Exhibit 99.1
REVISED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial information has been prepared by the management of W2007 Grace Acquisition I, Inc. (the Company) and gives pro forma effect to the completion of (i) the transfer by subsidiaries of the Company of 20 wholly owned hotels (the Company Hotel Transfer) and the transfer by subsidiaries of WNT Holdings, LLC (WNT) of 96 hotels (the WNT Hotel Transfer, and, together with the Company Hotel Transfer, the Portfolio Transfer) pursuant to the Amended and Restated Real Estate Sale Agreement (the Agreement), dated November 11, 2014, with subsidiaries of American Realty Capital Hospitality Trust, Inc. (the Buyer), in exchange for total consideration of $1.808 billion, and (ii) the application of a portion of the proceeds from the transfer to defease $149.8 million outstanding under the Company’s notes payable, repay $3.7 million under one of the Company’s notes payable and repay $50.0 million in junior subordinated debt (the Debt Repayment). The following unaudited pro forma condensed consolidated financial information also gives pro forma effect to the exercise of the purchase option (the Purchase Option Exercise) by WNT Holdings, LLC (WNT) for 97% of the equity interests in W2007 Senior Mezz, LLC (Senior Mezz), the indirect owner of 106 hotels prior to the WNT Hotel Transfer.
The following unaudited pro forma condensed consolidated financial information is provided for informational purposes only. The unaudited pro forma condensed consolidated financial information is not necessarily indicative of what the financial position or results of operations of the Company actually would have been if the Portfolio Transfer, the Debt Repayment, and the Purchase Option Exercise had been completed as of and for the periods indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or operating results of the Company after consummation of the Portfolio Transfer, the Debt Repayment, and the Purchase Option Exercise.
In connection with the Company Hotel Transfer, the Company received preferred equity interests (Preferred Equity Interests) with an initial capital balance of approximately $99.8 million in a newly-formed Delaware limited liability company, ARC Hospitality Portfolio II Holdco, LLC, which is the indirect owner of 20 hotels in the Portfolio. Due to the Company’s continuing involvement in the hotels through the Preferred Equity Interest, the Company cannot recognize the Company Hotel Transfer as a sale under the current accounting guidance. Under the current accounting guidance, the Preferred Equity Interests are not recognized in the accompanying pro forma condensed consolidated financial statements, although the Company is legally entitled to all of its rights under the Preferred Equity Interests including payment of the initial capital balance of $99.8 million and the return thereon.
The Company will record all payments received under the Preferred Equity Interests as a reduction of the Investment in ARC Hotels if and when received. The unrecognized gain on the transaction and the return received on the Preferred Equity Interests will be recognized as income if and when the Preferred Equity Interests have been paid in full and the Company’s continuing involvement in the hotels ceases.
The unaudited pro forma condensed consolidated financial information is based on financial statements prepared in accordance with U.S. generally accepted accounting principles. In addition, the unaudited pro forma condensed consolidated financial information is based upon available information and a number of assumptions that the Company considers to be reasonable, and that have been made solely for purposes of developing such unaudited pro forma condensed consolidated financial information in compliance with the disclosure requirements of Regulation S-X Article 11 promulgated by the Securities and Exchange Commission (SEC).
The unaudited pro forma condensed consolidated statement of operations gives effect to the Portfolio Transfer, the Debt Repayment, and the Purchase Option Exercise as if they had occurred on January 1, 2014. The unaudited pro forma condensed consolidated balance sheet gives effect to the Portfolio Transfer and the Debt Repayment as if they had been consummated on December 31, 2014.
Pro forma adjustments related to the unaudited pro forma condensed consolidated statement of operations give effect to certain events that are (i) directly attributable to the Portfolio Transfer, the Debt Repayment, and the Purchase Option Exercise, (ii) factually supportable and (iii) expected to have a continuing impact on the Company’s results. Pro forma
adjustments related to the unaudited pro forma condensed consolidated balance sheet give effect to events (i) that are directly attributable to the Portfolio Transfer and the Debt Repayment and (ii) that are factually supportable regardless of whether they have a continuing impact or are non-recurring.
