UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-14331
Interstate Hotels &
Resorts, Inc.
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Delaware
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52-2101815
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(State of
Incorporation)
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(IRS Employer Identification
No.)
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4501 North Fairfax Drive, Ste 500
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22203
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Arlington, VA
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(Zip Code)
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(Address of Principal Executive
Offices)
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www.ihrco.com
This
Form 10-Q
can be accessed at no charge through above website.
(703) 387-3100
(Registrants 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated
filer
o
(Do not check if a smaller reporting company)
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Smaller reporting
company
o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The number of shares of Common Stock, par value $0.01 per share,
outstanding at May 1, 2008 was 31,820,557.
INTERSTATE
HOTELS & RESORTS, INC.
INDEX
1
PART I.
FINANCIAL INFORMATION
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Item 1:
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Financial
Statements
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March 31,
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December 31,
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2008
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2007
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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10,246
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$
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9,775
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Restricted cash
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7,126
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7,090
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Accounts receivable, net of allowance for doubtful accounts of
$1,194 and $516, respectively
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25,052
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27,989
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Due from related parties, net of allowance for doubtful accounts
of $1,465 and $1,465, respectively
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2,516
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1,822
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Prepaid expenses and other current assets
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5,376
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5,101
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Deferred income taxes
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8,060
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3,796
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Total current assets
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58,376
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55,573
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Marketable securities
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1,690
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1,905
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Property and equipment, net
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281,451
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278,098
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Investments in unconsolidated entities
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41,078
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27,631
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Notes receivable, net of allowance of $2,551 and $2,551,
respectively
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5,492
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4,976
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Deferred income taxes
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15,240
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18,247
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Goodwill
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66,599
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66,599
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Intangible assets, net
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16,149
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17,849
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Total assets
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$
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486,075
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$
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470,878
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LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
EQUITY
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Current liabilities:
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Accounts payable
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$
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3,431
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$
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2,597
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Accrued expenses
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58,076
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64,952
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Current portion of long-term debt
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863
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863
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Total current liabilities
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62,370
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68,412
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Deferred compensation
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1,750
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1,831
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Long-term debt
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232,512
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210,800
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Total liabilities
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296,632
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281,043
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Minority interest (redemption value of $263 at March 31,
2008)
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326
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329
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued
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Common stock, $.01 par value; 250,000,000 shares
authorized; 31,771,984 and 31,718,817 shares issued at
March 31, 2008 and December 31, 2007, respectively
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318
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317
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Treasury stock
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(69
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)
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(69
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)
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Paid-in capital
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196,065
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195,729
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Accumulated other comprehensive loss
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(527
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)
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(87
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Accumulated deficit
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(6,670
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)
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(6,384
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Total stockholders equity
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189,117
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189,506
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Total liabilities, minority interest and stockholders
equity
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$
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486,075
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$
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470,878
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The accompanying notes are an integral part of the
consolidated financial statements.
2
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Three Months Ended March 31,
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2008
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2007
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(As restated)
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Revenue:
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Lodging
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$
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23,918
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$
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13,076
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Management fees
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8,523
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10,622
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Management fees-related parties
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1,386
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847
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Termination fees
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3,010
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1,575
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Other
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2,099
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2,269
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38,936
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28,389
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Other revenue from managed properties
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151,014
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176,370
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Total revenue
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189,950
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204,759
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Expenses:
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Lodging
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17,025
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9,372
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Administrative and general
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15,829
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13,315
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Depreciation and amortization
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4,274
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3,225
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Asset impairments and write-offs
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1,112
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2,399
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38,240
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28,311
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Other expenses from managed properties
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151,014
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176,370
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Total operating expenses
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189,254
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204,681
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OPERATING INCOME
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696
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78
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Interest income
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319
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436
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Interest expense
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(3,815
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)
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(2,733
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Equity in earnings from unconsolidated entities
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2,361
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401
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LOSS BEFORE INCOME TAXES AND MINORITY INTEREST
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(439
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)
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(1,818
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)
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Income tax benefit
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151
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781
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Minority interest income (expense)
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2
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(46
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)
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LOSS FROM CONTINUING OPERATIONS
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(286
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)
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(1,083
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Income from discontinued operations, net of tax
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17,001
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NET (LOSS) INCOME
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$
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(286
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)
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$
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15,918
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Other comprehensive (loss) income, net of tax:
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Foreign currency translation gain (loss)
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11
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(5
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)
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Unrealized (loss) gain on cash flow hedge instruments
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(451
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)
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Unrealized gain on investments
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1
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17
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COMPREHENSIVE (LOSS) INCOME
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$
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(725
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)
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$
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15,930
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BASIC (LOSS) EARNINGS PER SHARE:
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Continuing operations
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$
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(0.01
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)
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$
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(0.04
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)
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Discontinued operations
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0.54
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Basic (loss) earnings per share
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$
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(0.01
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)
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$
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0.50
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DILUTED (LOSS) EARNINGS PER SHARE:
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Continuing operations
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$
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(0.01
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)
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$
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(0.04
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)
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Discontinued operations
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0.54
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Diluted (loss) earnings per share
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$
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(0.01
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)
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$
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0.50
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The accompanying notes are an integral part of the
consolidated financial statements.
3
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Three Months Ended March 31,
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2008
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2007
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(As restated)
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OPERATING ACTIVITIES:
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Net income (loss)
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$
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(286
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)
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$
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15,918
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Adjustments to reconcile net income (loss) to cash provided by
operating activities:
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Depreciation and amortization
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4,274
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3,225
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Amortization of deferred financing fees
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306
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743
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Amortization of key money management contracts
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189
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154
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Stock compensation expense
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372
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259
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Discount on note receivable
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148
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Bad debt expense
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722
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(32
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)
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Asset impairments and write-offs
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1,112
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2,399
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Equity in earnings from unconsolidated entities
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(2,361
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)
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(401
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)
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Operating distributions from unconsolidated entities
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145
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63
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Minority interest
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(2
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)
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46
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Deferred income taxes
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(1,257
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)
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(1,350
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)
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Excess tax benefits from share-based payment arrangements
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23
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(56
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)
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Discontinued operations:
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Gain loss on sale
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(17,609
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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1,633
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(1,859
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)
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Due from related parties, net
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(694
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)
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311
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Prepaid expenses and other current assets
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(275
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)
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(778
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)
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Accounts payable and accrued expenses
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(5,746
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)
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(9,150
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)
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Changes in assets and liabilities held for sale
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93
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Other changes in asset and liability accounts
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|
406
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10
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Cash used in operating activities
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(1,291
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)
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(8,014
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)
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INVESTING ACTIVITIES:
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Proceeds from the sale of discontinued operations
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34,444
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Change in restricted cash
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(36
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)
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(1,906
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)
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Acquisition of hotel
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(52,180
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)
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Purchases related to discontinued operations
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(68
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)
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Purchases of property and equipment
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(7,102
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)
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|
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(1,492
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)
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Additions to intangible assets
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|
|
(498
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)
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|
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(909
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)
|
Contributions to unconsolidated entities
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(13,517
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)
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|
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(815
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)
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Distributions from unconsolidated entities
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1,830
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|
|
|
300
|
|
Changes in notes receivable
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|
|
(594
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)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
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Cash used in investing activities
|
|
|
(19,917
|
)
|
|
|
(22,585
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)
|
|
|
|
|
|
|
|
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|
FINANCING ACTIVITIES:
|
|
|
|
|
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|
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|
Proceeds from borrowings
|
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|
22,000
|
|
|
|
97,825
|
|
Repayment of borrowings
|
|
|
(288
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)
|
|
|
(40,526
|
)
|
Proceeds from issuance of common stock
|
|
|
1
|
|
|
|
1
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(23
|
)
|
|
|
56
|
|
Financing fees paid
|
|
|
|
|
|
|
(2,164
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
21,690
|
|
|
|
55,192
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(11
|
)
|
|
|
(5
|
)
|
Net increase in cash and cash equivalents
|
|
|
471
|
|
|
|
24,588
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
9,775
|
|
|
|
25,308
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
10,246
|
|
|
$
|
49,896
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest and income taxes:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,499
|
|
|
$
|
1,751
|
|
Income taxes
|
|
|
143
|
|
|
|
1,250
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
4
We are a leading hotel real estate investor and the
nations largest independent operator, as measured by
number of rooms under management and gross annual revenues of
the managed portfolio. We have two reportable operating
segments: hotel ownership (through whole-ownership and joint
ventures) and hotel management. A third reportable operating
segment, corporate housing, was disposed of on January 26,
2007 with the sale of BridgeStreet Corporate Housing Worldwide,
Inc. and its affiliated subsidiaries (BridgeStreet).
The operations of BridgeStreet are presented as discontinued
operations in our consolidated statement of operations and cash
flows for all periods presented. Each segment is reviewed and
evaluated by the companys senior management. For financial
information about each segment, see Note 9, Segment
Information.
Our hotel ownership segment includes our wholly-owned hotels and
our minority interest investments in hotel properties through
unconsolidated entities. Hotel ownership allows us to
participate in operations and potential asset appreciation of
the hotel properties. As of March 31, 2008, we owned seven
hotels with 2,045 rooms and held non-controlling equity
interests in 18 joint ventures, which owned or held ownership
interests in 47 of our managed properties. We managed all of the
properties within our hotel ownership segment.
We manage a portfolio of hospitality properties and provide
related services in the hotel, resort and conference center
markets. Our portfolio is diversified by location/market,
franchise and brand affiliations, and ownership group(s). The
related services provided include insurance and risk management,
purchasing and capital project management, information
technology and telecommunications, and centralized accounting.
As of March 31, 2008, we and our affiliates managed 217
hotel properties with 45,252 rooms and six ancillary service
centers (which consist of a convention center, a spa facility,
two restaurants and two laundry centers), in 36 states, the
District of Columbia, Russia, Mexico, Canada, Belgium and
Ireland.
We are the sole general partner of our operating partnership
subsidiary. Certain independent third parties and we are limited
partners of the partnership. The interests of those third
parties are reflected as minority interests on our consolidated
balance sheet. The partnership agreement gives the general
partner full control over the business and affairs of the
partnership. We own more than 99 percent of the subsidiary
operating partnership.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
General
We have prepared these unaudited consolidated interim financial
statements according to the rules and regulations of the
Securities and Exchange Commission. Accordingly, we have omitted
certain information and footnote disclosures that are normally
included in financial statements prepared in accordance with
U.S. generally accepted accounting principles
(GAAP). These interim financial statements should be
read in conjunction with the financial statements, accompanying
notes and other information included in our Annual Report on
Form 10-K,
for the year ended December 31, 2007.
In our opinion, the accompanying unaudited consolidated interim
financial statements reflect all normal and recurring
adjustments necessary for a fair presentation of the financial
condition, results of operations and cash flows for the periods
presented. The preparation of financial statements in accordance
with GAAP requires us to make estimates and assumptions. Such
estimates and assumptions affect reported asset and liability
amounts, as well as the disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Our actual results could differ from those estimates.
The results of operations for the interim periods are not
necessarily indicative of our results for the entire year. These
consolidated financial statements include our accounts and the
accounts of all of our majority owned subsidiaries. We eliminate
all intercompany balances and transactions.
The condensed consolidated balance sheet and statement of
operations for the three months ended March 31, 2007 are
presented as restated in this Quarterly Report on
Form 10-Q.
Subsequent to the issuance of our interim condensed consolidated
financial statements for the quarter ended March 31, 2007,
our Audit Committee
5
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined, after discussions with management, that the
previously-issued financial statements as of, and for the
quarters ended, March 31, 2007, June 30, 2007 and
September 30, 2007 should no longer be relied upon due to
an error in the calculation of intangible asset impairment
charges that resulted from the termination of certain hotel
management contracts. For additional information on the
restatement and the impact of the restatement on the condensed
consolidated financial data, refer to Note 19, Quarterly
Financial Data (Unaudited), of our consolidated financial
statements included in our Annual Report on
Form 10-K,
for the year ended December 31, 2007.
