Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On August 31, 2017, RLJ Lodging Trust (the “Company or “RLJ”), RLJ Lodging Trust, L.P. (the “Operating Partnership”), Rangers Sub I, LLC, a wholly owned subsidiary of the Operating Partnership (“Rangers”), and Rangers Sub II, LP, a wholly owned subsidiary of the Operating Partnership (“Partnership Merger Sub”), consummated the transactions contemplated by the definitive Agreement and Plan of Merger (the “Merger Agreement”), dated as of April 23, 2017, with FelCor Lodging Trust Incorporated (“FelCor”) and FelCor Lodging Limited Partnership (“FelCor LP”) pursuant to which Partnership Merger Sub merged with and into FelCor LP, with FelCor LP surviving as an indirect wholly owned subsidiary of the Operating Partnership (the “Partnership Merger”), and, immediately thereafter, FelCor merged with and into Rangers, with Rangers surviving as a wholly owned subsidiary of the Operating Partnership (the “REIT Merger” and, together with the Partnership Merger, the “Mergers”).
Upon completion of the REIT Merger and under the terms of the Merger Agreement, each issued and outstanding share of common stock, par value $0.01 per share, of FelCor (other than shares held by any wholly owned subsidiary of FelCor or by the Company or any of its subsidiaries) was converted into the right to receive 0.362 (the “Common Exchange Ratio”) common shares of beneficial interest, par value $0.01 per share, of the Company (the “Common Shares”), and each issued and outstanding share of $1.95 Series A cumulative convertible preferred stock, par value $0.01 per share, of FelCor was converted into the right to receive one $1.95 Series A Cumulative Convertible Preferred Share, par value $0.01 per share, of the Company (a “Series A Preferred Share”).
Upon completion of the Partnership Merger and under the terms of the Merger Agreement, each limited partner of FelCor LP was entitled to elect to exchange its outstanding common limited partnership units in FelCor LP (the “FelCor LP Common Units”) for a number of newly issued Common Shares based on the Common Exchange Ratio. Upon completion of the Partnership Merger, each outstanding FelCor LP Common Unit of any holder who did not make the foregoing election was converted into the right to receive a number of common limited partnership units in the Operating Partnership (the “OP Units”) based on the Common Exchange Ratio. No fractional Common Shares or OP Units were issued in the Mergers, and the value of any fractional interests was paid in cash.
The total consideration for the Mergers was approximately $1.4 billion, which included the Company issuing approximately 50.4 million Common Shares at $20.18 per share, to FelCor common stockholders, approximately 12.9 million Series A Preferred Shares at $28.49 per share, to former FelCor preferred stockholders, approximately 0.2 million OP Units at $20.18 per unit, to former FelCor LP limited partners, and cash. The total consideration consisted of the following (in thousands):
| | Consideration | |
Common Shares | | $ | 1,016,227 | |
Series A Preferred Shares | | 366,936 | |
OP Units | | 4,342 | |
Cash, net of cash acquired | | 41,921 | |
Total consideration | | $ | 1,429,426 | |
The Company allocated the purchase price consideration as follows (in thousands):
| | Allocation | |
Investment in hotel properties | | $ | 2,707,319 | |
Investment in unconsolidated joint ventures | | 25,651 | |
Restricted cash reserves | | 17,038 | |
Hotel and other receivables | | 28,308 | |
Intangible assets | | 151,706 | |
Prepaid expenses and other assets | | 22,525 | |
Debt | | (1,305,337 | ) |
Accounts payable and other liabilities | | (122,163 | ) |
Advance deposits and deferred revenue | | (15,779 | ) |
Accrued interest | | (22,612 | ) |
Distributions payable | | (4,312 | ) |
Noncontrolling interest in consolidated joint ventures | | (8,488 | ) |
Preferred equity in a consolidated joint venture | | (44,430 | ) |
Total consideration | | $ | 1,429,426 | |
The following unaudited pro forma condensed combined financial statements for the year ended December 31, 2016 and the nine months ended September 30, 2017 have been prepared as if the Mergers occurred on January 1, 2016 for purposes of the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and nine months ended September 30, 2017. The unaudited pro forma condensed combined statements of operations are not necessarily indicative of what the actual operating results would have been had the Mergers occurred on January 1, 2016, nor do they purport to represent RLJ’s future operating results. Because the Mergers are already reflected in RLJ’s consolidated balance sheet as of September 30, 2017 included in RLJ’s Quarterly Report on Form 10-Q for the quarter then ended, a pro forma combined balance sheet is not required to be presented as part of the unaudited pro forma financial information.
The estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available and may result in variances to the amounts presented in the unaudited pro forma condensed combined statements of operations.
The assumptions and estimates underlying the adjustments to the unaudited pro forma condensed combined statements of operations are described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The adjustments are based on available information and assumptions that management of RLJ considered to be reasonable. The unaudited pro forma condensed combined statements of operations do not purport to: (1) represent the results of RLJ’s operations that would have actually occurred had the Mergers occurred on January 1, 2016; or (2) project RLJ’s results of operations for any future period.
In the third quarter of 2017, FelCor sold two hotels prior to the Mergers that exceeded the significance level that requires the presentation of pro forma condensed combined financial information pursuant to Article 11 of Regulation S-X. FelCor’s historical consolidated statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017 have been adjusted to reflect the significant dispositions. For purposes of the unaudited pro forma condensed combined financial statements, these dispositions are assumed to have occurred on January 1, 2016.
The unaudited pro forma condensed combined statements of operations have been developed from, and should be read in conjunction with, (i) the consolidated financial statements of RLJ and the accompanying notes thereto included in RLJ’s Annual Report on Form 10-K for the year ended December 31, 2016 and Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, (ii) the consolidated financial statements of FelCor and the accompanying notes thereto included in FelCor’s Annual Report on Form 10-K for the year ended December 31, 2016, as amended, and (iii) the accompanying notes to the unaudited pro forma condensed combined financial statements. In RLJ’s opinion, all adjustments necessary to reflect the Mergers have been made.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016
(in thousands)
| | RLJ | | FelCor | | FelCor | | FelCor | | ProForma | | RLJ | |
| | Historical | | Historical | | Dispositions a | | Adjusted | | Adjustments | | Pro Forma | |
Revenue | | | | | | | | | | | | | |
Operating revenue | | | | | | | | | | | | | |
Room revenue | | $ | 1,010,637 | | $ | 661,640 | | $ | (24,676 | ) | $ | 636,964 | | $ | — | | $ | 1,647,601 | |
Food and beverage revenue | | 111,691 | | 155,227 | | (4,941 | ) | 150,286 | | — | | 261,977 | |
Other operating department revenue | | 37,667 | | 50,087 | | (814 | ) | 49,273 | | — | | 86,940 | |
Total revenue | | $ | 1,159,995 | | $ | 866,954 | | $ | (30,431 | ) | $ | 836,523 | | $ | — | | $ | 1,996,518 | |
Expense | | | | | | | | | | | | | |
Operating expense | | | | | | | | | | | | | |
Room expense | | $ | 228,656 | | $ | 171,883 | | $ | (12,090 | ) | $ | 159,793 | | $ | — | | $ | 388,449 | |
Food and beverage expense | | 79,589 | | 119,047 | | (5,441 | ) | 113,606 | | — | | 193,195 | |
Management and franchise fee expense | | 118,210 | | 32,935 | | — | | 32,935 | | — | | 151,145 | |
Other operating expense | | 241,654 | | 227,300 | | (9,486 | ) | 217,814 | | — | | 459,468 | |
Total property operating expense | | 668,109 | | 551,165 | | (27,017 | ) | 524,148 | | — | | 1,192,257 | |
Depreciation and amortization | | 162,500 | | 114,054 | | (4,765 | ) | 109,289 | | (26,604 | )b | 245,185 | |
Impairment loss | | — | | 26,459 | | (20,126 | ) | 6,333 | | | | 6,333 | |
Property tax, insurance and other | | 77,281 | | 70,057 | | (4,249 | ) | 65,808 | | 5,143 | c | 148,232 | |
General and administrative | | 31,516 | | 27,037 | | — | | 27,037 | | — | | 58,553 | |
