
|
|
|
502
|
|
|
86.8
|
|
|
|
277.77
|
|
|
241.18
|
|
|
8.3
|
|
Renaissance
Austin Hotel
|
|
|
Austin,
Texas
|
|
|
492
|
|
|
80.9
|
|
|
|
159.63
|
|
|
129.10
|
|
|
19.6
|
|
Torrance
Marriott
|
|
|
Los
Angeles County, California
|
|
|
487
|
|
|
75.7
|
|
|
|
120.50
|
|
|
91.23
|
|
|
3.8
|
|
Orlando
Airport Marriott
|
|
|
Orlando,
Florida
|
|
|
486
|
|
|
81.1
|
|
|
|
128.81
|
|
|
104.53
|
|
|
10.1
|
|
Marriott
Griffin Gate Resort
|
|
|
Lexington,
Kentucky
|
|
|
408
|
|
|
62.5
|
|
|
|
134.58
|
|
|
84.16
|
|
|
10.4
|
|
Oak
Brook Hills Marriott Resort
|
|
|
Oak
Brook, Illinois
|
|
|
384
|
|
|
52.1
|
|
|
|
134.69
|
|
|
70.24
|
|
|
8.0
|
|
Westin
Atlanta North at Perimeter (1)
|
|
|
Atlanta,
Georgia
|
|
|
369
|
|
|
71.0
|
|
|
|
139.36
|
|
|
99.00
|
|
|
6.8
|
|
Vail
Marriott Mountain Resort & Spa (1)
|
|
|
Vail,
Colorado
|
|
|
346
|
|
|
65.8
|
|
|
|
312.25
|
|
|
205.36
|
|
|
10.2
|
|
Marriott
Atlanta Alpharetta
|
|
|
Atlanta,
Georgia
|
|
|
318
|
|
|
62.4
|
|
|
|
155.63
|
|
|
97.09
|
|
|
5.5
|
|
Courtyard
Manhattan/Midtown East
|
|
|
New
York, New York
|
|
|
312
|
|
|
88.0
|
|
|
|
267.44
|
|
|
235.39
|
|
|
29.0
|
|
Conrad
Chicago (1)
|
|
|
Chicago,
Illinois
|
|
|
311
|
|
|
66.0
|
|
|
|
218.13
|
|
|
144.00
|
|
|
25.8
|
|
Bethesda
Marriott Suites
|
|
|
Bethesda,
Maryland
|
|
|
272
|
|
|
73.3
|
|
|
|
187.99
|
|
|
137.85
|
|
|
8.6
|
|
SpringHill
Suites Atlanta Buckhead
|
|
|
Atlanta,
Georgia
|
|
|
220
|
|
|
65.0
|
|
|
|
117.59
|
|
|
76.40
|
|
|
(5.8
|
)
|
Courtyard
Manhattan/Fifth Avenue
|
|
|
New
York, New York
|
|
|
185
|
|
|
90.9
|
|
|
|
255.36
|
|
|
232.23
|
|
|
17.1
|
|
The
Lodge at Sonoma, a Renaissance Resort & Spa
|
|
|
Sonoma,
California
|
|
|
182
|
|
|
64.2
|
|
|
|
203.97
|
|
|
130.94
|
|
|
(0.7
|
)
|
TOTAL/WEIGHTED
AVERAGE (3)
|
|
|
9,804
|
|
|
74.3
|
%
|
|
$
|
173.44
|
|
$
|
128.81
|
|
|
9.1
|
%
|
(1) |
The
Frenchman's Reef & Morning Star Marriott Beach Resort, Vail Marriott
Mountain Resort & Spa, Westin Atlanta North at Perimeter and Conrad
Chicago report operations on a calendar month and year basis. The
period
from January 1, 2007 to June 15, 2007 includes the operations for
the
period from January 1, 2007 to May 31, 2007 for these four
hotels.
|
(2) |
The
Westin Boston Waterfront Hotel reports operations on a calendar month
and
year basis. The period from January 1, 2007 to June 15, 2007 includes
the
operations for the period from January 31, 2007 (date of acquisition)
to
May 31, 2007.
|
(3) |
Total
hotel statistics exclude the Westin Boston Waterfront Hotel. This
hotel
was newly built in 2006 and there are no comparable statistics for
the
period from January 1, 2006 to June 16,
2006.
|
Results
of Operations
As
of
June 15, 2007, we owned twenty-one hotels. Our total assets were $2.2 billion
as
of June 15, 2007. Total liabilities were $1.1 billion as of June 15, 2007,
including $868.5 million of debt. Shareholders' equity was approximately
$1.1 billion as of June 15, 2007. Our
total
assets were $1.8 billion as of December 31, 2006. Total liabilities were $1.0
billion as of December 31, 2006, including $843.8 million of debt. Shareholders’
equity was approximately $784.9 million as of December 31, 2006.
Comparison
of the Fiscal Quarter Ended June 15, 2007 to the Fiscal Quarter Ended June
16,
2006
Our
net
income for the fiscal quarter ended June 15, 2007 was $20.5 million
compared to $13.9 million for the fiscal quarter ended June 16, 2006. We
acquired five of our twenty-one hotels during and after the second fiscal
quarter of 2006. Accordingly, the current period results are not comparable
to
the results for the corresponding period in 2006.
Revenue. Revenue
consists primarily of the room, food and beverage and other operating revenues
from our hotels. Revenues for the fiscal quarters ended June 15, 2007 and June
16, 2006, respectively, consist of the following (in thousands):
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended
June
16,
2006
|
|
Rooms
|
|
$
|
115,681
|
|
$
|
81,273
|
|
Food
and beverage
|
|
|
54,340
|
|
|
36,676
|
|
Other
|
|
|
9,523
|
|
|
7,018
|
|
Total
revenues
|
|
$
|
179,544
|
|
$
|
124,967
|
|
Our
total
revenues increased $54.5 million, from $125.0 million for the fiscal
quarter ended June 16, 2006 to $179.5 million for the fiscal quarter ended
June
15, 2007. This
increase includes amounts that are not comparable year-over-year as
follows:
· |
$19.6
million increase from the Westin Boston Waterfront Hotel, which was
newly
built in 2006 and purchased in January
2007;
|
· |
$9.0
million increase from the Renaissance Austin Hotel, which was purchased
in
December 2006;
|
· |
$8.4
million increase from the Renaissance Waverly Hotel, which was purchased
in December 2006;
|
· |
$6.6
million increase from the Conrad Chicago, which was purchased in
November
2006;
|
· |
$3.8
million increase from the Westin Atlanta North at Perimeter, which
was
purchased in May 2006.
|
The
remaining increase of $7.1 million is attributable to a $6.6 million increase
in
room revenue and a $0.5 million increase in food and beverage and other
operating revenue at the comparable hotels. The increase in room revenue was
a
result of an 8.1% increase in RevPAR which was primarily due to an 8.0% increase
in ADR at the comparable hotels.