The following table presents the effects of correcting the
errors described herein on our previously reported consolidated
balance sheet and statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
(As Reported)
|
|
|
Adjustments
|
|
|
(Restated)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
49,896
|
|
|
|
|
|
|
$
|
49,896
|
|
Escrow and restricted funds
|
|
|
8,391
|
|
|
|
|
|
|
|
8,391
|
|
Accounts receivable, net
|
|
|
33,073
|
|
|
|
|
|
|
|
33,073
|
|
Due to related party, net
|
|
|
1,483
|
|
|
|
|
|
|
|
1,483
|
|
Prepaid expenses and other current assets
|
|
|
3,523
|
|
|
|
|
|
|
|
3,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
96,366
|
|
|
|
|
|
|
|
96,366
|
|
Marketable securities
|
|
|
1,656
|
|
|
|
|
|
|
|
1,656
|
|
Property and equipment, net
|
|
|
154,739
|
|
|
|
|
|
|
|
154,739
|
|
Investments in affiliates
|
|
|
11,998
|
|
|
|
|
|
|
|
11,998
|
|
Notes receivable, net
|
|
|
4,994
|
|
|
|
|
|
|
|
4,994
|
|
Deferred income taxes
|
|
|
12,385
|
|
|
|
1,416
|
|
|
|
13,801
|
|
Goodwill
|
|
|
73,672
|
|
|
|
|
|
|
|
73,672
|
|
Intangible assets, net
|
|
|
31,215
|
|
|
|
(2,223
|
)
|
|
|
28,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
387,025
|
|
|
|
(807
|
)
|
|
$
|
386,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS
EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,653
|
|
|
|
|
|
|
$
|
2,653
|
|
Accrued expenses
|
|
|
58,194
|
|
|
|
488
|
|
|
|
58,682
|
|
Current portion of long-term debt
|
|
|
650
|
|
|
|
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
61,497
|
|
|
|
488
|
|
|
|
61,985
|
|
Deferred compensation
|
|
|
1,717
|
|
|
|
|
|
|
|
1,717
|
|
Long-term debt
|
|
|
140,875
|
|
|
|
|
|
|
|
140,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
204,089
|
|
|
|
488
|
|
|
|
204,577
|
|
Minority interests
|
|
|
521
|
|
|
|
(7
|
)
|
|
|
514
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value
|
|
|
316
|
|
|
|
|
|
|
|
316
|
|
Treasury stock
|
|
|
(69
|
)
|
|
|
|
|
|
|
(69
|
)
|
Paid in capital
|
|
|
194,625
|
|
|
|
|
|
|
|
194,625
|
|
Accumulated other comprehensive (loss) income
|
|
|
(451
|
)
|
|
|
|
|
|
|
(451
|
)
|
Accumulated deficit
|
|
|
(12,006
|
)
|
|
|
(1,288
|
)
|
|
|
(13,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
182,415
|
|
|
|
(1,288
|
)
|
|
|
181,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests and stockholders
equity
|
|
$
|
387,025
|
|
|
|
(807
|
)
|
|
$
|
386,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
(As Reported)
|
|
|
Adjustments
|
|
|
(Restated)
|
|
|
Total revenue
|
|
|
204,759
|
|
|
|
|
|
|
|
204,759
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lodging
|
|
|
9,372
|
|
|
|
|
|
|
|
9,372
|
|
Administrative and general
|
|
|
13,315
|
|
|
|
|
|
|
|
13,315
|
|
Depreciation and amortization
|
|
|
3,293
|
|
|
|
(68
|
)
|
|
|
3,225
|
|
Asset impairments and write-offs
|
|
|
108
|
|
|
|
2,291
|
|
|
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,088
|
|
|
|
2,223
|
|
|
|
28,311
|
|
Other expenses from managed properties
|
|
|
176,370
|
|
|
|
|
|
|
|
176,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
202,458
|
|
|
|
2,223
|
|
|
|
204,681
|
|
OPERATING INCOME (LOSS)
|
|
|
2,301
|
|
|
|
(2,223
|
)
|
|
|
78
|
|
INCOME (LOSS) BEFORE MINORITY INTERESTS AND INCOME TAXES
|
|
|
405
|
|
|
|
(2,223
|
)
|
|
|
(1,818
|
)
|
Income tax (expense) benefit
|
|
|
(147
|
)
|
|
|
928
|
|
|
|
781
|
|
Minority interests (expense) benefit
|
|
|
(53
|
)
|
|
|
7
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
205
|
|
|
|
(1,288
|
)
|
|
|
(1,083
|
)
|
Income from discontinued operations, net of tax
|
|
|
17,001
|
|
|
|
|
|
|
|
17,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
17,206
|
|
|
|
(1,288
|
)
|
|
$
|
15,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.01
|
|
|
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
Discontinued Operations
|
|
$
|
0.54
|
|
|
|
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.55
|
|
|
|
(0.05
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
0.01
|
|
|
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
Discontinued Operations
|
|
$
|
0.53
|
|
|
|
0.01
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.54
|
|
|
|
(0.04
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the restatement on the consolidated statement of
cash flows was a decrease in net income of $1.3 million, a
decrease is deferred income taxes of $1.4 million, and an
increase in accrued expenses for the change in taxes payable of
$0.5 million. The effect on depreciation and amortization
and minority interest on the consolidated statement of cash
flows was immaterial. Cash used by operating activities did not
change as of March 31, 2007. The effect of the restatement
on earnings per share was a decrease of $0.05 in basic earnings
per share and a decrease of $0.04 in diluted earnings per share.
Revenue
Recognition Related to Termination Fees
Blackstone retains the right to replace a terminated management
contract with a replacement contract on a different hotel and
reduce the amount of any remaining unpaid fees. Management fees
we would earn from any new management contract provided to us
from Blackstone would reduce dollar for dollar the termination
fee balance due to us from Blackstone.
For properties that we acquired from The Blackstone Group
(Blackstone) that we managed prior to the purchase,
we were entitled to termination fees under the preexisting
management agreements for those properties. Under Emerging
Issues Task Force Issue
04-1,
Accounting for Preexisting Relationships between the
Parties to a
7
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business Combination
(EITF 04-1),
the settlement of the preexisting management agreements
(including the payment of the termination fees) requires
accounting separate from the acquisition of the properties.
Under
EITF 04-1,
the effective settlement of a management agreement with respect
to an acquired property is required to be measured at the lesser
of (x) the amount by which the agreement is favorable or
unfavorable from our perspective when compared to pricing for
current market transactions for the same or similar management
agreements and (y) the stated settlement provisions that
are unfavorable to the seller. Therefore, in connection with the
purchase of a hotel being managed by us, we will evaluate the
terms of the contract and record the lesser amount, if any, as
income from the settlement of the management contract and a
corresponding increase in the recorded purchase price.
Related
Parties
In January 2007, we were retained as manager for two properties
owned by Capstar Hotel Company, LLC (New Capstar), a
newly formed real estate investment company founded by Paul
Whetsell, our current Chairman of the Board. As of
March 31, 2008 and 2007, balances related to New Capstar
have been included within due from related parties
on our consolidated balance sheet and management
fees related parties on our consolidated
statement of operations.
Our managed properties for which we also hold a joint venture
ownership interest have also been classified and included within
due from related parties on our consolidated balance
sheet and management fees related
parties on our consolidated statement of operations. See
Note 4, Investments in Unconsolidated Entities
for further information.
Fair
Value Accounting
In September 2006, the Financial Accounting Standards Board
(FASB) issued FASB Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date (an exit price). The standard also establishes
and outlines a valuation framework and creates a fair value
hierarchy in order to increase the consistency and comparability
of fair value measurements and the related disclosures. Under
GAAP, certain assets and liabilities must be measured at fair
value, and SFAS 157 details the disclosures that are
required for items measured at fair value. The provisions of
SFAS 157 were adopted on January 1, 2008. In February
2008, the FASB staff issued Staff Position
No. 157-2
Effective Date of FASB Statement No. 157
(FSP
SFAS 157-2).
FSP
SFAS 157-2
delayed the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The
provisions of FSP
SFAS 157-2
will be effective for our fiscal year beginning January 1,
2009. The deferral will apply to certain fair value measurements
under FASB Statements 142 and 144 among other items.
We have various financial assets and liabilities that must be
measured under the new fair value standard including certain
cash equivalents, marketable securities and derivative
instruments. SFAS 157 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). The
three levels of the fair value hierarchy under SFAS 157 are:
Level 1 Inputs are unadjusted quoted prices in active
markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Inputs include quoted prices for similar
assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable
for the asset or liability (i.e., interest rates, yield curves,
etc.), and inputs that are derived principally from, or
corroborated by, observable market data by correlation or other
means (market corroborated inputs) for substantially the full
term of the asset or liability;
8
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Level 3 Inputs are used to measure fair value to the
extent that observable inputs are not available, thereby
allowing for situations in which there is little, if any, market
activity for the asset or liability at the measurement date.
Such unobservable inputs include prices or valuation techniques
that require inputs that are both significant to the fair value
measurement and that reflect our assumption(s) about the
assumption(s) that market participants would use in pricing the
asset or liability (including assumptions about risk). We
develop these inputs based on the best information available,
including our own data.
The following table sets forth our financial assets and
liabilities measured at fair value by level within the fair
value hierarchy. As required by SFAS 157, assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at March 31, 2008
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
|
|
Marketable securities
|
|
$
|
1,690
|
|
|
$
|
1,690
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
1,697
|
|
|
$
|
1,690
|
|
|
$
|
7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
752
|
|
|
$
|
|
|
|
$
|
752
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our marketable securities are valued using quoted market prices
in active markets and as such are classified within Level 1
of the fair value hierarchy. The fair value of the marketable
equity securities is calculated as the quoted market price of
the marketable equity security multiplied by the quantity of
shares held by us.
Our derivative instruments are classified within Level 2 of
the fair value hierarchy as they are valued using third-party
pricing models which contain inputs that are derived from
observable market data. Where possible, we verify the values
produced by its pricing models to market prices. Valuation
models require a variety of inputs, including contractual terms,
market prices, yield curves, credit spreads, measures of
volatility, and correlations of such inputs.
In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments
and certain other items at fair value, with the objective of
improving financial reporting by mitigating volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. The provisions of SFAS 159 were
adopted on January 1, 2008. We did not elect the Fair Value
Option for any of our financial assets or liabilities, and
therefore, the adoption of SFAS 159 had no impact on our
consolidated financial position, results of operations or cash
flows.
Recently
Issued Accounting Pronouncements
In December 2007, FASB Statement No. 160,
Non-controlling Interests in Consolidated Financial
Statements
(SFAS 160) was issued.
SFAS 160 establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary
that does not result in deconsolidation. The statement also
requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the
interests of the parents owners and the interest of the
non-controlling owners of the subsidiary. SFAS 160 is
effective for fiscal years beginning after December 15,
2008. We are currently evaluating the impact of the adoption of
this statement.
In December 2007, FASB Statement No. 141R,
Business Combinations
(SFAS 141R) was issued. SFAS 141R
revises SFAS 141,
Business Combinations
(SFAS 141), but it retains a number of
fundamental requirements of SFAS 141. SFAS 141R will
significantly change the accounting for business combinations in
a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, in-process
research and development costs, and restructuring costs. In
addition, under SFAS 141R, changes in deferred tax
9
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
asset valuation allowances and acquired income tax uncertainties
in a business combination after the measurement period will
impact income tax expense. SFAS 141R, will be applied
prospectively to business combinations for which the acquisition
dates are on or after the start of the year beginning on or
after December 15, 2008.
In March 2008, FASB Statement No. 161,
Disclosures
about Derivative Instruments and Hedging Activities
(SFAS 161) was issued. SFAS 161 amends
FASB Statement No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), and requires enhanced
disclosure regarding an entitys derivative and hedging
activities. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after
November 15, 2008. We are currently evaluating the impact
of the adoption of this statement.