Transaction and pursuit costs | | 192 | | — | | — | | — | | — | | 192 | |
Total operating expense | | 939,598 | | 788,772 | | (56,157 | ) | 732,615 | | (21,461 | ) | 1,650,752 | |
Operating income | | 220,397 | | 78,182 | | 25,726 | | 103,908 | | 21,461 | | 345,766 | |
Earnings from unconsolidated joint ventures | | — | | 1,533 | | — | | 1,533 | | (1,119 | )e | 414 | |
Other income | | 303 | | 342 | | — | | 342 | | — | | 645 | |
Interest income | | 1,695 | | 62 | | — | | 62 | | — | | 1,757 | |
Interest expense | | (58,820 | ) | (78,244 | ) | — | | (78,244 | ) | 15,483 | f | (121,581 | ) |
Income from continuing operations before income tax expense | | 163,575 | | 1,875 | | 25,726 | | 27,601 | | 35,825 | | 227,001 | |
Income tax expense | | (8,190 | ) | (873 | ) | — | | (873 | ) | (11,660 | )g | (20,723 | ) |
Income from continuing operations | | 155,385 | | 1,002 | | 25,726 | | 26,728 | | 24,165 | | 206,278 | |
Loss from discontinued operations | | — | | (3,131 | ) | — | | (3,131 | ) | — | | (3,131 | ) |
Gain on sale of hotel properties | | 45,929 | | 6,322 | | — | | 6,322 | | — | | 52,251 | |
Net income | | 201,314 | | 4,193 | | 25,726 | | 29,919 | | 24,165 | | 255,398 | |
Net income attributable to noncontrolling interests | | | | | | | | | | | | | |
Preferred distributions - consolidated joint venture | | — | | (1,461 | ) | — | | (1,461 | ) | — | | (1,461 | ) |
Noncontrolling interest in consolidated joint venture | | (55 | ) | 673 | | — | | 673 | | — | | 618 | |
Noncontrolling interest in the Operating Partnership | | (907 | ) | 93 | | — | | 93 | | — | | (814 | ) |
Preferred dividends | | — | | (25,115 | ) | — | | (25,115 | ) | | | (25,115 | ) |
Net income attributable to common shareholders | | $ | 200,352 | | $ | (21,617 | ) | $ | 25,726 | | $ | 4,109 | | $ | 24,165 | | $ | 228,626 | |
Basic per common share data: | | | | | | | | | | | | | |
Net income (loss) per share attributable to common shareholders | | $ | 1.61 | | $ | (0.16 | ) | $ | 0.19 | | $ | 0.03 | | $ | (0.33 | ) | $ | 1.31 | |
Weighted-average number of common shares | | 123,651 | | 138,128 | | 138,128 | | 138,128 | | (87,770 | )h | 174,009 | |
Diluted per common share data: | | | | | | | | | | | | | |
Net income (loss) per share attributable to common shareholders | | $ | 1.61 | | $ | (0.16 | ) | $ | 0.19 | | $ | 0.03 | | $ | (0.33 | ) | $ | 1.31 | |
Weighted-average number of common shares | | 123,879 | | 138,128 | | 138,128 | | 138,128 | | (87,770 | )h | 174,237 | |
See accompanying notes to the unaudited pro forma condensed combined financial statements
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(in thousands)
| | RLJ | | FelCor | | FelCor | | FelCor | | ProForma | | RLJ | |
| | Historical | | Historical | | Dispositions a | | Adjusted | | Adjustments | | Pro Forma | |
Revenue | | | | | | | | | | | | | |
Operating revenue | | | | | | | | | | | | | |
Room revenue | | $ | 770,751 | | $ | 425,682 | | $ | (11,028 | ) | $ | 414,654 | | $ | — | | $ | 1,185,405 | |
Food and beverage revenue | | 91,392 | | 90,572 | | (2,287 | ) | 88,285 | | — | | 179,677 | |
Other operating department revenue | | 31,628 | | 35,261 | | (562 | ) | 34,699 | | — | | 66,327 | |
Total revenue | | $ | 893,771 | | $ | 551,515 | | $ | (13,877 | ) | $ | 537,638 | | $ | — | | $ | 1,431,409 | |
Expense | | | | | | | | | | | | | |
Operating expense | | | | | | | | | | | | | |
Room expense | | $ | 176,523 | | $ | 112,813 | | $ | (6,408 | ) | $ | 106,405 | | $ | — | | $ | 282,928 | |
Food and beverage expense | | 66,458 | | 71,828 | | (2,987 | ) | 68,841 | | — | | 135,299 | |
Management and franchise fee expense | | 86,110 | | 19,901 | | — | | 19,901 | | — | | 106,011 | |