Individual
hotel revenues for the fiscal quarters ended June 15, 2007 and June 16, 2006,
respectively, consist of the following (in millions):
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended
June
16, 2006
|
|
|
|
|
|
|
|
Chicago
Marriott
|
|
$
|
26.9
|
|
$
|
24.3
|
|
Westin
Boston Waterfront Hotel (2) (3)
|
|
|
19.6
|
|
|
-
|
|
Frenchman's
Reef & Morning Star Marriott Beach Resort (1)
|
|
|
16.3
|
|
|
16.5
|
|
Los
Angeles Airport Marriott
|
|
|
12.9
|
|
|
12.7
|
|
Renaissance
Worthington
|
|
|
9.5
|
|
|
9.7
|
|
Renaissance
Austin Hotel (3)
|
|
|
9.0
|
|
|
-
|
|
Renaissance
Waverly Hotel (3)
|
|
|
8.4
|
|
|
-
|
|
Marriott
Griffin Gate Resort
|
|
|
7.5
|
|
|
7.0
|
|
Courtyard
Manhattan/Midtown East
|
|
|
7.5
|
|
|
6.2
|
|
Oak
Brook Hills Marriott Resort
|
|
|
7.0
|
|
|
6.3
|
|
Vail
Marriott Mountain Resort & Spa (1)
|
|
|
6.9
|
|
|
6.3
|
|
Conrad
Chicago (1)(3)
|
|
|
6.6
|
|
|
-
|
|
Orlando
Airport Marriott
|
|
|
6.2
|
|
|
5.7
|
|
Torrance
Marriott
|
|
|
5.8
|
|
|
5.3
|
|
Salt
Lake City Marriott Downtown
|
|
|
5.5
|
|
|
5.3
|
|
Westin
Atlanta North at Perimeter (1)
|
|
|
5.3
|
|
|
1.5
|
|
Bethesda
Marriott Suites
|
|
|
4.7
|
|
|
4.5
|
|
The
Lodge at Sonoma, a Renaissance Resort & Spa
|
|
|
4.4
|
|
|
4.6
|
|
Courtyard
Manhattan/Fifth Avenue
|
|
|
4.1
|
|
|
3.6
|
|
Marriott
Atlanta Alpharetta
|
|
|
3.8
|
|
|
3.8
|
|
SpringHill
Suites Atlanta Buckhead
|
|
|
1.6
|
|
|
1.7
|
|
Total
|
|
$
|
179.5
|
|
$
|
125.0
|
|
(1) |
The
Frenchman's Reef & Morning Star Marriott Beach Resort, Vail Marriott
Mountain Resort & Spa, Westin Atlanta North at Perimeter and Conrad
Chicago report operations on a calendar month and year basis. The
fiscal
quarter ended June 15, 2007 includes the operations for the period
from
March 1, 2007 to May 31, 2007 for these four hotels. The fiscal quarter
ended June 16, 2006 includes the operations for the period from March
1,
2006 to May 31, 2006 for the Frenchman’s Reef & Morning Star Marriott
Beach Resort and Vail Marriott Mountain Resort & Spa and the period
from May 3, 2006 (date of acquisition) to May 31, 2006 for the Westin
Atlanta North at Perimeter.
|
(2) |
The
Westin Boston Waterfront Hotel reports operations on a calendar month
and
year basis. The fiscal quarter ended June 15, 2007, includes the
operations for the period from March 1, 2007 to May 31, 2007. This
hotel
was newly built in 2006.
|
(3) |
The
Company acquired this hotel subsequent to June 16, 2006. Accordingly,
there are no revenues recorded for the fiscal quarter ended June
16,
2006.
|
The
following are the pro forma key hotel operating statistics for our hotels for
the fiscal quarters ended June 15, 2007 and June 16, 2006. The pro forma hotel
operating statistics presented below include the results of operations of the
hotels under previous ownership for the comparable period to our ownership
period. The operating statistics for the fiscal quarters ended June 15, 2007
and
June 16, 2006 exclude the Westin Boston Waterfront Hotel due to the fact that
this hotel was newly built in 2006 and there are no comparable statistics for
the fiscal quarter ended June 16, 2006.
|
|
Fiscal
Quarter Ended June 15, 2007
|
|
Fiscal
Quarter Ended
June
16, 2006
|
|
% Change
|
|
Occupancy
%
|
|
|
76.4
|
%
|
|
75.5
|
%
|
|
0.9
percentage points
|
|
ADR
|
|
$
|
179.47
|
|
$
|
167.30
|
|
|
7.3
|
%
|
RevPAR
|
|
$
|
137.10
|
|
$
|
126.24
|
|
|
8.6
|
%
|
Hotel
operating expenses. Hotel
operating expenses consist primarily of operating expenses of our hotels,
including non-cash ground rent expense. The operating expenses for the fiscal
quarters ended June 15, 2007 and June 16, 2006, respectively, consist of the
following (in millions):
|
|
Fiscal
Quarter Ended
June
15, 2007
|
|
Fiscal
Quarter Ended
June
16, 2006
|
|
Rooms
departmental expenses
|
|
$
|
25.5
|
|
$
|
18.1
|
|
Food
and beverage departmental expenses
|
|
|
35.8
|
|
|
23.4
|
|
Other
hotel expenses
|
|
|
46.8
|
|
|
33.4
|
|
Base
management fees
|
|
|
5.0
|
|
|
3.5
|
|
Yield
support
|
|
|
(0.1
|
)
|
|
(1.4
|
)
|
Incentive
management fees
|
|
|
3.0
|
|
|
2.7
|
|
Property
taxes
|
|
|
5.5
|
|
|
4.7
|
|
Ground
rent—Contractual
|
|
|
0.4
|
|
|
0.5
|
|
Ground
rent—Non-cash
|
|
|
1.9
|
|
|
1.5
|
|
Total
hotel operating expenses
|
|
$
|
123.8
|
|
$
|
86.4
|
|
Our
hotel
operating expenses increased $37.4 million from $86.4 million for the fiscal
quarter ended June 16, 2006 to $123.8 million for the fiscal quarter ended
June 15, 2007. This increase includes amounts that are not comparable
year-over-year as follows:
· |
$13.4
million increase from the Westin Boston Waterfront Hotel, which was
newly
built in 2006 and purchased in January
2007;
|
· |
$6.3
million increase from the Renaissance Austin Hotel, which was purchased
in
December 2006;
|
· |
$6.0
million increase from the Renaissance Waverly Hotel, which was purchased
in December 2006;
|
· |
$4.5
million increase from the Conrad Chicago, which was purchased in
November
2006;
|
· |
$2.5
million increase from the Westin Atlanta North at Perimeter, which
was
purchased in May 2006.
|
The
remaining increase of $4.7 million is attributable to increases in departmental
expenses and other operating expenses at the comparable hotels as well as lower
yield support recognized in the fiscal quarter ended June 15, 2007 compared
to
the corresponding period in 2006.
In
connection with entering into certain management agreements with Marriott,
Marriott provided the Company with limited operating cash flow guarantees
(“yield support”) for those hotels. The yield support is designed to protect us
from the disruption often associated with changing the hotel’s brand or manager
or undergoing significant renovations. Across our portfolio, we are entitled
to
up to $0.8 million of yield support in 2007 for the Oak Brook Hills Marriott
and
$100,000 in 2007 for the Buckhead SpringHill Suites. We currently anticipate
that we will recognize $0.5 million of yield support in 2007. We
recorded yield support of $0.1 million during the fiscal quarter ended June
15,
2007. We recorded $1.4 million of yield support during the fiscal quarter ended
June 16, 2006.