We calculate our basic earnings per common share by dividing net
income/(loss) by the weighted average number of shares of common
stock outstanding. Our diluted earnings per common share assumes
the issuance of common stock for all potentially dilutive stock
equivalents outstanding. Potentially dilutive shares include
unvested restricted stock and stock options granted under our
various stock compensation plans and operating partnership units
held by minority partners. In periods in which there is a loss
from continuing operations, diluted shares outstanding will
equal basic shares outstanding to prevent anti-dilution. Basic
and diluted earnings per common share are as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
Income/
|
|
|
|
|
|
Per Share
|
|
|
Income/
|
|
|
|
|
|
Per Share
|
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
(Loss) income from continuing operations
|
|
$
|
(286
|
)
|
|
|
31,714
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1,083
|
)
|
|
|
31,546
|
|
|
$
|
(0.04
|
)
|
(Loss) income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,001
|
|
|
|
|
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net (loss) income
|
|
$
|
(286
|
)
|
|
|
31,714
|
|
|
$
|
(0.01
|
)
|
|
$
|
15,918
|
|
|
|
31,546
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
INVESTMENTS
IN UNCONSOLIDATED ENTITIES
|
Investments in unconsolidated entities consist of the following
(in thousands, except number of hotels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Equity
|
|
|
March 31,
|
|
|
December 31,
|
|
Joint Venture
|
|
Number of Hotels
|
|
|
Participation
|
|
|
2008
|
|
|
2007
|
|
|
Amitel Holdings, LLC
|
|
|
6
|
|
|
|
15.0
|
%
|
|
$
|
4,013
|
|
|
$
|
4,065
|
|
Budget Portfolio Properties, LLC
|
|
|
22
|
|
|
|
10.0
|
%
|
|
|
1,546
|
|
|
|
250
|
|
CNL/IHC Partners, L.P.
|
|
|
3
|
|
|
|
15.0
|
%
|
|
|
2,896
|
|
|
|
2,825
|
|
Cameron S-Sixteen Broadway, LLC
|
|
|
1
|
|
|
|
15.7
|
%
|
|
|
961
|
|
|
|
1,002
|
|
Cameron S-Sixteen Hospitality, LLC
|
|
|
1
|
|
|
|
10.9
|
%
|
|
|
267
|
|
|
|
399
|
|
Harte IHR Joint
Venture
(1)
|
|
|
4
|
|
|
|
20.0
|
%
|
|
|
11,494
|
|
|
|
2,356
|
|
IHR Greenbuck Hotel Venture,
LLC
(2)
|
|
|
|
|
|
|
15.0
|
%
|
|
|
2,531
|
|
|
|
2,038
|
|
IHR Invest Hospitality Holdings, LLC
|
|
|
2
|
|
|
|
15.0
|
%
|
|
|
4,186
|
|
|
|
4,372
|
|
IHR/Steadfast Hospitality Management,
LLC
(3)
|
|
|
|
|
|
|
50.0
|
%
|
|
|
740
|
|
|
|
649
|
|
Interstate Cross Keys, LLC
|
|
|
1
|
|
|
|
15.0
|
%
|
|
|
511
|
|
|
|
557
|
|
RQB Resort/Development Investors, LLC
|
|
|
1
|
|
|
|
10.0
|
%
|
|
|
1,693
|
|
|
|
1,378
|
|
Steadfast Mexico, LLC
|
|
|
3
|
|
|
|
15.0
|
%
|
|
|
6,221
|
|
|
|
6,133
|
|
Other
|
|
|
3
|
|
|
|
various
|
|
|
|
4,019
|
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
47
|
|
|
|
|
|
|
$
|
41,078
|
|
|
$
|
27,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The joint venture closed on the
purchase of four properties in February 2008. The structure of
this joint venture includes 10 legal entities which compose our
20 percent interest.
|
|
(2)
|
|
Hotel number is not listed as this
joint venture is in the process of developing hotels.
|
|
(3)
|
|
Hotel number is not listed as this
joint venture owns a management company.
|
In February 2008, we invested $11.6 million to acquire a
20 percent equity interest in a joint venture with Harte
Holdings (Harte) of Cork, Ireland. The joint venture
purchased four hotels from affiliates of Blackstone for an
aggregate price of $208.7 million. At the time of our
investment, we managed three of the properties and had
previously managed the fourth. The joint venture plans to invest
more than $30 million for comprehensive renovations of the
hotels over the 30 months following the acquisition. Our
contribution for this renovation work is expected to be
approximately $2 million. The four properties acquired by
the joint venture were the 142-room Latham Hotel in
Washington, DC, the 198-room Sheraton Frazer Great Valley
in Frazer, Pennsylvania, the 225-room Sheraton Mahwah in
Mahwah, New Jersey and the 327-room Hilton Lafayette in
Lafayette, Louisiana.
In February 2008, our joint venture with FFC Capital Corporation
(FFC), acquired a portfolio of 22 properties located
throughout the Midwest in Illinois, Iowa, Michigan, Minnesota,
Wisconsin and Texas. We invested $1.7 million representing
our 10 percent equity interest in the portfolio. Upon
closing, all 22 properties, representing 2,397 rooms, were
converted to various Wyndham Worldwide brands.
In February 2008, True North Tesoro Property Partners,
L.P
.
, a joint venture in which we hold a
15.9 percent equity interest, sold the Doral Tesoro
Hotel & Golf Club, located near Dallas, Texas. Our
portion of the joint ventures gain on sale of the hotel
was approximately $2.4 million before post-closing
adjustments and has been recorded as equity in earnings from
unconsolidated entities on our consolidated statement of
operations. In March 2008, we received $1.8 million from
the sale of proceeds. Additional distributions are anticipated
as post-closing adjustments are settled.
In February 2008, we and JHM Hotels, LLC (JHM),
formed a joint venture management company in which we hold a
50 percent ownership interest. The joint venture will seek
management opportunities throughout India and has already signed
its first management agreement in April 2008. Management of this
hotel will commence in
11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the fourth quarter of 2008. We provided to our partner, JHM,
$0.5 million in the form of a convertible note towards the
working capital of the joint venture, which is expected to
convert to an equity interest in the joint venture during 2008.
Simultaneous with the formation of this management company, we
and JHM each committed to invest $6.25 million in the
private real estate fund, Duet India Hotels (Duet
Fund), which will seek opportunities to purchase
and/or
develop hotels throughout India. As of March 31, 2008, we
had invested $1.6 million in the Duet Fund. In return for
our investment, the Duet Fund will give our joint venture the
right of first refusal for all hotels that it invests which are
not already encumbered by an existing management contract.
We had net related party accounts receivable for management fees
and reimbursable costs from the hotels owned by the joint
ventures of $2.4 million and $1.6 million as of
March 31, 2008 and December 31, 2007, respectively. We
earned related party management fees from our joint ventures of
$1.4 million and $0.8 million for the three months
ended March 31, 2008 and 2007, respectively.
The recoverability of the carrying values of our investments in
unconsolidated entities is dependent upon the operating results
of the underlying hotel assets. Future adverse changes in the
hospitality and lodging industry, market conditions or poor
operating results of the underlying assets could result in
future impairment losses or the inability to recover the
carrying value of these interests. The debt of all investees is
non-recourse to us, and we do not guarantee any of our
investees obligations. We are not the primary beneficiary
or controlling investor in any of these joint ventures. Where we
exert significant influence over the activities of the investee,
we account for our interests under the equity method.
|
|
5.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
29,712
|
|
|
$
|
26,912
|
|
Furniture and fixtures
|
|
|
30,385
|
|
|
|
28,841
|
|
Building and improvements
|
|
|
232,465
|
|
|
|
230,058
|
|
Leasehold improvements
|
|
|
5,722
|
|
|
|
5,695
|
|
Computer equipment
|
|
|
6,294
|
|
|
|
6,686
|
|
Software
|
|
|
12,411
|
|
|
|
12,336
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
316,989
|
|
|
|
310,528
|
|
Less accumulated depreciation
|
|
|
(35,538
|
)
|
|
|
(32,430
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
281,451
|
|
|
$
|
278,098
|
|
|
|
|
|
|
|
|
|
|
We acquired the Sheraton Columbia hotel in November 2007 and
recorded a preliminary purchase allocation at that time. In
early 2008, we received the property appraisal from a
third-party hospitality consulting group to finalize the
purchase allocation. We have finalized the purchase price
allocation, increasing the amount of the land allocation by
$2.8 million to $6.5 million and increasing furniture
and fixtures by $0.8 million to $2.6 million. We
reduced our previously recorded value for building and
improvements by $3.6 million to $38.9 million.
12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Management contracts
|
|
$
|
19,868
|
|
|
$
|
21,338
|
|
Franchise fees
|
|
|
1,924
|
|
|
|
1,925
|
|
Deferred financing fees
|
|
|
3,615
|
|
|
|
3,619
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
25,407
|
|
|
|
26,882
|
|
Less accumulated amortization
|
|
|
(9,258
|
)
|
|
|
(9,033
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
16,149
|
|
|
$
|
17,849
|
|
|
|
|
|
|
|
|
|
|
The majority of our management contract costs were identified as
intangible assets at the time of the merger in 2002 and through
the purchase of Sunstone Hotel Properties (Sunstone)
in 2004, as part of the purchase accounting for each
transaction. We also capitalize external direct costs, such as
legal fees, which are incurred to acquire new management
contracts.
We amortize the value of our intangible assets, all of which
have definite useful lives, over their estimated useful lives
which generally correspond with the expected terms of the
associated management, franchise, or financing agreements. In
the first three months of 2008, we recognized management
contract impairment charges of $1.1 million related to
unamortized management contract costs for four properties sold
by various owners, for which the new owner terminated the
underlying management agreement. For the first three months of
2007, we recognized management contract impairment charges of
$2.3 million related to management contract costs for four
properties sold by Blackstone and $0.1 million related to
three properties sold by various owners.
We incurred scheduled amortization expense on our remaining
management contracts and franchise fees of $0.5 million and
$1.3 million for the three months ended March 31, 2008
and 2007, respectively. We also amortized deferred financing
fees in the amount of $0.3 million and $0.7 million
for the three months ended March 31, 2008 and 2007,
respectively. During the first quarter of 2007,
$0.5 million of deferred financing fees related to our old
senior credit facility was amortized in connection with our
entrance into a new $125.0 million senior secured credit
facility (Credit Facility) and the related payoff of
our old senior credit facility and subordinated term loan. In
connection with the new facility, we recorded $2.2 million
of loan fees which will be amortized over the term of the new
facility. Amortization of deferred financing fees is included in
interest expense. See Note 8, Long-Term Debt,
for additional information related to the new senior secured
credit facility.
Upon termination of a management agreement, we write-off the
entire value of the intangible asset related to the terminated
contract as of the date of termination. We will continue to
assess the recorded value of our management contracts and their
related amortization periods as circumstances warrant.
Our goodwill is related to our hotel management segment. We
evaluate goodwill annually for impairment during the fourth
quarter; however, when circumstances warrant, we will assess the
valuation of our goodwill more frequently. During the three
months ended March 31, 2008, no significant management
contract losses or other material transactions and events
occurred that were not already considered in our analysis during
the fourth quarter of 2007. As such, we did not re-evaluate
goodwill for impairment in the first quarter of 2008.
13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Salaries and employee related benefits
|
|
$
|
22,161
|
|
|
$
|
27,837
|
|
Other
|
|
|
35,915
|
|
|
|
37,115
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,076
|
|
|
$
|
64,952
|
|
|
|
|
|
|
|
|
|
|
Other consists of legal expenses, sales and use tax
accruals, property tax accruals, owners insurance for our
managed hotels, general and administrative costs of managing our
business and various other items. No individual amounts in
Other represent more than 5 percent of current
liabilities.