Other operating expense | | 195,000 | | 147,827 | | (5,340 | ) | 142,487 | | — | | 337,487 | |
Total property operating expense | | 524,091 | | 352,369 | | (14,735 | ) | 337,634 | | — | | 861,725 | |
Depreciation and amortization | | 122,136 | | 73,065 | | (2,027 | ) | 71,038 | | (15,915 | )b | 177,259 | |
Impairment loss | | — | | 35,109 | | (35,109 | ) | — | | — | | — | |
Property tax, insurance and other | | 60,929 | | 44,278 | | (1,908 | ) | 42,370 | | 3,428 | c | 106,727 | |
General and administrative | | 28,757 | | 16,006 | | — | | 16,006 | | — | | 44,763 | |
Transaction and pursuit costs | | 36,923 | | 68,248 | | — | | 68,248 | | (104,958 | )d | 213 | |
Total operating expense | | 772,836 | | 589,075 | | (53,779 | ) | 535,296 | | (117,445 | ) | 1,190,687 | |
Operating income | | 120,935 | | (37,560 | ) | 39,902 | | 2,342 | | 117,445 | | 240,722 | |
Earnings from unconsolidated joint ventures | | 57 | | 1,074 | | — | | 1,074 | | (746 | )e | 385 | |
Other income | | 323 | | 100 | | — | | 100 | | — | | 423 | |
Interest income | | 2,306 | | 126 | | — | | 126 | | — | | 2,432 | |
Interest expense | | (48,527 | ) | (51,690 | ) | — | | (51,690 | ) | 10,477 | f | (89,740 | ) |
Gain (loss) on settlement | | 2,670 | | (3,278 | ) | — | | (3,278 | ) | — | | (608 | ) |
Income from continuing operations before income tax expense | | 77,764 | | (91,228 | ) | 39,902 | | (51,326 | ) | 127,176 | | 153,614 | |
Income tax expense | | (9,362 | ) | (499 | ) | — | | (499 | ) | (6170 | )g | (16,031 | ) |
Income from continuing operations | | 68,402 | | (91,727 | ) | 39,902 | | (51,825 | ) | 121,006 | | 137,583 | |
Loss from discontinued operations | | — | | (3,415 | ) | — | | (3,415 | ) | — | | (3,415 | ) |
Gain on sale of hotel properties | | (49 | ) | (1,764 | ) | 1,566 | | (198 | ) | — | | (247 | ) |
Net income | | 68,353 | | (96,906 | ) | 41,468 | | (55,438 | ) | 121,006 | | 133,921 | |
Net income attributable to noncontrolling interests | | | | | | | | | | | | | |
Preferred distributions - consolidated joint venture | | (122 | ) | (979 | ) | — | | (979 | ) | — | | (1,101 | ) |
Noncontrolling interest in consolidated joint venture | | 5 | | 545 | | — | | 545 | | — | | 550 | |
Noncontrolling interest in the Operating Partnership | | (318 | ) | 495 | | — | | 495 | | — | | 177 | |
Preferred dividends | | (2,093 | ) | (16,744 | ) | — | | (16,744 | ) | | | (18,837 | ) |
Net income attributable to common shareholders | | $ | 65,825 | | $ | (113,589 | ) | $ | 41,468 | | $ | (72,121 | ) | $ | 121,006 | | $ | 114,710 | |
Basic per common share data: | | | | | | | | | | | | | |
Net income (loss) per share attributable to common shareholders | | $ | 0.50 | | $ | (0.83 | ) | $ | 0.30 | | $ | (0.53 | ) | $ | 0.69 | | $ | 0.66 | |
Weighted-average number of common shares | | 129,317 | | 137,332 | | 137,332 | | 137,332 | | (92,508 | )h | 174,141 | |
Diluted per common share data: | | | | | | | | | | | | | |
Net income (loss) per share attributable to common shareholders | | $ | 0.50 | | $ | (0.83 | ) | $ | 0.30 | | $ | (0.53 | ) | $ | 0.69 | | $ | 0.66 | |
Weighted-average number of common shares | | 129,399 | | 137,332 | | 137,332 | | 137,332 | | (92,508 | )h | 174,223 | |
See accompanying notes to the unaudited pro forma condensed combined financial statements
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands unless otherwise noted)
1. Overview
The unaudited pro forma condensed combined financial statements have been prepared by applying the acquisition method of accounting with RLJ as the acquiring entity. Accordingly, the total estimated purchase price was allocated to the FelCor assets acquired and the liabilities assumed based on their respective fair values, as further described below.