Depreciation
and amortization. Depreciation
and amortization is recorded on our hotel buildings over 40 years for the
periods subsequent to acquisition. Depreciable lives of hotel furniture,
fixtures and equipment are estimated as the time period between the acquisition
date and the date that the hotel furniture, fixtures and equipment will be
replaced. Our depreciation and amortization expense increased $5.5 million
from
$12.1 million for the fiscal quarter ended June 16, 2006 to $17.6 million
for the fiscal quarter ended June 15, 2007. This increase includes amounts
that
are not comparable year-over-year as follows:
· |
$2.4
million increase from the Westin Boston Waterfront Hotel, which was
newly
built in 2006 and purchased in January
2007;
|
· |
$0.9
million increase from the Renaissance Waverly Hotel, which was purchased
in December 2006;
|
· |
$0.8
million increase from the Conrad Chicago, which was purchased in
November
2006;
|
· |
$0.7
million increase from the Renaissance Austin Hotel, which was purchased
in
December 2006;
|
· |
$0.4
million increase from the Westin Atlanta North at Perimeter, which
was
purchased in May 2006.
|
Corporate
expenses. Our
corporate expenses increased from $2.6 million for the fiscal quarter ended
June
16, 2006 to $3.3 million for the fiscal quarter ended June 15, 2007, due
primarily to an increase in stock-based compensation expense. Corporate expenses
principally consist of employee-related costs, including base payroll, bonus
and
restricted stock. Corporate expenses also include corporate operating costs,
professional fees and directors' fees.
Interest
expense. Our
interest expense totaled $11.9 million and $9.3 million for the fiscal
quarters ended June 15, 2007 and June 16, 2006, respectively. The 2007 interest
expense is related to mortgage debt ($11.2 million), amortization of
deferred financing costs ($0.1 million) and interest and unused facility
fees on our credit facility ($0.6 million). The 2006 interest expense is
related to mortgage debt ($8.8 million), amortization and write off of deferred
financing costs ($0.3 million) and interest and unused facility fees on our
credit facility ($0.2 million). As of June 15, 2007, we had property-specific
mortgage debt outstanding on twelve of our hotels. On all twelve of the hotels,
we have fixed-rate secured debt, which bears interest at rates ranging from
5.11% to 7.69% per year. Amounts drawn under the credit facility bear interest
at a variable rate that fluctuates based on the level of outstanding
indebtedness in relation to the value of our assets from time to time. The
interest rate as of June 15, 2007 on the credit facility was 6.27%. The Company
had $26.5 million drawn on the credit facility as of June 15, 2007. Our
weighted-average interest rate on all debt as of June 15, 2007 was
5.7%.
Interest
income.
Interest income decreased $0.5 million from $1.2 million for the fiscal quarter
ended June 16, 2006 to $0.7 million for the fiscal quarter ended June 15, 2007.
The decrease is a result of interest income earned on higher levels of corporate
cash in the corresponding period of 2006 related to our April 2006 equity
offering.
Income
taxes. We
recorded an income tax expense of $3.1 million and $1.8 million for the fiscal
quarters ended June 15, 2007 and June 16, 2006, respectively. The second quarter
2007 income tax expense was incurred on the $7.2 million pre-tax income of
our
TRS for the fiscal quarter ended June 15, 2007, together with foreign income
tax
expense of $0.2 million related to the taxable REIT subsidiary that owns the
Frenchman’s Reef & MorningStar Marriott Beach Resort. The 2006 income tax
expense was incurred on the $4.0 million pre-tax income of our TRS for the
fiscal quarter ended June 16, 2006.
Comparison
of the Period from January 1, 2007 to June 15, 2007 to the Period from January
1, 2006 to June 16, 2006
Our
net
income for the period from January 1, 2007 to June 15, 2007 was
$27.3 million compared to $18.3 million for the period from January 1, 2006
to June 16, 2006. We acquired six of our twenty-one hotels after January 1,
2006. Accordingly, the current period results are not comparable to the results
for the corresponding period in 2006.
Revenue.
Revenue consists primarily of the room, food and beverage and other revenues
from our hotels. Revenues
for the periods from January 1, 2007 to June 15, 2007 and January 1, 2006 to
June 16, 2006, respectively, consist of the following (in
thousands):
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
Rooms
|
|
$
|
201,796
|
|
$
|
135,788
|
|
Food
and beverage
|
|
|
95,843
|
|
|
60,745
|
|
Other
|
|
|
15,640
|
|
|
11,556
|
|
Total
revenues
|
|
$
|
313,279
|
|
$
|
208,089
|
|
Our
total
revenues increased $105.2 million, from $208.1 million for the period from
January 1, 2006 to June 16, 2006 to $313.3 million for the period from January
1, 2007 to June 15, 2007. This increase includes amounts that are not comparable
year-over-year as follows:
· |
$23.6
million increase from the Westin Boston Waterfront Hotel, which was
newly
built in 2006 and purchased in January
2007;
|
· |
$19.9
million increase from the Chicago Marriott, which was purchased in
March
2006.
|
· |
$17.7
million increase from the Renaissance Austin Hotel, which was purchased
in
December 2006;
|
· |
$17.5
million increase from the Renaissance Waverly Hotel, which was purchased
in December 2006;
|
· |
$9.0
million increase from the Conrad Chicago, which was purchased in
November
2006;
|
· |
$7.2
million increase from the Westin Atlanta North at Perimeter, which
was
purchased in May 2006.
|
The
remaining increase of $10.3 million is attributable to a $9.4 million increase
in room revenue and a $0.9 million increase in food and beverage and other
operating revenue at the comparable hotels. The increase in room revenue was
a
result of an 8.4% increase in RevPAR which was primarily due to an 8.6% increase
in ADR at the comparable hotels.
Individual
hotel revenues for the periods from January 1, 2007 to June 15, 2007 and January
1, 2006 to June 16, 2006, respectively, consist of the following
(in millions):
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
|
|
|
|
|
|
Chicago
Marriott
|
|
$
|
44.3
|
|
$
|
24.3
|
|
Los
Angeles Airport Marriott
|
|
|
27.2
|
|
|
26.6
|
|
Frenchman's
Reef & Morning Star Marriott Beach Resort (1)
|
|
|
27.1
|
|
|
26.3
|
|
Westin
Boston Waterfront Hotel (2) (3)
|
|
|
23.6
|
|
|
-
|
|
Renaissance
Worthington
|
|
|
19.2
|
|
|
18.9
|
|
Renaissance
Austin Hotel (3)
|
|
|
17.7
|
|
|
-
|
|
Renaissance
Waverly Hotel (3)
|
|
|
17.5
|
|
|
-
|
|
Vail
Marriott Mountain Resort & Spa (1)
|
|
|
14.6
|
|
|
13.5
|
|
Orlando
Airport Marriott
|
|
|
13.3
|
|
|
12.1
|
|
Courtyard
Manhattan/Midtown East
|
|
|
12.7
|
|
|
9.8
|
|
Salt
Lake City Marriott Downtown
|
|
|
12.3
|
|
|
11.8
|
|
Marriott
Griffin Gate Resort
|
|
|
11.5
|
|
|
10.7
|
|
Torrance
Marriott
|
|
|
10.8
|
|
|
10.3
|
|
Oak
Brook Hills Marriott Resort
|
|
|
10.5
|
|
|
10.1
|
|
Conrad
Chicago (1)(3)
|
|
|
9.0
|
|
|
-
|
|
Westin
Atlanta North at Perimeter (1)
|
|
|
8.7
|
|
|
1.5
|
|
Bethesda
Marriott Suites
|
|
|
8.2
|
|
|
7.7
|
|
Marriott
Atlanta Alpharetta
|
|
|
7.4
|
|
|
7.4
|
|
The
Lodge at Sonoma, a Renaissance Resort & Spa
|
|
|
7.4
|
|
|
7.4
|
|
Courtyard
Manhattan/Fifth Avenue
|
|
|
7.2
|
|
|
6.3
|
|
SpringHill
Suites Atlanta Buckhead
|
|
|
3.1
|
|
|
3.4
|
|
Total
|
|
$
|
313.3
|
|
$
|
208.1
|
|
(1) |
The
Frenchman's Reef & Morning Star Marriott Beach Resort, Vail Marriott
Mountain Resort & Spa, Westin Atlanta North at Perimeter and Conrad
Chicago report operations on a calendar month and year basis. The
period
from January 1, 2007 to June 15, 2007 includes the operations for
the
period from January 1, 2007 to May 31, 2007 for these four hotels.