Our long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Senior credit facility term loan
|
|
$
|
113,850
|
|
|
$
|
114,138
|
|
Senior credit facility revolver loan
|
|
|
62,000
|
|
|
|
40,000
|
|
Mortgage debt
|
|
|
57,525
|
|
|
|
57,525
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
233,375
|
|
|
|
211,663
|
|
Less current portion
|
|
|
(863
|
)
|
|
|
(863
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
232,512
|
|
|
$
|
210,800
|
|
|
|
|
|
|
|
|
|
|
Senior
Credit Facility
In March 2007, we closed on a new senior secured Credit Facility
with various lenders. The Credit Facility consisted of a
$65.0 million term loan and a $60.0 million revolving
loan. Upon entering into the Credit Facility, we borrowed
$65.0 million under the term loan, using a portion of it to
pay off the remaining obligations under our previous credit
facility. In May 2007, we amended the Credit Facility to
increase the borrowings under our term loan by
$50.0 million, resulting in a total of $115.0 million
outstanding under the term loan, and increased the availability
under our revolving loan to $85.0 million. In addition, we
have the ability to increase the revolving credit facility
and/or
term
loan by up to $75.0 million, in the aggregate, by and after
seeking additional commitments from lenders and amending certain
of our covenants. The Credit Facility matures in March 2010.
Simultaneously with the amendment, we used the additional
$50.0 million under the term loan, along with cash on hand,
to purchase the 495-room Westin Atlanta Airport. In
November 2007, we borrowed $40.0 million on the revolving
loan, along with cash on hand, to purchase the
288-room Sheraton Columbia. We are required to make
quarterly payments of $0.3 million on the term loan until
its maturity date in March 2010.
The actual interest rates on both the revolving loan and term
loan depend on the results of certain financial tests. As of
March 31, 2008, based on those financial tests, borrowings
under the term loan and the revolving loan bore interest at the
30-day
LIBOR
rate plus 275 basis points (a rate of 5.46 percent per
annum). We incurred interest expense of $2.7 million and
$0.9 million on the senior credit facilities for the three
months ended March 31, 2008 and 2007, respectively.
The debt under the Credit Facility is guaranteed by certain of
our wholly-owned subsidiaries and collateralized by pledges of
ownership interests, owned hospitality properties, and other
collateral that was not previously prohibited from being pledged
by any of our existing contracts or agreements. The Credit
Facility contains covenants that include maintenance of certain
financial ratios at the end of each quarter, compliance
reporting
14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requirements and other customary restrictions. At March 31,
2008, we were in compliance with the loan covenants of the
Credit Facility.
Mortgage
Debt
The following table summarizes our mortgage debt as of
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Maturity
|
|
Spread over
|
|
Interest Rate as of
|
|
|
Amount
|
|
Date
(1)
|
|
30-Day LIBOR
|
|
March 31, 2008
|
|
Hilton Arlington
|
|
$
|
24.7 million
|
|
|
|
November 2009
|
|
|
|
135 bps
|
|
|
|
4.23
|
%
|
Hilton Houston Westchase
|
|
$
|
32.8 million
|
|
|
|
February 2010
|
|
|
|
135 bps
|
|
|
|
4.23
|
%
|
|
|
|
(1)
|
|
We are required to make
interest-only payments until these loans mature, with two
optional one-year extensions.
|
Based on the terms of these mortgage loans, a prepayment cannot
be made during the first year after it has been entered. After
one year, a penalty of 1 percent is assessed on any
prepayments. The penalty is reduced ratably over the course of
the second year. There is no penalty for prepayments made during
the third year.
In April 2007, we repaid in full, the $19.0 million of
mortgage debt relating to the Hilton Concord. We incurred no
prepayment penalties in connection with the early repayment. We
incurred interest expense related to our mortgage loans of
$0.7 million and $1.1 million for the three months
ended March 31, 2008 and 2007, respectively.
In May 2008, we placed a non-recourse mortgage of
$25.0 million on the Sheraton Columbia. We are required to
make interest-only payments until March 2011. Beginning May 2011
the loan will amortize over a 25 year period. The loan
bears interest at a rate of LIBOR, plus 200 basis points.
The net proceeds were used to pay down the revolver under our
Credit Facility. Upon making the principle reduction payment
towards our revolver, we have approximately $47.0 million
available under the Credit Facility. We have the ability to
borrow up to an additional $10.0 million under the mortgage
based upon achieving certain net operating income hurdles and
renovation milestones.
Interest
Rate Caps
We have entered into three interest rate cap agreements in order
to provide an economic hedge against the potential effect of
future interest rate fluctuations. The following table
summarizes our interest rate cap agreements as of March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
30-day LIBOR
|
|
|
Amount
|
|
Date
|
|
Cap Rate
|
|
October 2006 (Hilton Arlington mortgage loan)
|
|
$
|
24.7 million
|
|
|
|
November 2009
|
|
|
|
7.25
|
%
|
February 2007 (Hilton Westchase mortgage loan)
|
|
$
|
32.8 million
|
|
|
|
February 2010
|
|
|
|
7.25
|
%
|
At March 31, 2008, the total fair value of these interest
rate cap agreements was not significant. The change in fair
value for these interest rate cap agreements is recognized in
our consolidated statement of operations.
In March 2005, we entered into an interest rate cap with a
notional amount of $55.0 million related to our then
effective, amended and restated credit agreement. In January
2008, the $55.0 million interest rate cap matured.
In April 2008, we entered into a $25.0 million, five-year
interest rate cap agreement in conjunction with our mortgage
loan associated with the Sheraton Columbia. The interest rate
agreement caps the three-month LIBOR at 6.00 percent and is
scheduled to mature on May 1, 2013.
Interest
Rate Collar
On January 11, 2008, we entered into an interest rate
collar agreement for a notional amount of $110.0 million to
hedge against the potential affect of future interest rate
fluctuations underlying our Credit Facility. The interest rate
collar consists of an interest rate cap at 4.0 percent and
an interest rate floor at 2.47 percent on the
30-day
LIBOR
rate. We are to receive the effective difference of the cap rate
and the
30-day
LIBOR
rate, should LIBOR
15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exceed the stated cap rate. If, however, the
30-day
LIBOR
rate should fall to a level below the stated floor rate, we are
to pay the effective difference. The interest rate collar became
effective January 14, 2008, with monthly settlement dates
on the last day of each month beginning January 31, 2008,
and maturing January 31, 2010. At the time of inception, we
designated the interest rate collar to be a cash flow hedge. The
effective portion of the change in fair value of the interest
rate collar is recorded as other comprehensive income.
Ineffectiveness is recorded through earnings. At March 31,
2008, the interest rate collar had a fair value of
$(0.8) million. The amount of ineffectiveness was
inconsequential.
We are organized into two reportable segments: hotel ownership
and hotel management. A third reportable segment, corporate
housing, was disposed of on January 26, 2007, with the sale
of BridgeStreet and its affiliated subsidiaries. Each segment is
managed separately because of its distinctive economic
characteristics. Reimbursable expenses, classified as
other revenue and expenses from managed properties
on the statement of operations, are not included as part of this
segment analysis. These reimbursable expenses are all part of
the hotel management segment.
Hotel ownership includes our wholly-owned hotels and our
minority interest investments in hotel properties through
unconsolidated entities. For the hotel ownership segment
presentation, we have allocated internal management fee expense
of $0.7 million and $0.4 million for the three months
ended March 31, 2008 and 2007, respectively, to
wholly-owned hotels. These fees are eliminated in consolidation
but are presented as part of the segment to present their
operations on a stand-alone basis. Interest expense related to
hotel mortgages and other debt drawn specifically to finance the
hotels is included in the hotel ownership segment.
Hotel management includes the operations related to our managed
properties, our purchasing, construction and design subsidiary
and our insurance subsidiary. Revenue for this segment consists
of management fees, termination fees and
other from our consolidated statement of operations.
Our insurance subsidiary, as part of the hotel management
segment, provides a layer of reinsurance for property, casualty,
auto and employment practices liability coverage to our hotel
owners.
Corporate is not a reportable segment but rather includes costs
that do not specifically relate to any other single segment of
our business. Corporate includes expenses related to our public
company structure, certain restructuring charges, Board of
Directors costs, audit fees, unallocated corporate interest
expense and an allocation for rent and legal expenses. Corporate
assets include our cash accounts, deferred tax assets, deferred
financing fees and various other corporate assets. Due to the
sale of our third reportable segment, corporate housing, in
January 2007, the operations of this segment are included as
part of discontinued operations on the consolidated
2007 statement of operations.
Capital expenditures includes the acquisition of
hotels and purchases of property and equipment
line items from our cash flow statement. All amounts presented
are in thousands.
16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
|
|
|
Hotel
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
|
Management
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
Three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
23,918
|
|
|
$
|
15,018
|
|
|
$
|
|
|
|
$
|
38,936
|
|
Depreciation and amortization
|
|
|
3,184
|
|
|
|
975
|
|
|
|
115
|
|
|
|
4,274
|
|
Operating expense
|
|
|
17,441
|
|
|
|
15,233
|
|
|
|
1,292
|
|
|
|
33,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,293
|
|
|
|
(1,190
|
)
|
|
|
(1,407
|
)
|
|
|
696
|
|
Interest expense, net
|
|
|
(3,496
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,496
|
)
|
Equity in earnings of affiliates
|
|
|
2,361
|
|
|
|
|
|
|
|
|
|
|
|
2,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes
|
|
$
|
2,158
|
|
|
$
|
(1,190
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
327,704
|
|
|
$
|
120,295
|
|
|
$
|
38,076
|
|
|
$
|
486,075
|
|
Capital expenditures
|
|
$
|
6,760
|
|
|
$
|
298
|
|
|
$
|
44
|
|
|
$
|
7,102
|
|
Three months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,076
|
|
|
$
|
15,313
|
|
|
$
|
|
|
|
$
|
28,389
|
|
Depreciation and amortization
|
|
|
1,426
|
|
|
|
1,695
|
|
|
|
104
|
|
|
|
3,225
|
|
Operating expense
|
|
|
9,736
|
|
|
|
14,401
|
|
|
|
949
|
|
|
|
25,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,914
|
|
|
|
(783
|
)
|
|
|
(1,053
|
)
|
|
|
78
|
|
Interest expense, net
|
|
|
(1,410
|
)
|
|
|
|
|
|
|
(887
|
)
|
|
|
(2,297
|
)
|
Equity in earnings of affiliates
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes
|
|
$
|
905
|
|
|
$
|
(783
|
)
|
|
$
|
(1,940
|
)
|
|
$
|
(1,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
170,436
|
|
|
$
|
146,843
|
|
|
$
|
68,939
|
|
|
$
|
386,218
|
|
Capital expenditures
|
|
$
|
52,938
|
|
|
$
|
587
|
|
|
$
|
147
|
|
|
$
|
53,672
|
|
Revenues from foreign operations, excluding reimbursable
expenses, were as follows (in
thousands)
(1),(2)
:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
Russia
(3)
|
|
$
|
178
|
|
|
$
|
180
|
|
Other
|
|
$
|
97
|
|
|
$
|
94
|
|
|
|
|
(1)
|
|
Revenues for the United Kingdom and
France related solely to BridgeStreet operations have been
reclassified as discontinued operations on the consolidated
statement of operations for the related periods due to the sale
of BridgeStreet during the first quarter of 2007 and therefore
have not been included in the above table. BridgeStreet revenues
from the United Kingdom and France were $2.8 million and
$0.2 million, respectively, for the three months ended
March 31, 2007. These revenues have been classified as
discontinued operations on the consolidated statement of
operations for the related periods.
|
|
(2)
|
|
Management fee revenues from our
managed properties in Mexico are recorded through our joint
venture, IHR/Steadfast Hospitality Management, LLC, and as such,
are included in equity in earnings in our consolidated statement
of operations for the three months ended March 31, 2008.
|
|
(3)
|
|
Deferred revenues related to
incentive fees paid, but not yet earned, of $1.2 million
have not been included for the three month periods ended
March 31, 2008. There was no deferred revenue for the three
months ended March 31, 2007.
|
A significant portion of our managed properties and management
fees are derived from seven owners. This group of owners
represents 39.6 percent of our managed properties as of
March 31, 2008, and 39.6 percent of our base and
incentive management fees for the three months ended
March 31, 2008.