To the extent identified, certain reclassifications have been reflected in the unaudited pro forma condensed combined statements of operations to conform FelCor’s financial statement presentation to that of RLJ. However, the unaudited pro forma condensed combined statements of operations may not reflect all the adjustments necessary to conform the accounting policies of FelCor.
The pro forma adjustments represent RLJ management’s preliminary estimates and are subject to change as additional information becomes available and additional analyses are performed. The unaudited pro forma condensed combined statements of operations do not reflect the impact of possible cost savings from operating efficiencies or synergies. Also, the unaudited pro forma condensed combined statements of operations do not reflect possible adjustments related to restructuring or integration activities that have yet to be determined or transaction or other costs following the Mergers that are not expected to have a continuing impact. Further, non-recurring transaction-related expenses are not included in the unaudited pro forma condensed combined statements of operations.
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and for the nine months ended September 30, 2017 combine the historical consolidated statements of operations of RLJ and FelCor, giving effect to the Mergers as if they occurred on January 1, 2016, the beginning of the earliest period presented.
Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2016 and the nine months ended September 30, 2017
The historical amounts include RLJ’s and FelCor’s actual operating results for the periods presented. The pro forma adjustments to the historical amounts are presented in the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017, assuming the Mergers occurred on January 1, 2016. Noted below are the explanations for the adjustments included in the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017:
a. FelCor Significant Dispositions
In the third quarter of 2017, FelCor sold two hotels that exceeded the significance level that requires the presentation of pro forma condensed combined financial information pursuant to Article 11 of Regulation S-X. FelCor’s historical consolidated statements of operations for the year ended December 31, 2016 and the nine months ended September 30, 2017 have been adjusted to reflect these significant dispositions. For purposes of the unaudited pro forma condensed combined statements of operations, these dispositions are assumed to have occurred on January 1, 2016.
b. Depreciation and Amortization
For purposes of the unaudited pro forma condensed combined statements of operations, depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives of 40 years for buildings, 15 years for building improvements, and five years for furniture, fixtures, and equipment. As RLJ would have commenced depreciation and amortization on January 1, 2016, the depreciation and amortization expense included in FelCor’s historical financial statements has been removed so that the unaudited pro forma condensed combined statements of operations reflect the depreciation and amortization that RLJ would have recognized subsequent to the consummation of the Mergers.
c. Property tax, insurance and other
The pro forma adjustment represents the amortization of intangibles recognized in purchase accounting related to below market long-term ground leases. The intangibles are amortized to ground rent expense over the remaining terms of the ground leases.
d. Transaction and Pursuit Costs
Both RLJ and FelCor incurred significant merger-related transaction costs during the nine months ended September 30, 2017. The pro forma adjustment represents the reversal of these costs, which were directly related to the Mergers and will not have a continuing impact on the operating results of RLJ.
e. Equity in Income from Unconsolidated Joint Ventures
The pro forma adjustment represents the amortization of the differences between RLJ’s investment in unconsolidated joint ventures as compared to the historical basis of the joint ventures.
f. Interest Expense
The pro forma adjustments to interest expense represent the (1) amortization of the above-market debt fair value adjustment as a result of recognizing the assumed FelCor debt at fair value, and (2) elimination of FelCor’s historic amortization of deferred financing costs.
g. Income Tax Expense
The pro forma adjustment represents an increase in income tax expense due to a potential ownership change limitation on the utilization of net operating loss carryforwards as a result of the Mergers.
h. Earnings (Loss) Per Share
The pro forma adjustment to shares outstanding represents the conversion of the issued and outstanding shares of FelCor common stock into approximately 50.4 million Common Shares. For purposes of the pro forma unaudited condensed combined statements of operations, the conversion is assumed to have occurred on January 1, 2016.