The
period from January 1, 2006 to June 16, 2006 includes the operations
for
the period from January 1, 2006 to May 31, 2006 for the Frenchman’s Reef
& Morning Star Marriott Beach Resort and Vail Marriott Mountain Resort
& Spa and the period from May 3, 2006 (date of acquisition) to May
31,
2006 for the Westin Atlanta North at
Perimeter.
|
(2) |
The
Westin Boston Waterfront Hotel reports operations on a calendar month
and
year basis. The period from January 1, 2007 to June 15, 2007, includes
the
operations for the period from January 31, 2007 (date of acquisition)
to
May 31, 2007. This hotel was newly built in
2006.
|
(3) |
The
Company acquired this hotel subsequent to June 16, 2006. Accordingly,
there are no revenues recorded for the period from January 1, 2006
to June
16, 2006.
|
The
following are the pro forma key hotel operating statistics for our hotels for
the period from January 1, 2007 to June 15, 2007 and January 1, 2006 to June
16,
2006. The pro forma hotel operating statistics presented below include the
results of operations of the hotels under previous ownership for the comparable
period to our ownership period. The operating statistics for the period from
January 1, 2007 to June 15, 2007 and January 1, 2006 to June 16, 2006 exclude
the Westin Boston Waterfront Hotel due to the fact that this hotel was newly
built in 2006 and there are no comparable statistics for the period from January
1, 2006 to June 16, 2006.
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
% Change
|
|
Occupancy
%
|
|
|
74.3
|
%
|
|
73.1
|
%
|
|
1.2
percentage points
|
|
ADR
|
|
$
|
173.44
|
|
$
|
161.40
|
|
|
7.5
|
%
|
RevPAR
|
|
$
|
128.81
|
|
$
|
118.06
|
|
|
9.1
|
%
|
Hotel
operating expenses. Hotel
operating expenses consist primarily of operating expenses of our hotels,
including non-cash ground rent expense. The operating expenses for the periods
from January 1, 2007 to June 15, 2007 and January 1, 2006 to June 16, 2006,
respectively, consist of the following (in millions):
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
Rooms
departmental expenses
|
|
$
|
45.8
|
|
$
|
31.0
|
|
Food
and beverage departmental expenses
|
|
|
64.3
|
|
|
40.3
|
|
Other
hotel expenses
|
|
|
84.1
|
|
|
58.0
|
|
Base
management fees
|
|
|
8.7
|
|
|
6.1
|
|
Yield
support
|
|
|
(0.2
|
)
|
|
(1.6
|
)
|
Incentive
management fees
|
|
|
4.7
|
|
|
3.2
|
|
Property
taxes
|
|
|
10.5
|
|
|
6.8
|
|
Ground
rent—Contractual
|
|
|
0.8
|
|
|
0.9
|
|
Ground
rent—Non-cash
|
|
|
3.6
|
|
|
3.2
|
|
Total
hotel operating expenses
|
|
$
|
222.3
|
|
$
|
147.9
|
|
Our
hotel
operating expenses increased $74.4 million from $147.9 million for the period
from January 1, 2006 to June 16, 2006 to $222.3 million for the period from
January 1, 2007 to June 15, 2007. This increase includes amounts that are not
comparable year-over-year as follows:
· |
$16.7
million increase from the Westin Boston Waterfront Hotel, which was
newly
built in 2006 and purchased in January
2007;
|
· |
$16.1
million increase from the Chicago Marriott, which was purchased in
March
2006.
|
· |
$12.4
million increase from the Renaissance Waverly Hotel, which was purchased
in December 2006;
|
· |
$12.3
million increase from the Renaissance Austin Hotel, which was purchased
in
December 2006;
|
· |
$7.1
million increase from the Conrad Chicago, which was purchased in
November
2006;
|
· |
$4.7
million increase from the Westin Atlanta North at Perimeter, which
was
purchased in May 2006.
|
The
remaining increase of $5.1 million is attributable to increases in departmental
expenses and other operating expenses at the comparable hotels as well as lower
yield support recognized for the period from January 1, 2007 to June 15, 2007
compared to the corresponding period in 2006.
In
connection with entering into certain management agreements with Marriott,
Marriott provided the Company with limited operating cash flow guarantees
(“yield support”) for those hotels. The yield support is designed to protect us
from the disruption often associated with changing the hotel’s brand or manager
or undergoing significant renovations. Across our portfolio, we are entitled
to
up to $0.8 million of yield support in 2007 for the Oak Brook Hills Marriott
and
$100,000 in 2007 for the Buckhead SpringHill Suites. We currently anticipate
that we will recognize $0.5 million of yield support in 2007. We
recorded yield support of $0.2 million for the period from January 1, 2007
to
June 15, 2007. We recorded $1.6 million of yield support for the period from
January 1, 2006 to June 16, 2006.
Depreciation
and amortization. Depreciation
and amortization is recorded on our hotel buildings over 40 years for the
periods subsequent to acquisition. Depreciable lives of hotel furniture,
fixtures and equipment are estimated as the time period between the acquisition
date and the date that the hotel furniture, fixtures and equipment will be
replaced. Our depreciation and amortization expense increased $12.6 million
from
$21.1 million for the period from January 1, 2006 to June 16, 2006 to
$33.7 million for the period from January 1, 2007 to June 15, 2007. This
increase includes amounts that are not comparable year-over-year as
follows:
· |
$4.4
million increase from the Westin Boston Waterfront Hotel, which was
newly
built in 2006 and purchased in January
2007;
|
· |
$2.3
million increase from the Chicago Marriott, which was purchased in
March
2006.
|
· |
$1.7
million increase from the Renaissance Waverly Hotel, which was purchased
in December 2006;
|
· |
$1.7
million increase from the Conrad Chicago, which was purchased in
November
2006;
|
· |
$1.5
million increase from the Renaissance Austin Hotel, which was purchased
in
December 2006;
|
· |
$0.9
million increase from the Westin Atlanta North at Perimeter, which
was
purchased in May 2006.
|
Corporate
expenses. Our
corporate expenses increased $1.2 million from $5.2 million for the period
from
January 1, 2006 to June 16, 2006 to $6.4 million for the period from January
1,
2007 to June 15, 2007. The increase is primarily due to a $0.9 million increase
in stock-based compensation expense and a $0.5 million increase in other
employee-related costs offset by a $0.2 million decrease in other corporate
operating costs. Corporate expenses principally consist of employee-related
costs, including base payroll, bonus and restricted stock. Corporate expenses
also include corporate operating costs, professional fees and directors' fees.