17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Insurance
Matters
As part of our management services to hotel owners, we generally
obtain casualty (workers compensation and general
liability) insurance coverage for our managed hotels. In
December 2002, one of the carriers we used to obtain casualty
insurance coverage was downgraded significantly by rating
agencies. In January 2003, we negotiated a transfer of that
carriers current policies to a new carrier. We have been
working with the prior carrier to facilitate a timely and
efficient settlement of the original 1,213 claims outstanding
under the prior carriers casualty policies. The prior
carrier has primary responsibility for settling those claims
from its assets. As of March 31, 2008, only 40 claims
remained outstanding. If the prior carriers assets are not
sufficient to settle these outstanding claims, and the claims
exceed amounts available under state guaranty funds, we may be
required to settle those claims. We are indemnified under our
management agreements for such amounts, except for periods prior
to January 2001, when we leased certain hotels from owners.
Based on currently available information, we believe the
ultimate resolution of these claims will not have a material
adverse effect on our consolidated financial position, results
of operations or liquidity.
During 2005, the prior carrier presented invoices to us and
other policy holders related to dividends previously granted to
us and other policy holders with respect to the prior policies.
Based on this information we have determined that the amount is
probable and estimable and have therefore recorded the
liability. In September 2005, we invoiced the prior carrier for
premium refunds due to us on previous policies. The initial
premiums on these policies were calculated based on estimated
employee payroll expenses and gross hotel revenues. Due to the
September 11th terrorist attacks and the resulting
substantial decline in business and leisure travel in the months
that followed, we reduced hotel level headcount and payroll. The
estimated premiums billed were significantly overstated and as a
result, we are owed refunds on the premiums paid. The amount of
our receivable exceeds the dividend amounts claimed by the prior
carrier. We have reserved the amount of the excess given the
financial condition of the carrier. We believe that we hold the
legal right of offset in regard to this receivable and payable
with the prior insurance carrier. We will continue to pursue
collection of our receivable and do not expect to pay any
amounts to the prior carrier prior to reaching an agreement with
them regarding the contractual amounts due to us. To the extent
we do not collect sufficiently on our receivable and pay amounts
that we have been invoiced, we will vigorously attempt to
recover any additional amounts from our owners. We are engaged
in ongoing discussions to bring this matter to a conclusion.
Insurance
Receivables and Reserves
Our insurance captive subsidiary earns insurance revenues
through direct premiums written and reinsurance premiums ceded.
Reinsurance premiums are recognized when policies are written
and any unearned portions of the premium are recognized to
account for the unexpired term of the policy. Direct premiums
written are recognized in accordance with the underlying policy
and reinsurance premiums ceded are recognized on a pro-rata
basis over the life of the related policies. Losses, at present
value, are provided for reported claims, claims incurred but not
reported and claims settlement expenses. We provide a
reinsurance layer between the primary and excess carrier that we
manage through our captive insurance subsidiary. We employ
outside consultants to evaluate the adequacy of the amount of
reserves we record. We have engaged a recognized actuarial firm
to analyze our loss experience and calculate our loss reserves.
At March 31, 2008 and December 31, 2007, our reserve
for claims was $1.5 million and $1.6 million,
respectively.
18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Leases
As of March 31, 2008, our lease obligations consist of
office space for our corporate offices. Future minimum lease
payments required under these operating leases as of
March 31, 2008 were as follows (in thousands):
|
|
|
|
|
March 31,
2008-2009
|
|
$
|
4,016
|
|
March 31,
2009-2010
|
|
|
4,186
|
|
March 31,
2010-2011
|
|
|
4,269
|
|
March 31,
2011-2012
|
|
|
3,726
|
|
March 31,
2012-2013
|
|
|
3,724
|
|
Thereafter
|
|
|
2,209
|
|
|
|
|
|
|
Total
|
|
$
|
22,130
|
|
|
|
|
|
|
The operating lease obligations shown in the table above have
not been reduced by a non-cancelable sublease related to our
former corporate office space. We remain secondarily liable
under this lease in the event that the sub-lessee defaults under
the sublease terms. Given the size and financial stability of
the sub-tenant, we do not believe that any payments will be
required as a result of the secondary liability provisions of
the primary lease agreements. We expect to receive minimum
payments under this sublease as follows (in thousands):
|
|
|
|
|
March 31,
2008-2009
|
|
$
|
1,145
|
|
March 31,
2009-2010
|
|
|
1,190
|
|
March 31,
2010-2011
|
|
|
1,238
|
|
March 31,
2011-2012
|
|
|
1,288
|
|
March 31,
2012-2013
|
|
|
1,339
|
|
Thereafter
|
|
|
571
|
|
|
|
|
|
|
Total
|
|
$
|
6,771
|
|
|
|
|
|
|
Commitments
Related to Management Agreements and Hotel
Ownership
Under the provisions of management agreements with certain hotel
owners, we are obligated to provide an aggregate of
$5.0 million to these hotel owners in the form of advances
or loans. The timing or amount of working capital loans to hotel
owners is not currently known as these advances are at the hotel
owners discretion.
In connection with our owned hotels, we have committed to
provide certain funds for property improvements as required by
the respective brand franchise agreements. As of March 31,
2008, we had ongoing renovation and property improvement
projects with remaining expected costs to complete of
approximately $28 million, of which $10.1 million and
$11.1 million are directly attributable to comprehensive
renovations for the Westin Atlanta Airport and the Sheraton
Columbia, respectively.
We are partners or members of various unconsolidated
partnerships or limited liability companies that own hotel
assets. The terms of such partnership or limited liability
company agreements provide that we contribute capital as
specified. Generally, in the event that we do not make required
capital contributions, our ownership interest will be diluted,
dollar for dollar, equal to any amounts funded on our behalf by
our partner(s). Concurrent with the formation of our management
platform in India, we and our partner have each committed to
invest $6.25 million to acquire a general partnership
interest in the Duet India Hotels fund. The investment fund is
dedicated solely to the investment in, and the development of,
hotels throughout India. As of March 31, 2008, we had
invested $1.6 million in the Duet Fund, and we expect to
invest an additional $4.65 million during the second
quarter of 2008.
19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Guarantees
As discussed in Note 8 Long-Term Debt, on
May 1, 2008, our subsidiary which owns the Sheraton
Columbia hotel entered into a mortgage which is non-recourse to
us. In order to obtain this mortgage we entered into a guarantee
agreement in favor of the lender which requires the prompt
completion and payment of the required improvements as defined
in the agreement. These required improvements are included in
the property improvement plan, as required by the brand
franchise agreement and are subject to change based upon changes
in the construction budget. As of March 31, 2008, the
required improvements were approximately $10.3 million and
we anticipate the completion prior to June 30, 2009. No
liability has been recognized related to this guarantee. If the
required improvements are not completed, the lender has the
right to force us to do so.
Letters
of Credit
As of March 31, 2008, we had a $1.0 million letter of
credit outstanding from Northridge Insurance Company in favor of
our property insurance carrier. The letter of credit expires on
April 4, 2009. We are required by the property insurance
carrier to deliver the letter of credit to cover its losses in
the event we default on payments to the carrier. Accordingly,
the lender has required us to restrict a portion of our cash
equal to the amount of the letter of credit, which we present as
restricted cash on the consolidated balance sheet. We also have
a $0.75 million letter of credit outstanding in favor of
the insurance carrier that issues surety bonds on behalf of the
properties we manage. The letter of credit expires on
March 31, 2009. We are required by the insurance carrier to
deliver the letter of credit to cover its risk in the event the
properties default on their required payments related to the
surety bonds.
Contingent
Liabilities Related to Partnership Interests
In connection with one of our development joint ventures, we
have agreed to fund a portion of any development and
construction cost overruns up to $0.6 million of the
approved capital spending plan for each hotel developed and
constructed by our joint venture, IHR Greenbuck Hotel Venture.
We believe that with our experience in project management and
design, the risk of any required additional funding in excess of
our planned equity investments is minimal. However certain
circumstances throughout the design and construction process
could arise that may prevent us from completing the project with
total costs under 110 percent and therefore require us to
contribute additional funding.
Additionally, we own interests in other partnerships and joint
ventures. To the extent that any of these partnerships or joint
ventures become unable to pay its obligations, those obligations
would become obligations of the general partners. We are not the
sole general partner of any of our joint ventures. The debt of
all investees is non-recourse to us and we do not guarantee any
of our investees obligations. Furthermore, we do not
provide any operating deficit guarantees or income support
guarantees to any of our joint venture partners. While we
believe we are protected from any risk of liability because our
investments in these partnerships as a general partner were
conducted through the use of single-purpose entities, to the
extent any debtors pursue payment from us, it is possible that
we could be held liable for those liabilities, and those amounts
could be material.
|
|
11.
|
ACQUISITIONS &
DISPOSITIONS
|
Dispositions
On January 26, 2007, we sold BridgeStreet, our corporate
housing subsidiary, for total proceeds of approximately
$42.4 million in cash. Our corporate housing business had
been classified as its own reportable segment.
20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The operations of the corporate housing subsidiary have been
classified as discontinued operations in our consolidated
statement of operations for the three months ended
March 31, 2007. The following table summarizes operating
results, the gain on the sale, and our segment reporting of our
corporate housing subsidiary:
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31, 2007
|
|
|
Revenue
|
|
$
|
8,500
|
|
Depreciation and amortization
|
|
|
|
|
Operating expense
|
|
|
8,969
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(469
|
)
|
Gain on sale
|
|
|
17,609
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest and taxes
|
|
$
|
17,140
|
|
Income tax (expense) benefit
|
|
|
(139
|
)
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
$
|
17,001
|
|
|
|
|
|
|
With respect to the foreign operations, the disposition was
considered a sale of stock of the subsidiary and resulted in a
capital loss for tax purposes. As this capital loss can only be
used to offset capital gains for tax purposes, a full valuation
allowance was recorded resulting in an effective tax rate of
approximately 1 percent.
|
|
12.
|
STOCK-BASED
COMPENSATION
|
On January 1, 2006, we adopted SFAS No. 123
(revised 2004),
Share Based Payment
(SFAS No. 123R) using the modified
prospective method. Since January 1, 2003, we have used the
Black-Scholes pricing model to estimate the value of stock
options granted to employees. The adoption of
SFAS No. 123R did not have a material impact on our
results of operations or financial position as all of our
unvested stock-based awards as of December 31, 2005 had
previously been accounted for under the fair value method of
accounting.
In February 2008, we granted 815,245 shares of restricted
stock to members of senior management. The restricted stock
awards granted vest ratably over four years, except for our
chief executive officer whose awards vest over three years based
on his employment agreement. We recognized $0.3 million of
restricted stock expense in the consolidated statement of
operations for the three months ended March 31, 2008.
21
|
|
Item 2:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is intended to
help the reader understand Interstate Hotels &
Resorts, Inc., our operations and our present business
environment. MD&A is provided as a supplement to, and
should be read in conjunction with, our consolidated interim
financial statements and the accompanying notes.
Forward-Looking
Statements
The SEC encourages companies to disclose forward-looking
information so that investors can better understand a
companys future prospects and make informed investment
decisions. In this Quarterly Report on
Form 10-Q
and the information incorporated by reference herein, we make
some forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These
statements are often, but not always, made through the use of
words or phrases such as will likely result,
expect, will continue,
anticipate, estimate,
intend, plan, projection,
would and outlook and other similar
terms and phrases. Any statements in this document about our
expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and are
forward-looking statements. Forward-looking statements are based
on managements current expectations and assumptions and
are not guarantees of future performance that involve known and
unknown risks, uncertainties and other factors which may cause
our actual results to differ materially from those anticipated
at the time the forward-looking statements are made. These risks
and uncertainties include those risk factors discussed in
Item 1A of our Annual Report on
Form 10-K
for the year ended December 31, 2007.