Interest
expense. Our
interest expense totaled $23.4 million and $15.1 million for the periods
from January 1, 2007 to June 15, 2007 and January 1, 2006 to June 16, 2006,
respectively. The 2007 interest expense is related to mortgage debt
($22.1 million), amortization of deferred financing costs
($0.3 million) and interest and unused facility fees on our credit facility
($1.0 million). The 2006 interest expense is related to mortgage debt
($14.0 million), amortization and write off of deferred financing costs
($0.5 million) and interest and unused facility fees on our credit facility
($0.6 million). As of June 15, 2007, we had property-specific mortgage debt
outstanding on twelve of our hotels. On all twelve of the hotels, we have
fixed-rate secured debt, which bears interest at rates ranging from 5.11% to
7.69% per year. Amounts drawn under the credit facility bear interest at a
variable rate that fluctuates based on the level of outstanding indebtedness
in
relation to the value of our assets from time to time. The interest rate as
of
June 15, 2007 on the credit facility was 6.27%. The Company had $26.5 million
drawn on the credit facility as of June 15, 2007. Our weighted-average interest
rate on all debt as of June 15, 2007 was 5.7%.
Interest
income.
We
recorded interest income of $1.3 million and $1.4 million for the periods from
January 1, 2007 to June 15, 2007 and January 1, 2006 to June 16, 2006,
respectively.
Income
taxes. We
recorded income tax expense of $1.4 million and $1.8 million for the periods
from January 1, 2007 to June 15, 2007 and January 1, 2006 to June 16, 2006,
respectively. The 2007 income tax expense was incurred on the $2.7 million
pre-tax income of our TRS for the period from January 1, 2007 to June 15, 2007,
and foreign income tax expense of $0.4 million related to the taxable REIT
subsidiary that owns the Frenchman’s Reef & MorningStar Marriott Beach
Resort. The 2006 income tax expense was incurred on the $4.0 million pre-tax
income of our TRS for the period from January 1, 2006 to June 16,
2006.
Liquidity
and Capital Resources
Our
short-term liquidity requirements consist primarily of funds necessary to fund
future distributions to our stockholders to maintain our REIT status as well
as
to pay for operating expenses and other expenditures directly associated with
our hotels, including maintenance and recurring capital expenditures as well
as
payments of interest and principal. We expect to meet our short-term liquidity
requirements generally through net cash provided by operations, existing cash
balances and, if necessary, short-term borrowings under our credit
facility.
Our
long-term liquidity requirements consist primarily of funds necessary to pay
for
the costs of acquiring additional hotels, renovations, expansions and other
capital expenditures that need to be made periodically to our hotels, scheduled
debt payments and making distributions to our stockholders. We expect to meet
our long-term liquidity requirements through various sources of capital, cash
provided by operations, existing cash balances, and borrowings as well as
through the issuances of additional equity or debt securities. Our ability
to
incur additional debt is dependent upon a number of factors, including our
degree of leverage, the value of our unencumbered assets and borrowing
restrictions imposed by existing lenders. Our ability to raise funds through
the
issuance of debt and equity securities is dependent upon, among other things,
general market conditions for REITs and market perceptions about us. We have
an
effective shelf registration statement that allows us to issue public securities
on an expedited basis, but does not assure that there will be buyers for such
securities.
Our
Financing Strategy
We
are
committed to maintaining a conservative capital structure with aggregate
leverage weighted towards long-term fixed-rate debt. However, we maintain the
flexibility to modify these strategies if we believe fundamental changes have
occurred in the capital or lodging markets.
As
of
June 15, 2007, 96.9% of our debt carries fixed interest rates, with a
weighted-average interest rate of 5.7%, and a weighted-average maturity of
8.2 years. As of June 15, 2007, we had $865.9 million of debt outstanding.
In
the
current market, we have a preference towards fixed-rate, long-term, limited
recourse, single property specific debt. When possible and desirable, we will
seek to replace short-term sources of capital with long-term financing. In
addition to property-specific debt and our credit facility, we intend to use
other financing methods as necessary, including obtaining funds from banks,
institutional investors or other lenders, bridge loans, letters of credit and
other arrangements, any of which may be unsecured or may be secured by mortgages
or other interests in our investments. In addition, we may issue publicly or
privately placed debt instruments.
Credit
Facilities
On
July
8, 2005, the Company entered into a three-year, $75.0 million senior secured
revolving credit facility from Wachovia Bank, National Association, as
administrative agent under the credit facility, and Citicorp North America,
Inc.
and Bank of America, N.A., as co-syndication agents under the credit facility
(the “Former Facility”). The Company amended and restated the Former Facility to
expand it into a $200.0 million unsecured credit facility on February 28, 2007
(the “New Facility”).
The
New
Facility has a term of 48 months. The Company may extend the maturity date
of
the New Facility for an additional year upon the payment of applicable fees
and
the satisfaction of certain other customary conditions. The Company also has
the
right to increase the amount of the New Facility to $500.0 million with the
lenders’ approval.
Interest
is paid on the periodic advances under the New Facility at varying rates, based
upon either LIBOR or the alternate base rate, plus an agreed upon additional
margin amount. The interest rate depends upon our level of outstanding
indebtedness in relation to the value of our assets from time to time, as
follows:
|
|
Leverage
Ratio
|
|
|
|
60% or greater
|
|
55% to 60%
|
|
50%
to 55%
|
|
Less
than 50%
|
|
Alternate
base rate margin
|
|
|
0.65
|
%
|
|
0.45
|
%
|
|
0.25
|
%
|
|
0.00
|
%
|
LIBOR
margin
|
|
|
1.55
|
%
|
|
1.45
|
%
|
|
1.25
|
%
|
|
0.95
|
%
|
Our
New
Facility contains various corporate financial covenants. A summary of the most
restrictive covenants is as follows:
|
|
|
|
Value
at
|
|
|
|
Covenant
|
|
June
15, 2007
|
|
|
|
|
|
|
|
Maximum
leverage ratio
|
|
|
65
|
%
|
|
36.9
|
%
|
Minimum
fixed charge coverage ratio
|
|
|
1.6
|
x |
|
3.85
|
x |
Minimum
tangible net worth
|
|
$
|
738.4
million
|
|
$
|
1.2
billion
|
|
Unhedged
floating rate debt as a percentage of total indebtedness
|
|
|
35
|
%
|
|
3.1
|
%
|
Our
New
Facility requires that the Company maintain a specific pool of unencumbered
borrowing base properties. The unencumbered borrowing base assets are subject
to
the following limitations and covenants:
· |
A
minimum of four properties with an unencumbered borrowing base value,
as
defined, of not less than $150
million.
|
· |
No
single borrowing base asset shall contribute more than 40% of the
adjusted
net operating income, as defined, of the unencumbered borrowing
base.
|
· |
Not
more than 40% of the adjusted net operating income, as defined, of
the
unencumbered borrowing base shall be located in one
MSA.
|
· |
The
minimum implied debt service ratio of the unencumbered borrowing
base
assets shall be greater than 1.50x.
|
· |
Total
unsecured indebtedness shall not exceed 65% of the unencumbered borrowing
base asset value, as defined.
|
In
addition to the interest payable on amounts outstanding under the New Facility,
the Company is required to pay an amount equal to 0.20% of the unused portion
of
the New Facility if the unused portion of the New Facility is greater than
50%
and 0.125% if the unused portion of the new Facility is less than 50%. The
Company incurred interest and unused credit facility fees of $1.0 million for
the period from January 1, 2007 to June 15, 2007 on the credit facilities.