Any forward-looking statements are qualified in their entirety
by reference to the factors discussed throughout this Quarterly
Report on
Form 10-Q
and our most recent Annual Report on
Form 10-K
and the documents incorporated by reference herein. You should
not place undue reliance on any of these forward-looking
statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we do not undertake to
update any forward-looking statement or statements to reflect
events or circumstances after the date on which the statement is
made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible to
predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements.
Overview
and Outlook
Our Business
We are a leading hotel real
estate investor and the nations largest independent
operator, as measured by number of rooms under management and
gross annual revenues of the managed portfolio. We have two
reportable operating segments: hotel ownership (through
whole-ownership and joint ventures) and hotel management. A
third reportable segment, corporate housing, was disposed of on
January 26, 2007 with the sale of BridgeStreet. The results
of this segment are reported as discontinued operations in our
consolidated financial statements for all periods presented.
As of March 31, 2008, we owned seven hotels with 2,045
rooms and held non-controlling joint venture equity interests in
18 joint ventures, which owned or held ownership interests in 47
of our managed properties. We managed all of the properties
within our hotel ownership segment.
As of March 31, 2008, we and our affiliates managed 217
hotel properties with 45,252 rooms and six ancillary service
centers (which consist of a convention center, a spa facility,
two restaurants and two laundry centers), in 36 states, the
District of Columbia, Russia, Mexico, Canada, Belgium and
Ireland. Our portfolio of managed properties is diversified by
location/market, franchise and brand affiliations, and ownership
group(s). We manage hotels represented by more than 30 franchise
and brand affiliations in addition to operating 16 independent
hotels. Our managed hotels are owned by more than 60 different
ownership groups.
Industry Overview
The lodging industry, of
which we are a part, is subject to both national and
international extraordinary events. Over the past several years
we have continued to be impacted by events including the ongoing
war on terrorism, the potential outbreak and epidemic of
infectious disease, natural disasters, the continuing change
22
in the strength and performance of regional and global economies
and the level of hotel acquisition activity by private equity
investors and other acquirers of real estate.
According to PKF Hospitality Research, the U.S. lodging
industry enjoyed a tremendous period of recovery from 2003
through 2007. RevPAR growth was 5.7 percent and
7.8 percent in 2007 and 2006, respectively. Room demand
increased by 1.2 percent in 2007 (against a room supply
increase of 1.4 percent), up from a 0.5 percent room
demand increase in 2006 (against a room supply increase of
0.2 percent). The demand in the industry is forecasted to
grow at 0.9 percent in 2008 and 1.7 percent in 2009.
Because increases in demand for hotel rooms are expected to lag
behind increases in supply, the U.S. national average
occupancy rate is expected to decline from 63.2 percent in
2007 to 61.9 percent in 2009. Notwithstanding the declining
occupancy levels, average daily rates, or ADR, is expected to
increase at a rate that is higher than the expected rate of
inflation.
Overall industry RevPAR is projected to grow an additional
3.0 percent in 2008. As occupancy is projected to decrease
1.6 percent in 2008, nearly all of the growth will be
driven by an increase in ADR of 4.7 percent. Overall,
industry room supply and room demand are both projected to grow
by 2.6 percent and 0.9 percent in 2008, respectively.
Financial Highlights
Our operating results
for the first quarter of 2008 reflect tangible results of our
strategy to diversify and stabilize our income streams through
the increase of wholly-owned hotel real estate. For the three
months ended March 31, 2008, revenues from our owned hotels
were $23.9 million, an increase of $10.8 million
compared to the same period in 2007. In addition, operating
income from owned-hotels increased $1.4 million, while
gross margins increased slightly from 28.3 percent in the
first quarter of 2007 to 28.6 percent in the first quarter
of 2008.
While we have benefited during the first quarter from the
operations relating to our 2007 acquisitions of wholly-owned
real estate, we have also realized significant growth in the
number of hotels under management. During the first quarter of
2008, we have grown our management contact portfolio by a
net 26 properties, providing a net increase of 2,632
additional rooms. Although our management contract losses have
been significant over the past two years, we believe the
attrition we have experienced within our portfolio of third
party management agreements has leveled off, and we are
beginning to expand our portfolio once again, as is evidenced by
a net increase of 33 properties over the past two quarters.
Investments in and Acquisitions of Real Estate
In the first quarter of 2008, we continued to implement our
growth strategy of selective hotel ownership through
wholly-owned acquisitions and joint venture investments. In
February 2008
,
our joint venture with Harte, closed on
the purchase of a four property portfolio from affiliates of
Blackstone, for an aggregate price of $208.7 million. We
invested $11.6 million representing our 20 percent
equity interest in the portfolio. At the time of our investment,
we managed three of the properties and had previously managed
the fourth. The joint venture plans to invest more than
$30 million of additional funds for comprehensive
renovations of the hotels over the 30 months following the
acquisition, with our contribution expected to be approximately
$2 million. The four properties included in the joint
venture acquisition were as follows:
|
|
|
|
|
|
|
|
|
Property
|
|
Location
|
|
Guest Rooms
|
|
|
Sheraton Frazer Great Valley
|
|
|
Frazer, PA
|
|
|
|
198
|
|
Sheraton Mahwah
|
|
|
Mahwah, NJ
|
|
|
|
225
|
|
Latham Hotel Georgetown
|
|
|
Washington, DC
|
|
|
|
142
|
|
Hilton Lafayette
|
|
|
Lafayette, LA
|
|
|
|
327
|
|
In February 2008, our joint venture with FFC acquired a
portfolio of 22 properties located throughout the Midwest in
Illinois, Iowa, Michigan, Minnesota, Wisconsin and Texas. We
invested $1.7 million, representing our 10 percent
equity interest in the portfolio. Upon closing, all 22
properties, representing 2,397 rooms, were converted to various
Wyndham Worldwide brands. The properties are located along major
interstates and proximate to major commercial and leisure demand
generators. Our investment includes our share of planned capital
improvements to re-brand, re-image, and reposition the hotels.
In February 2008, we and JHM Hotels, LLC (JHM),
formed a joint venture management company in which we hold a
50 percent ownership interest. The joint venture will seek
management opportunities throughout India
23
and has already signed its first management agreement in April
2008. Management of this hotel will commence in the fourth
quarter of 2008. We provided to our partner, JHM,
$0.5 million in the form of a convertible note towards the
working capital of the joint venture, which is expected to
convert to an equity interest in the joint venture during 2008.
Simultaneous with the formation of this management company, we
and JHM each committed to invest $6.25 million in the
private real estate fund, Duet India Hotels (Duet
Fund), which will seek opportunities to purchase
and/or
develop hotels throughout India. As of March 31, 2008, we
had invested $1.6 million in the Duet Fund. In return for
our investment, the Duet Fund will give our joint venture the
right of first refusal for all hotels that it invests which are
not already encumbered by an existing management contract.
In February 2008, True North Tesoro Property Partners,
L.P
.
, a joint venture in which we hold a
15.9 percent equity interest, sold the Doral Tesoro
Hotel & Golf Club, located near Dallas, Texas. Our
portion of the joint ventures gain on sale of the hotel
was approximately $2.4 million before post-closing
adjustments. In March 2008, we received $1.8 million from
the sale proceeds. Additional distributions are anticipated as
post-closing adjustments are settled. The joint venture owns a
separate entity that holds mineral rights and receives royalties
related to gas production activities which was not marketed in
the sale of the hotel. This transaction serves as a primary
example of the value we seek to create through the operational
expertise we provide to owners, combined with the realization of
the equitable appreciation of the underlying real estate asset.
Turnover of Management Contracts
During the
first quarter of 2008, we continued to see a reduction in the
number of hotel real estate transactions, leading to further
stabilization in our third-party managed portfolio. The
increased transaction activity beginning in 2005, had created a
higher level of contract attrition within our portfolio;
however, due to the tightening of the credit markets and the
reduction in transaction activity during the past three
quarters, we have seen our managed portfolio stabilize and
furthermore begin to grow over the past two quarters.
The following table highlights the contract activity within our
managed portfolio:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
Properties
|
|
|
Rooms
|
|
|
As of December 31, 2007
|
|
|
191
|
|
|
|
42,620
|
|
New contracts
|
|
|
34
|
|
|
|
4,547
|
|
Lost contracts
|
|
|
(8
|
)
|
|
|
(1,915
|
)
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
217
|
|
|
|
45,252
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, we continued to manage nine
Blackstone properties, which accounted for $1.0 million in
management fees for the three months ended March 31, 2008.
During the first quarter of 2008, Blackstone sold four hotels
which we managed, three of which we continue to manage through
one of our joint venture partnerships. Unpaid termination fees
due to us from Blackstone as of March 31, 2008 for hotels
previously sold by Blackstone is $18.4 million. For 21 of
the hotels sold and with respect to $15.8 million of the
unpaid fees, Blackstone retains the right to replace a
terminated management contract during the 48 month payment
period with a replacement contract on a different hotel and
reduce the amount of any remaining unpaid fees. Management fees
we would earn from any replacement management contract entered
into with Blackstone would reduce dollar for dollar the
termination fee balance due to us from Blackstone.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP
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. 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 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.
We have discussed those policies that we believe are critical
and require judgment in their application in our Annual Report
on
Form 10-K,
for the year ending December 31, 2007.
24
Results
of Operations
Operating
Statistics
Statistics related to our wholly-owned properties and managed
hotel properties include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
Percent Change
|
|
|
|
2008
|
|
|
2007
|
|
|
08 vs. 07
|
|
|
Hotel Ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties
|
|
|
7
|
|
|
|
5
|
|
|
|
40.0
|
%
|
Number of rooms
|
|
|
2,045
|
|
|
|
1,260
|
|
|
|
62.3
|
%
|
Hotel
Management
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties managed
|
|
|
217
|
|
|
|
207
|
|
|
|
4.8
|
%
|
Number of rooms
|
|
|
45,252
|
|
|
|
47,159
|
|
|
|
(4.0
|
)%
|
|
|
|
(1)
|
|
Statistics related to hotels in
which we hold a partial ownership interest through a joint
venture or wholly-owned have been included in hotel management.
|
Hotels under management increased by a net of 10 properties as
of March 31, 2008 compared to March 31, 2007, due to
the following:
|
|
|
|
|
We secured 22 additional management contracts related to the
Budget Portfolio Properties joint venture.
|
|
|
|
We secured 11 additional management contracts from Inland
Lodging Corporation.
|
|
|
|
We secured 20 additional management contracts from various
owners.
|
|
|
|
Blackstone sold 23 properties, 15 of which we no longer manage.
In the case of the other eight properties, we either purchased
the properties or were retained as manager by the new owners.
|
|
|
|
Sunstone REIT sold seven properties which we no longer manage.
|
|
|
|
21 properties, owned by various other owners, were transitioned
out of our system.
|
The operating statistics related to our managed hotels,
including wholly-owned hotels, on a same-store
basis
(2)
,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Percent Change
|
|
|
|
2008
|
|
|
2007
|
|
|
08 vs. 07
|
|
|
Hotel Management
|
|
|
|
|
|
|
|
|
|
|
|
|
RevPAR
|
|
$
|
96.33
|
|
|
$
|
93.47
|
|
|
|
3.1
|
%
|
ADR
|
|
$
|
138.49
|
|
|
$
|
129.66
|
|
|
|
6.8
|
%
|
Occupancy
|
|
|
69.6
|
%
|
|
|
72.1
|
%
|
|
|
(3.5
|
)%
|
|
|
|
(2)
|
|
We present these operating
statistics for the periods included in this report on a
same-store basis. We define our same-store hotels as those which
(i) are managed or owned by us for the entirety of the
reporting periods being compared or have been managed by us for
part of the reporting periods compared and we have been able to
obtain operating statistics for the period of time in which we
did not manage the hotel and (ii) have not sustained
substantial property damage, business interruption or undergone
large-scale capital projects during the periods being reported.