As of
June 15, 2007, the Company had $26.5 million outstanding on the New Facility
with a capacity to borrow an additional $173.5 million. On June 21, 2007, the
Company drew an additional $11.5 million under the New Facility. On July 23,
2007, the Company repaid $3.0 million on the New Facility. As of June 15, 2007,
the Company was in compliance with all financial covenants of the New
Facility.
Sources
and Uses of Cash
Our
principal sources of cash are revenues from operations, borrowing under mortgage
financings, draws on our credit facility and the proceeds from our equity
offerings. Our principal uses of cash are debt service, asset acquisitions,
capital expenditures, operating costs, corporate expenses and
dividends.
Cash
Provided by Operating Activities. Our
cash provided by operating activities was $53.4 million for the period from
January 1, 2007 to June 15, 2007, which is the result of our $27.3 million
net
income and $1.7 million of cash received from yield support, adjusted for the
impact of several non-cash charges, including $33.7 million of
depreciation, $3.6 million of non-cash straight line ground rent,
$0.3 million of amortization of deferred financing costs, and $2.1 million
of stock compensation, offset by $0.9 million of amortization of debt premium
and unfavorable agreements, and unfavorable working capital changes of
$14.2 million. Our cash provided by operating activities was
$34.4 million for the period from January 1, 2006 to June 16, 2006, which
is the result of our $18.3 million net income, adjusted for the impact of
several non-cash charges, including $21.1 million of depreciation, $3.4
million of non-cash straight line ground rent, $0.5 million of amortization
of
deferred financing costs and loan repayment losses, $1.2 million of stock
compensation, $1.6 million of non-cash yield support, offset by an unfavorable
working capital changes of $7.9 million.
Cash
Used In Investing Activities. Our
cash used in investing activities was $354.4 million and
$167.9 million for the periods from January 1, 2007 to June 15, 2007 and
January 1, 2006 to June 16, 2006, respectively. During the period from January
1, 2007 to June 15, 2007, we utilized $331.3 million for the acquisition of
the Westin Boston Waterfront Hotel and incurred capital expenditures at our
other hotels of $22.5 million. During the period from January 1, 2006 to
June 16, 2006, we utilized $145.6 million of cash for the acquisitions of the
Chicago Marriott Downtown Magnificent Mile and Westin Atlanta North at Perimeter
and incurred capital expenditures at our other hotels of $26.0
million.
Cash
Provided by Financing Activities. Our
cash provided by financing activities was $304.6 million and
$233.0 million for the period from January 1, 2007 to June 15, 2007 and
January 1, 2006 to June 16, 2006, respectively. The cash provided by financing
activities for the period from January 1, 2007 to June 15, 2007, primarily
consists of $317.6 million of net proceeds from sales of our common stock and
$61.5 million in draws under our credit facilities. The cash provided by
financing activities for the period from January 1, 2007 to June 15, 2007 was
offset by the $35.0 million in repayments of the credit facilities,
$1.7 million of scheduled debt principal payments, $1.1 million payment of
financing costs, and $36.7 million of dividend payments. The cash provided
by financing activities for the period from January 1, 2006 to June 16, 2006,
primarily consists of $79.5
million of proceeds from a short-term loan in conjunction with the acquisition
of the Chicago Marriott Downtown Magnificent Mile, $271.0 million of proceeds
from the mortgage debt of the Chicago Marriott ($220.0 million) and the
Courtyard Manhattan/Fifth Avenue ($51.0 million), $238.2 million of net proceeds
from our secondary offering of our common stock, and $24.0 million in draws
under our senior secured credit facility. The cash provided by financing
activities for the period from January 1, 2006 to June 16, 2006 was offset
by
the $325.5 repayment of debt, including the $220.0 variable-rate mortgage
assumed in the acquisition of the Chicago Marriott, the $23.0 million
variable-rate mortgage debt on the Courtyard Manhattan/Fifth Avenue, and the
$79.5 million short-term loan incurred in conjunction with the acquisition
of
the Chicago Marriott, a $33.0 million repayment of our senior secured
credit facility, $1.6 million of scheduled debt principal payments, $1.3
million payment of financing costs, and $18.3 million of dividend
payments.
The
following table summarizes our significant financing activities since the
beginning of 2007:
Transaction
Date
|
|
Description
of Transaction
|
|
Amount
|
January 3,
2007
|
|
Draw
under Former Facility
|
|
$ |
5.0
million
|
January 4,
2007
|
|
Payment
of fourth quarter dividends
|
|
|
(13.8
million)
|
January
9, 2007
|
|
Draw
under Former Facility
|
|
|
15.0
million
|
January
23, 2007
|
|
Proceeds
from follow-on offering
|
|
|
317.9
million
|
February
28, 2007
|
|
Repayment
of Former Facility
|
|
|
(20.0
million)
|
February
28, 2007
|
|
Draw
under New Facility
|
|
|
21.5
million
|
March
29, 2007
|
|
Draw
under New Facility
|
|
|
20.0
million
|
April
2, 2007
|
|
Payment
of first quarter dividends
|
|
|
(22.9
million)
|
April
30, 2007
|
|
Repayment
of New Facility
|
|
|
(12.0
million)
|
May
30, 2007
|
|
Repayment
of New Facility
|
|
|
(3.0
million)
|
June
21, 2007
|
|
Draw
under New Facility
|
|
|
11.5
million
|
June
22, 2007
|
|
Payment
of second quarter dividends
|
|
|
(22.8
million)
|
July
23, 2007
|
|
Repayment
of New Facility
|
|
|
(3.0
million)
|
Dividend
Policy
Generally,
we intend to continue to distribute to our stockholders each year on a regular
quarterly basis sufficient amounts of our REIT taxable income so as to avoid
paying corporate income tax and excise tax on our earnings (other than the
earnings of our TRS and TRS lessees, which are all subject to tax at regular
corporate rates) and to qualify for the tax benefits afforded to REITs under
the
Internal Revenue Code of 1986, as amended (the “Code”). In order to qualify as a
REIT under the Code, we generally must make distributions to our stockholders
each year in an amount equal to at least:
|
·
|
90%
of our REIT taxable income determined without regard to the dividends
paid
deduction, plus
|
|
·
|
90%
of the excess of our net income from foreclosure property over the
tax
imposed on such income by the Code, minus
|
|
·
|
any
excess non-cash income.
|
During
the first fiscal quarter of 2007, the Company’s board of directors declared a
cash dividend of $0.24 per share of common stock. The dividend was paid on
April
2, 2007 to all stockholders of record as of March 23, 2007. During the second
fiscal quarter of 2007, the Company’s board of directors declared a cash
dividend of $0.24 per share of common stock. The dividend was paid on June
22,
2007 to all stockholders of record as of June 15, 2007.
Capital
Expenditures
The
management agreements for each of our hotels provide for the establishment
of
separate property improvement funds to cover, among other things, the cost
of
replacing and repairing furniture and fixtures at the hotel. Contributions
to
the property improvement fund are calculated as a percentage of hotel sales.
In
addition, we may be required to pay for the cost of certain additional
improvements that are not permitted to be funded from the property improvement
fund under the applicable management agreement. As of June 15, 2007, the Company
had set aside $28.6 million for capital projects in property improvement
funds ($25.7 million) and lender held restricted cash ($2.9 million).
Funds held in property improvement funds for one hotel are typically not
permitted to be applied to any other property.
The
Company has and continues to make significant capital investments in the
Company’s hotels. In 2007, the Company expects to incur approximately $70 to $80
million of capital improvements at the Company’s hotels. The Company incurred
$13.2 million of capital projects in the fiscal quarter ended June 15, 2007.
The
most significant projects are as follows:
· |
Chicago
Marriott Downtown:
The Company is currently in the planning stages of a $35 million
renovation of the hotel. The renovation includes a complete redo
of all
the meeting and ballrooms, adding 17,000 square feet of new meeting
space,
reconcepting and relocating the restaurant, expanding the lobby bar
and
creating a Marriott “great room” in the lobby. The work will begin in the
second half of 2007 and be completed in the first half of 2008. The
estimated disruption, mainly associated with the ballroom renovations,
will occur primarily in the first quarter of
2008.
|
· |
Westin
Boston Waterfront:
The Company is currently planning the construction of approximately
$15
million of tenant improvements to the unfinished shell space attached
to
the hotel. The improvements include the creation of over 37,000 square
feet to meeting/exhibit space as well as 20,000 square feet for restaurant
outlets. The project will be completed in the first quarter of
2008.
|
· |
Oak
Brook Hills Marriott Resort:
The Company completed the significant renovation of the hotel. The
renovation included the guestrooms and bathrooms, the main ballroom
and
meeting rooms and the lobby.
|
· |
Los
Angeles Airport Marriott:
The Company renovated 19 suites during the second quarter of 2007
and
plans to renovate certain breakout meeting rooms during the fourth
quarter
of 2007.
|
· |
Griffin
Gate Marriott Resort:
The Company added a spa, repositioned and reconcepted the hotel
restaurants as well as added meeting space to the hotel. These projects
were completed during the second quarter of
2007.
|
· |
Westin
Atlanta North:
The Company plans to renovate the guestrooms during the third quarter
of
2007.
|
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Non-GAAP
Financial Measures
We
use the following two non-GAAP financial measures that we believe are useful
to
investors as key measures of our operating performance: (1) EBITDA and
(2) FFO. These measures should not be considered in isolation or as a
substitute for measures of performance in accordance with GAAP.
EBITDA
represents net income excluding: (1) interest expense; (2) provision
for income taxes, including income taxes applicable to sale of assets; and
(3) depreciation and amortization. We believe EBITDA is useful to an
investor in evaluating our operating performance because it helps investors
evaluate and compare the results of our operations from period to period by
removing the impact of our capital structure (primarily interest expense) and
our asset base (primarily depreciation and amortization) from our operating
results. In addition, covenants included in our indebtedness use EBITDA as
a
measure of financial compliance. We also use EBITDA as one measure in
determining the value of hotel acquisitions and dispositions.
|
|
Fiscal
Quarter Ended
June
15, 2007
|
|
Fiscal
Quarter Ended
June
16, 2006
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
|
|
(in
thousands)
|
|
Net
income
|
|
$
|
20,513
|
|
$
|
13,897
|
|
$
|
27,303
|
|
$
|
18,263
|
|
Interest
expense
|
|
|
11,884
|
|
|
9,324
|
|
|
23,379
|
|
|
15,132
|
|
Income
tax expense
|
|
|
3,095
|
|
|
1,829
|
|
|
1,440
|
|
|
1,799
|
|
Real
estate related depreciation and amortization
|
|
|
17,643
|
|
|
12,078
|
|
|
33,704
|
|
|
21,125
|
|
EBITDA
|
|
$
|
53,135
|
|
$
|
37,128
|
|
$
|
85,826
|
|
$
|
56,319
|
|
|
|
Fiscal
Quarter Ended
June
15, 2007
|
|
Fiscal
Quarter Ended
June
16, 2006
|
|
Period
from January 1, 2007 to June 15, 2007
|
|
Period
from January 1, 2006 to June 16, 2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,513
|
|
$
|
13,897
|
|
$
|
27,303
|
|
$
|
18,263
|
|
Real
estate related depreciation and amortization
|
|
|
17,643
|
|
|
12,078
|
|
|
33,704
|
|
|
21,125
|
|
FFO
|
|
$
|
38,156
|
|
$
|
25,975
|
|
$
|
61,007
|
|
$
|
39,388
|
|
Critical
Accounting Policies
Our
consolidated financial statements include the accounts of DiamondRock
Hospitality Company and all consolidated subsidiaries. The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect
the
reported amount of assets and liabilities at the date of our financial
statements and the reported amounts of revenues and expenses during the
reporting period. While we do not believe the reported amounts would be
materially different, application of these policies involves the exercise of
judgment and the use of assumptions as to future uncertainties and, as a result,
actual results could differ materially from these estimates. We evaluate our
estimates and judgments, including those related to the impairment of long-lived
assets, on an ongoing basis. We base our estimates on experience and on various
other assumptions that are believed to be reasonable under the circumstances.
All of our significant accounting policies are disclosed in the notes to our
consolidated financial statements. The following represent certain critical
accounting policies that require us to exercise our business judgment or make
significant estimates:
Investment
in Hotels.
Acquired hotels, land improvements, building and furniture, fixtures and
equipment and identifiable intangible assets are recorded at fair value in
accordance with Statement of Financial Accounting Standards No. 141,
Business
Combinations.
Additions to property and equipment, including current buildings, improvements,
furniture, fixtures and equipment are recorded at cost. Property and equipment
are depreciated using the straight-line method over an estimated useful life
of
15 to 40 years for buildings and land improvements and one to ten years for
furniture and equipment. Identifiable intangible assets are typically related
to
contracts, including ground lease agreements and hotel management agreements,
which are recorded at fair value. Above-market and below-market contract values
are based on the present value of the difference between contractual amounts
to
be paid pursuant to the contracts acquired and our estimate of the fair market
contract rates for corresponding contracts. Contracts acquired that are at
market do not have significant value. We typically enter into a new hotel
management agreement based on market terms at the time of acquisition.
Intangible assets are amortized using the straight-line method over the
remaining non-cancelable term of the related agreements. In making estimates
of
fair values for purposes of allocating purchase price, we may utilize a number
of sources that may be obtained in connection with the acquisition or financing
of a property and other market data. Management also considers information
obtained about each property as a result of its pre-acquisition due diligence
in
estimating the fair value of the tangible and intangible assets acquired.
We
review
our investments in hotels for impairment whenever events or changes in
circumstances indicate that the carrying value of the investments in hotels
may
not be recoverable. Events or circumstances that may cause us to perform a
review include, but are not limited to, adverse changes in the demand for
lodging at our properties due to declining national or local economic conditions
and/or new hotel construction in markets where our hotels are located. When
such
conditions exist, management performs an analysis to determine if the estimated
undiscounted future cash flows from operations and the proceeds from the
ultimate disposition of an investment in a hotel exceed the hotel’s carrying
value. If the estimated undiscounted future cash flows are less than the
carrying amount of the asset, an adjustment to reduce the carrying value to
the
estimated fair market value is recorded and an impairment loss recognized.
Revenue
Recognition.
Hotel revenues, including room, golf, food and beverage, and other hotel
revenues, are recognized as the related services are provided.
Stock-based
Compensation.
The Company accounts for stock-based employee compensation using the fair
value based method of accounting under Statement of Financial Accounting
Standards No. 123 (revised 2004) ("SFAS 123R"), Share-Based
Payment.