In addition, the operating results of hotels for which we no
longer manage as of March 31, 2008 are not included in
same-store hotel results for the periods presented herein. Of
the 217 properties that we managed as of March 31, 2008,
172 hotels have been classified as same-store hotels.
|
25
Revenues
The significant components of revenue were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Percent Change
|
|
|
|
2008
|
|
|
2007
|
|
|
08 vs. 07
|
|
|
Lodging
|
|
$
|
23,918
|
|
|
$
|
13,076
|
|
|
|
82.9
|
%
|
Management fees
|
|
|
9,909
|
|
|
|
11,469
|
|
|
|
(13.6
|
)%
|
Termination fees
|
|
|
3,010
|
|
|
|
1,575
|
|
|
|
91.1
|
%
|
Other
|
|
|
2,099
|
|
|
|
2,269
|
|
|
|
(7.5
|
)%
|
Other revenue from managed properties
|
|
|
151,014
|
|
|
|
176,370
|
|
|
|
(14.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
189,950
|
|
|
$
|
204,759
|
|
|
|
(7.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lodging
The increase in lodging revenue of $10.8 million in the
first quarter of 2008 is primarily due to the inclusion of
revenues of $5.8 million from the Westin Atlanta, which was
purchased in May 2007, and $2.7 million from the Sheraton
Columbia, which was purchased in November 2007, and
$2.1 million in additional revenue from the Hilton Houston
Westchase, which was purchased in February 2007. In addition,
during the three month period ended March 31, 2008, we saw
an increase in RevPAR at the Hilton Durham and the Hilton Garden
Inn Baton Rouge of 11.7 percent and 3.6 percent,
respectively, over the same period in 2007 providing for
increases in total revenue of $0.2 million and
$0.1 million, respectively.
Management
fees and termination fees
The decrease in management fee revenue was mainly due to the net
loss of full service properties, which on average, yield a
higher management fee than limited service properties. In
addition, our room count was lower at March 31, 2008
compared to March 31, 2007. The decrease in the room count
and the loss of full service properties were partially offset by
a 3.1 percent increase in RevPAR during the first quarter
of 2008.
The majority of the termination fees for the three months ended
March 31, 2008 were due to the recognition of
$2.7 million of termination fees from Blackstone, of which
$1.4 million relates to three properties that our joint
venture with Harte purchased from Blackstone. For these three
hotels, Blackstone has waived the right to replace the
management contract with another contract. As all contingencies
have been removed, we recognized the full amount of the
termination fees related to these three hotels. Termination fees
from Blackstone are paid over 48 months or as a discounted
one-time payment. Blackstone may also offset any unpaid
termination fees due to us with future management fees earned
from any new management agreement we would enter into with
Blackstone. For the three months ended March 31, 2007, we
recognized $1.1 million in termination fees related to
previously terminated contracts from Blackstone.
Other
revenue from managed properties
Other revenue from managed properties decreased in the first
quarter of 2008 by $25.4 million, compared to the same
period in 2007 due to the loss of full service properties. These
amounts represent the payroll and related costs, and certain
other costs of the hotels operations, that are
contractually reimbursed to us by the hotel owners and are also
recorded as other expenses from managed properties.
26
Operating
Expenses
The significant components of operating expenses were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Percent Change
|
|
|
|
2008
|
|
|
2007
|
|
|
07 vs. 06
|
|
|
|
|
|
|
(As restated)
|
|
|
Lodging
|
|
$
|
17,025
|
|
|
$
|
9,372
|
|
|
|
81.7
|
%
|
Administrative and general
|
|
|
15,829
|
|
|
|
13,315
|
|
|
|
18.9
|
%
|
Depreciation and amortization
|
|
|
4,274
|
|
|
|
3,225
|
|
|
|
32.5
|
%
|
Asset impairments and write-offs
|
|
|
1,112
|
|
|
|
2,399
|
|
|
|
(53.6
|
)%
|
Other expenses from managed properties
|
|
|
151,014
|
|
|
|
176,370
|
|
|
|
(14.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
189,254
|
|
|
$
|
204,681
|
|
|
|
(7.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lodging
The increase in lodging expense in the first quarter of 2008 was
primarily due to the inclusion of lodging expense of
$4.2 million for the Westin Atlanta, which was acquired in
May 2007, and $2.2 million for the Sheraton Columbia, which
was acquired in November 2007. In addition, we recorded
additional lodging expense of $1.3 million for Hilton
Houston Westchase, which is primarily due to the inclusion of
operations for the full first quarter of 2008 compared to a
partial first quarter of 2007.
Administrative
and general
These expenses consisted of payroll and related benefits for
employees in operations management, sales and marketing,
finance, legal, human resources and other support services, as
well as general corporate and public company expenses.
Administrative and general expenses increased $2.5 million
between periods, primarily due to increased legal fees of
$1.2 million, other professional fees of $0.2 million
and bad debt expense of $0.6 million.
Depreciation
and amortization
We had a significant increase in depreciable assets for the
three months ended March 31, 2008 compared to the three
months ended March 31, 2007 due to the properties acquired
in periods subsequent to the first quarter of 2007. We owned
seven hotels as of March 31, 2008, compared to five hotels
as of March 31, 2007. The Westin Atlanta and the Sheraton
Columbia, both of which were acquired after the first quarter of
2007, resulted in depreciation expense of $0.8 million, and
$0.7 million, respectively. These changes were offset by
the decrease in scheduled amortization expense for our
management contracts by approximately $0.8 million as a
result of the significant decrease in intangible assets
resulting from the write-off of properties as they are
terminated.
Other
expenses from managed properties
Other expenses from managed properties decreased in the first
quarter of 2008 by $25.4 million, compared to the same
period in 2007 due to the loss of full service properties. These
amounts represent the payroll and related costs, and certain
other costs of the hotels operations, that are
contractually reimbursed to us by the hotel owners and are also
recorded as other expenses from managed properties.
Asset
impairments and write-offs
For the three months ended March 31, 2008,
$1.1 million of asset impairments were recorded related to
four properties, three of which were sold by Blackstone and
purchased by one of our joint ventures. In the first three
months of 2007, we wrote-off the remaining unamortized
management contract intangible asset of $2.3 million
related to management contract costs for four properties sold by
Blackstone and $0.1 million related to three properties
sold by various other owners.
27
Other
Income and Expenses
The significant components of other income and expenses were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Percent Change
|
|
|
|
2008
|
|
|
2007
|
|
|
08 vs. 07
|
|
|
|
(As restated)
|
|
|
Interest expense, net
|
|
$
|
3,496
|
|
|
$
|
2,297
|
|
|
|
52.2
|
%
|
Equity in earnings from unconsolidated entities
|
|
|
2,361
|
|
|
|
401
|
|
|
|
>100
|
%
|
Income tax benefit
|
|
|
(151
|
)
|
|
|
(781
|
)
|
|
|
(80.7
|
)%
|
Minority interest (benefit) expense
|
|
|
(2
|
)
|
|
|
46
|
|
|
|
>(100
|
)%
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
17,001
|
|
|
|
(100
|
)%
|
Interest
expense
The majority of the increase in net interest expense of
$1.2 million was due to a higher average outstanding debt
balance under the Credit Facility, resulting from the purchase
and renovation of the Westin Atlanta and the Sheraton Columbia.
The increase in interest expense was partially offset by lower
interest expense related to the Hilton Concord mortgage debt
which was repaid during the second quarter of 2007 and the
non-recurrence of the write-off of $0.5 million of
unamortized deferred financing costs associated with the
extinguishment of our old credit facility in March 2007.
Equity in
earnings from unconsolidated entities
The majority of the increase in equity in earnings of
$2.0 million related to the gain on sale of
$2.4 million for the sale of Doral Tesoro Hotel & Golf
Club by one of our joint ventures. The gain was offset by equity
losses of $0.4 million related to other joint ventures.
Income
tax benefit
The change in income tax benefit was a result of a reduction in
our net loss before income taxes in addition to a change in our
effective tax rate from 38 percent, as of March 31,
2007, to 34.5 percent, as of March 31, 2008.
Income
from discontinued operations, net of tax
Discontinued operations during the first quarter of 2007
represents the $17.6 million gain on sale of BridgeStreet
in January 2007 offset by the $0.6 million operating loss,
net of tax of the subsidiary prior to the sale.
Liquidity,
Capital Resources and Financial Position
Key metrics related to our liquidity, capital resources and
financial position were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Percent Change
|
|
|
|
2008
|
|
|
2007
|
|
|
08 vs. 07
|
|
|
|
(As restated)
|
|
|
Cash used in operating activities
|
|
$
|
(1,291
|
)
|
|
$
|
(8,014
|
)
|
|
|
(83.9
|
)%
|
Cash used in investing activities
|
|
|
(19,917
|
)
|
|
|
(22,585
|
)
|
|
|
(11.8
|
)%
|
Cash provided by financing activities
|
|
|
21,690
|
|
|
|
55,192
|
|
|
|
(60.7
|
)%
|
Working capital (deficit)
|
|
|
(3,994
|
)
|
|
|
34,381
|
|
|
|
>(100
|
)%
|
Cash interest expense
|
|
|
3,499
|
|
|
|
1,751
|
|
|
|
99.8
|
%
|
Debt balance
|
|
|
233,375
|
|
|
|
141,525
|
|
|
|
64.9
|
%
|
Operating
Activities
Net income, excluding the effect of non-cash adjustments to
reconcile net income (loss) to cash provided by operating
activities, increased by $0.3 million for the three months
ended March 31, 2008. In addition, the change in
28
accounts receivable increased by $2.5 million, primarily
due to the reduction in the number of properties we managed in
the first quarter of 2008 compared to the first quarter of 2007.
The change in accounts payable and accrued expenses increased by
$3.4 million in the first quarter of 2008 compared to the
first quarter of 2007.
Investing
Activities
The major components of the decrease in cash used in investing
activities during the three month period ended March 31,
2008 compared to the three month period ended March 31,
2007 were:
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|
|
|
|
In the first quarter of 2007, we purchased the Houston Westchase
for $52.2 million, which included an escrow of additional
restricted cash of $1.9 million associated with this
acquisition, while we had no hotel acquisitions during the first
quarter of 2008.
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|
|
|
We made contributions of $13.5 million in joint venture
investments during the first quarter of 2008 compared to
$0.8 million during the same period in 2007. In 2008, we
contributed a total of $11.1 million for investments in
three new joint ventures, $0.8 million in existing joint
ventures and $1.6 million into the Duet Fund.
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|
|
|
We received a distribution from a joint venture, of
$1.8 million from the sale of Doral Tesoro
Hotel & Golf Club in February 2008. Distributions
which are a return of our investment in the joint venture are
recorded as investing cash flows, while distributions which are
a return on our investment are recorded as operating cash flows.
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|
|
|
We spent an additional $5.6 million on property and
equipment in the first quarter of 2008, compared to the first
quarter of 2007, which is primarily related to improvements at
the Westin Atlanta and the Sheraton Columbia.
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|
|
|
In the first quarter of 2007, the cash expenditures above were
offset by proceeds of $34.4 million from the sale of
BridgeStreet.
|
Financing
Activities
The decrease in cash provided by financing activities was
primarily due to net borrowings on long-term debt of
$21.7 million in the first quarter of 2008, compared to net
borrowings on long-term debt of $57.3 million in the first
quarter of 2007. Our additional borrowings in 2007 related to
the purchase of the Hilton Westchase of $32.8 million, and
borrowings from our new Credit Facility of $65 million that
we used to pay off the remaining balance on our previous credit
facility. In addition, we incurred financing fees of
$2.2 million in connection with the new Credit Facility
that we entered into in March 2007.
Liquidity
Liquidity Requirements
Our known short-term
liquidity requirements consist primarily of funds necessary to
pay for operating expenses and other expenditures, including:
corporate expenses, payroll and related benefits, legal costs,
and other costs associated with the management of hotels,
interest and scheduled principal payments on our outstanding
indebtedness and capital expenditures, which include renovations
and maintenance at our owned hotels. Our long-term liquidity
requirements consist primarily of funds necessary to pay for
scheduled debt maturities, capital improvements at our owned
hotels and costs associated with potential acquisitions.
Our ability to incur additional debt is dependent upon a number
of factors, including our degree of leverage, the value of our
unencumbered assets (if any), our public debt ratings and
borrowing restrictions imposed by existing lenders. In addition,
we have certain limitations under our Credit Facility that could
limit our ability to make future investments without the consent
of our lenders. We expect to use additional cash flows from
operations and amounts available under the Credit Facility to
pay required debt service, income taxes and make planned capital
purchases for our wholly-owned hotels. We may also seek to raise
additional funding for future investments and growth
opportunities by raising additional debt or equity from time to
time based on the specific needs of those future investments.
29
Senior Credit Facility
In March 2007, we
closed on our new $125.0 million Credit Facility. The new
Credit Facility consisted of a $65.0 million term loan and
a $60.0 million revolving loan. Upon entering into the new
Credit Facility, we borrowed $65.0 million under the term
loan and used a portion of those proceeds to pay off the
remaining obligations under the old credit facility. In
connection with the purchase of the Westin Atlanta Airport in
May 2007, we amended the Credit Facility. The amendment
increased our total borrowing capacity to $200.0 million,
consisting of a $115.0 term loan and a $85.0 million
revolving credit facility. As of March 31, 2008, we had
$23.0 million available under our revolver. In addition, we
have the ability to increase the revolving credit facility
and/or
term
loan by up to $75.0 million, in the aggregate, by seeking
additional commitments from lenders. Under the Credit Facility,
we are required to make quarterly payments on the term loan of
approximately $0.3 million.
The actual interest rates on both the revolving loan and term
loan depend on the results of certain financial tests. As of
March 31, 2008, based on those financial tests, borrowings
under the term loan and the revolving loan bore interest at the
30-day
LIBOR
rate plus 275 basis points (a rate of 5.46 percent per
annum). We incurred interest expense of $2.7 million and
$0.9 million on the senior credit facilities for the three
months ended March 31, 2008 and 2007, respectively.
The debt under the Credit Facility is guaranteed by certain of
our wholly owned subsidiaries and collateralized by pledges of
ownership interests, owned hospitality properties, and other
collateral that was not previously prohibited from being pledged
by any of our existing contracts or agreements. The Credit
Facility contains covenants that include maintenance of certain
financial ratios at the end of each quarter, compliance
reporting requirements and other customary restrictions. We
continually monitor our operating and cash flow models in order
to forecast our compliance with the financial covenants. As of
March 31, 2008 we are in compliance with all of those
covenants.
Mortgage Debt
The following table summarizes
our mortgage debt as of March 31, 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate as of
|
|
|
Principal
|
|
Maturity
|
|
Spread Over
|
|
March 31,
|
|
|
Amount
|
|
Date
(1)
|
|
30-Day LIBOR
|
|
2008
|
|
Hilton Arlington
|
|
$
|
24.7 million
|
|
|
|
November 2009
|
|
|
|
135 bps
|
|
|
|
4.23
|
%
|
Hilton Houston Westchase
|
|
$
|
32.8 million
|
|
|
|
February 2010
|
|
|
|
135 bps
|
|
|
|
4.23
|
%
|
|
|
|
(1)
|
|
We are required to make
interest-only payments until these loans mature, with two
optional one-year extensions.
|
We incurred interest expense on the mortgage loans of
$0.7 million and $1.1 million for the three months
ended March 31, 2008 and 2007, respectively. Based on the
terms of these mortgage loans, a prepayment cannot be made
during the first year after it has been entered. After one year,
a penalty of 1 percent is assessed on any prepayments. The
penalty is reduced ratably over the course of the second year.
There is no penalty for prepayments made in the third year.
In May 2008, we placed a non-recourse mortgage of
$25.0 million on the Sheraton Columbia. We are required to
make interest-only payments until the March 2011. Beginning May
2011 the loan will amortize over a 25 year period. The loan
bears interest at a rate of LIBOR, plus 200 basis points.
We used the net proceeds to pay down the revolver under our
Credit Facility. Upon making the principle reduction payment
towards our revolver, we expect to have approximately
$47 million available under the Credit Facility. We have
the ability to borrow up to an additional $10.0 million
under the mortgage based upon achieving certain net operating
income hurdles and renovation milestones.
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|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
In an effort to manage interest rate risk covering our
outstanding debt, we have entered into interest rate cap
agreements and an interest rate collar agreement that are
designed to provide an economic hedge against the potential
effect of future interest rate fluctuations.
In October 2006, we entered into an interest rate cap agreement
in connection with the purchase of the Hilton Arlington. The
$24.7 million, three-year interest rate cap agreement is
designed to hedge against the potential effect
30
of future interest rate fluctuations. The interest rate
agreement caps the
30-day
LIBOR
at 7.25 percent and is scheduled to mature on
November 19, 2009. In February 2007, we entered into an
interest rate cap agreement in connection with the purchase of
the Hilton Houston Westchase. The $32.8 million, three-year
interest rate cap agreement is designed to hedge against the
potential effect of future interest rate fluctuations. The
interest rate agreement caps the
30-day
LIBOR
at 7.25 percent and is scheduled to mature on
February 9, 2010. At March 31, 2008, the total fair
value of these interest rate cap agreements was not significant.
In January 2008, we entered into an interest rate collar
agreement for a notional amount of $110.0 million to hedge
against the potential effect of future interest rate fluctuation
underlying our Credit Facility. The interest rate collar
consists of an interest rate cap at 4.0 percent and an
interest rate floor at 2.47 percent on the
30-day
LIBOR
rate. We are to receive the effective difference of the cap rate
and the
30-day
LIBOR
rate, should LIBOR exceed the stated cap rate. Should the
30-day
LIBOR
rate fall to a level below the stated floor rate, we are to pay
the effective difference. The interest rate collar became
effective January 14, 2008, with monthly settlement dates
on the last day of each month beginning January 31, 2008,
and maturing January 31, 2010. At the time of inception, we
designated the interest rate collar to be a cash flow hedge. The
effective portion of the change in fair value of the interest
rate collar is recorded as other comprehensive income.
Ineffectiveness is recorded through earnings. At March 31,
2008, the interest rate collar had a fair value of
$(0.8) million. The amount of ineffectiveness was
inconsequential.
The
30-day
LIBOR rate, upon which our debt and interest rate cap and collar
agreements are based, decreased from 5.0 percent per annum,
as of December 31, 2007, to 2.7 percent per annum, as
of March 31, 2008. At March 31, 2008, we had
$233.4 million of outstanding debt that was variable rate.
Based upon this amount of variable rate debt and giving effect
to our interest rate hedging activities, a 1.0 percent
change in the
30-day
LIBOR
would have changed our interest expense by approximately
$0.6 million for the three months ended March 31, 2008.
There were no other material changes to the information provided
in Item 7A in our Annual Report on
Form 10-K
regarding our market risk other than the entrance into an
interest rate collar agreement, and the cancellation of an
interest rate cap agreement.
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information that is required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that the information is accumulated and
communicated to our management, including our chief executive
officer, chief financial officer, and chief accounting officer,
as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15-d-15(e)).
In connection with the preparation of our year end financial
statements, our chief executive officer and chief financial
concluded that the Companys internal control over
financial reporting was not effective as of December 31,
2007 because of the following material weakness:
The Company did not have effective policies and procedures
designed either to evaluate or review changes in accounting
principles in accordance with U.S. GAAP. Specifically, the
consideration and supervisory review of potential changes in the
Companys accounting principles was not designed to
encompass all of the factors required by GAAP. Furthermore, the
Companys disclosure committee did not have procedures
suitably designed to ensure that all of these factors were
reviewed before approving a change in accounting principle. As a
result, management adopted a new accounting policy related to
impairment of intangible assets during the first quarter of 2007
that was not in accordance with GAAP. This material weakness
resulted in material misstatements in the Companys interim
consolidated financial statements for the periods ended
March 31, 2007, June 30, 2007 and September 30,
2007, all of which have been restated in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2007.
Following the implementation of the remedial actions described
below and in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2007, we carried out an
evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our
chief financial officer, of the
31
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based on this
evaluation, we concluded that our disclosure controls and
procedures were effective as of March 31, 2008.
Changes
in Internal Control over Financial Reporting
In order to remedy the material weakness described above, during
the first quarter of 2008, management has formalized specific
actions that are required to be performed by the disclosure
committee with respect to the evaluation of accounting changes.
Except as described above, there have been no changes in the
Companys internal control over financial reporting during
the first quarter of 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met.
In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control
systems, there is only reasonable assurance that our controls
will succeed in achieving their stated goals under all potential
future conditions.
32
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
In the course of normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or
asserted against us. Based on currently available facts, we
believe that the disposition of matters pending or asserted will
not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
(a)
Exhibits
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Company, formerly MeriStar Hotels & Resorts, Inc.
(incorporated by reference to Exhibit 3.1 to the
Companys
Form S-l/A
filed with the Securities and Exchange Commission on
July 23, 1998 (Registration
No. 333-49881)).
|
|
3
|
.1.1
|
|
Certificate of Amendment of the Restated Certificate of
Incorporation of the Company dated June 30, 2001
(incorporated by reference to Exhibit 3.1.1 to the
Companys
Form 10-K
filed with the Securities and Exchange Commission on
March 8, 2002).
|
|
3
|
.1.2
|
|
Certificate of Merger of Interstate Hotels Corporation into
MeriStar Hotels & Resorts, Inc. (incorporated by
reference to Exhibit 3.1.2 to the Companys
Form 8-A/A
filed with the Securities and Exchange Commission on
August 2, 2002).
|
|
3
|
.1.3
|
|
Certificate of Amendment of the Restated Certificate of
Incorporation of the Company dated July 31, 2002
(incorporated by reference to Exhibit 3.1.3 to the
Companys
Form 8-A/A
filed with the Securities and Exchange Commission on
August 2, 2002).
|
|
3
|
.2
|
|
Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
December 20, 2007).
|
|
4
|
.1
|
|
Form of Common Stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Companys
Form 8-
A/A filed with the Securities and Exchange Commission on
August 2, 2002).
|
|
4
|
.2
|
|
Preferred Share Purchase Rights Agreement, dated July 23,
1998, between the Company, formerly MeriStar Hotels &
Resorts, Inc., and the Rights Agent (incorporated by reference
to Exhibit 4.4 to the Companys
Form S-l/A
filed with the Securities and Exchange Commission on
July 23, 1998 (Registration
No. 333-49881)).
|
|
4
|
.2.1
|
|
Amendment to Rights Agreement, dated December 8, 2000,
between the Company, formerly MeriStar Hotels &
Resorts, Inc., and the Rights Agent (incorporated by reference
to Exhibit 4.1 to the Companys
Form 8-K
filed with the Securities and Exchange Commission on
December 12, 2000).
|
|
4
|
.2.2
|
|
Second Amendment to Rights Agreement, dated May 1, 2002,
between the Company, formerly MeriStar Hotels &
Resorts, Inc., and the Rights Agent (incorporated by reference
to Exhibit 4.1 to the Companys
Form 8-K
filed with the Securities and Exchange Commission on May 3,
2002).
|
|
4
|
.3
|
|
Form of Rights Certificate (incorporated by reference to
Exhibit 4.3 to the Companys
Form S-l/A
filed with the Securities and Exchange Commission on
July 23, 1998 (Registration
No. 333-49881)).
|
|
31
|
.1*
|
|
Sarbanes-Oxley Act Section 302 Certifications of the Chief
Executive Officer.
|
|
31
|
.2*
|
|
Sarbanes-Oxley Act Section 302 Certifications of the Chief
Financial Officer.
|
|
32
|
*
|
|
Sarbanes-Oxley Act Section 906 Certifications of Chief
Executive Officer and Chief Financial Officer.
|
33
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.
Interstate
Hotels & Resorts, Inc.
|
|
|
|
By:
|
/s/
Denis
S. Mccarthy
|
Denis S. McCarthy
Chief Accounting Officer
Dated: May 8, 2008
34
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