The
Company records the cost of awards with service conditions based on the
grant-date fair value of the award. That cost is recognized over the period
during which an employee is required to provide service in exchange for the
award. No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. No awards with
performance-based or market-based conditions have been issued.
Accounting
for Key Money.
Marriott has contributed to us certain amounts, which we refer to as “key
money”, in exchange for the right to manage certain of our hotels. We defer key
money received from a hotel manager in conjunction with entering into a
long-term hotel management agreement and amortize the amount received against
management fees over the term of the management agreement.
Accounting
for Yield Support. Marriott
has provided us with operating cash flow guarantees for certain hotels and
will
fund shortfalls of actual hotel operating income, which is net of management
fees, compared to a negotiated target net operating income. We refer to these
guarantees as “yield support”. Yield support received is recognized over the
period earned if the yield support is not refundable and there is reasonable
uncertainty of receipt at inception of the management agreement. Yield support
is recorded as an offset to base management fees.
Inflation
Operators
of hotels, in general, possess the ability to adjust room rates daily to reflect
the effects of inflation. However, competitive pressures may limit the ability
of our management companies to raise room rates.
Seasonality
The
operations of hotels historically have been seasonal depending on location,
and
accordingly, we expect some seasonality in our business. Historically, we have
experienced approximately two-thirds of our annual income in the second and
fourth quarters.
New
Accounting Pronouncements
Statement
of Financial
Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
159”), provides companies with an option to report selected financial assets and
liabilities at fair value. SFAS 159’s objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. We will adopt the
provisions of SFAS 159 effective January 1, 2008. We do not expect SFAS 159
to
have a material impact on our results of operations, financial position or
cash
flows.
Item
3. Qualitative Disclosure about Market Risk
Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. In pursuing our business strategies, the
primary market risk to which we are currently exposed, and which we expect
to be
exposed in the future, is interest rate risk. The face amount of our outstanding
debt at June 15, 2007 was approximately $865.9 million, of which $26.5
million or 3.1% was variable rate debt. If market rates of interest on our
variable rate debt were to increase by 1.0%, or approximately 100 basis points,
the increase in interest expense on our variable rate debt would decrease future
earnings and cash flows by approximately $0.3 million annually. On the other
hand, if market rates of interest on our variable rate were to decrease by
one
percentage point, or approximately 100 basis points, the decrease in interest
expense on our variable rate debt would increase future earnings and cash flow
by approximately $0.3 million annually. If market rates of interest were to
increase by 1.0%, or approximately 100 basis points, the decrease in the fair
value of our fixed-rate debt would be $49.1 million. On the other hand, if
market rates of interest were to decrease by one percentage point, or
approximately 100 basis points, the increase in the fair value of our fixed-rate
debt would be $49.1 million. As of June 15, 2007, the fair value of the
$865.9 million of debt was approximately $872.6 million.
Item
4. Controls and Procedures
The
Company’s management has evaluated, under the supervision and with the
participation of the Company’s Chief Executive Officer and Chief Financial
Officer, the effectiveness of the disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”)), as required by paragraph (b) of Rules 13a-15 and
15d-15 under the Exchange Act, and has concluded that as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective to give reasonable assurances that information we disclose in
reports filed with the Securities and Exchange Commission is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.
There
was
no change in the Company’s internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Rules 13a-15
and
15d-15 under the Exchange Act during the Company’s most recent fiscal quarter
that materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
We
are
not involved in any material litigation nor, to our knowledge, is any material
litigation threatened against us other than routine litigation arising out
of
the ordinary course of business or which is expected to be covered by insurance
and none of which is expected to have a material impact on our business,
financial condition or results of operations.
There
have been no material changes in the risk factors described in Item 1A of
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Not
applicable.
|
The
Company held its Annual Meeting of Stockholders on April 26, 2007.
The
proposals in front of our stockholders and the results of voting
on such
proposals were as noted below.
|
(c)
|
Election
of Directors: the following persons were elected as directors for
a
one-year term expiring at the Annual Meeting to be held in
2008.
|
|
|
VOTES FOR
|
|
VOTES WITHHELD
|
|
William
W. McCarten
|
|
|
83,273,126
|
|
|
658,338
|
|
John
L. Williams
|
|
|
84,767,723
|
|
|
1,163,741
|
|
Daniel
Altobello
|
|
|
81,423,594
|
|
|
4,507,870
|
|
W.
Robert Grafton
|
|
|
85,163,966
|
|
|
767,498
|
|
Maureen
L. McAvey
|
|
|
85,164,565
|
|
|
766,898
|
|
Gilbert
T. Ray
|
|
|
84,636,237
|
|
|
1,295,227
|
|
|
|
Amendments
to the 2004 Stock Option and Incentive Plan were approved. The voting
results were as follows:
|
VOTES FOR
|
|
VOTES AGAINST
|
|
VOTES ABSTAINED
|
|
BROKER
NON-VOTES
|
73,745,527
|
|
7,119,052
|
|
13,754
|
|
5,053,131
|
|
(d)
|
Ratification
of Independent Auditors: the selection of KPMG LLP as our independent
auditors for fiscal year ending December 31, 2007 was ratified. The
voting
results were as follows:
|
VOTES FOR
|
|
VOTES AGAINST
|
|
VOTES ABSTAINED
|
85,202,856
|
|
724,416
|
|
4,191
|
Item
5. Other
Information
None.
Item
6. Exhibits
(a) Exhibits
The
following exhibits are filed as part of this Form 10-Q:
Exhibit
|
|
|
|
3.1.1
|
Articles
of Amendment and Restatement of the Articles of Incorporation of
DiamondRock Hospitality Company (incorporated
by reference to the Registrant’s Registration Statement on Form S-11 filed
with the Securities and Exchange Commission (File no.
333-123065))
|
|
|
3.1.2
|
Amendment
to the Articles of Amendment and Restatement of the Articles of
Incorporation of DiamondRock Hospitality Company (incorporated
by reference to the Registrant’s Current Report on Form 8-K dated January
9, 2007)
|
|
|
3.2.1
|
Second
Amended and Restated Bylaws of DiamondRock Hospitality Company
(incorporated
by reference to the Registrant’s Registration Statement on Form S-11 filed
with the Securities and Exchange Commission (File no.
333-123065))
|
|
|
3.2.2
|
Amendment
No. 1 to Second Amended and Restated Bylaws of DiamondRock Hospitality
Company (incorporated
by reference to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 7, 2006)
|
|
|
4.1
|
Form
of Certificate for Common Stock for DiamondRock Hospitality Company
(incorporated
by reference to the Registrant’s Registration Statement on Form S-11 filed
with the Securities and Exchange Commission (File no.
333-123065))
|
|
|
31.1
|
Certification
of Chief Executive Officer Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
|
31.2
|
Certification
of Chief Financial Officer Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Required by
Rule
13a-14(b) of the Securities Exchange Act of 1934, as
amended.
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
|
|
July
25, 2007
|
|
|
DiamondRock
Hospitality Company
|
|
|
|
|
|
|
|
|
/s/
Sean M. Mahoney
|
|
|
/s/
Michael D. Schecter
|
Sean
M. Mahoney
Senior
Vice President,
Chief
Accounting Officer
and
Corporate Controller
|
|
|
Michael
D. Schecter
Executive
Vice President,
General
Counsel and Corporate Secretary
|