You should read this unaudited pro forma information in conjunction with the accompanying notes to the unaudited pro forma condensed consolidated financial information and the separate historical audited consolidated financial statements and accompanying notes of the Company as of and for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
W2007 GRACE ACQUISITION I, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2014
(in thousands, except share and per share amounts)
| | | | | | | | | | | | |
| | | As Reported | | | Portfolio Transfer | | | Pro Forma | |
| ASSETS | | | | | | | | | | | | |
INVESTMENTS IN REAL ESTATE, net | | $ | 240,830 | | | $ | (240,830 | )(a) | | $ | — | |
INVESTMENT IN SENIOR MEZZ | | | 4,920 | | | | (1,515 | )(b) | | | 3,405 | |
CASH AND CASH EQUIVALENTS | | | 12,444 | | | | 25,040 | (c) | | | 37,484 | |
RESTRICTED CASH | | | 2,809 | | | | (2,809 | )(d) | | | — | |
ACCOUNTS RECEIVABLE, net | | | 1,906 | | | | (1,056 | )(e) | | | 850 | |
OTHER ASSETS | | | 834 | | | | (427 | )(f) | | | 407 | |
DEFERRED FINANCING COSTS, net | | | 359 | | | | (359 | )(g) | | | — | |
DEFERRED FRANCHISE FEES, net | | | 918 | | | | (918 | )(h) | | | — | |
| | | | | | | | | | | | |
Total assets | | $ | 265,020 | | | $ | (222,874 | ) | | $ | 42,146 | |
| | | | | | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | | | | | |
NOTES PAYABLE | | $ | 203,126 | | | $ | (203,126 | )(i) | | $ | — | |
INVESTMENT IN ARC HOTELS, net | | | — | | | | 6,209 | (j) | | | 6,209 | |
OTHER LIABILITIES: | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 33,437 | | | | — | | | | 33,437 | |
Payable to affiliate | | | 6,763 | | | | 1,734 | (k) | | | 8,497 | |
Accrued interest payable | | | 1,020 | | | | (1,020 | )(l) | | | — | |
| | | | | | | | | | | | |
Total liabilities | | | 244,346 | | | | (196,203 | ) | | | 48,143 | |
| | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | | | | | |
Preferred stock, $0.01 par value, 10,000,000 shares authorized: | | | | | | | | | | | | |
Series B, 8.75%, $0.01 par value, $25.00 redemption value, 3,450,000 shares issued and outstanding | | | 60,375 | | | | — | | | | 60,375 | |
Series C, 9.00%, $0.01 par value, $25.00 redemption value, 2,400,000 shares issued and outstanding | | | 40,800 | | | | — | | | | 40,800 | |
Series D, 8.00%, $0.01 par value, $250.00 redemption value, 125 shares issued and outstanding | | | 31 | | | | — | | | | 31 | |
Common stock, $0.01 par value, 100,000,000 shares authorized, 100 shares issued and outstanding | | | — | | | | — | | | | — | |
Additional paid-in-capital | | | 9,979 | | | | — | | | | 9,979 | |
Retained deficit | | | (74,764 | ) | | | (518 | )(m) | | | (75,282 | ) |
| | | | | | | | | | | | |
Total shareholders’ equity | | | 36,421 | | | | (518 | ) | | | 35,903 | |
| | | |
NON-CONTROLLING INTEREST | | | (15,747 | ) | | | (26,153 | )(m) | | | (41,900 | ) |
| | | | | | | | | | | | |
Total equity | | | 20,674 | | | | (26,671 | ) | | | (5,997 | ) |
| | | | | | | | | | | | |
Total liabilities and equity | | $ | 265,020 | | | $ | (222,874 | ) | | $ | 42,146 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of this pro forma condensed consolidated balance sheet.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)
| (a) | Represents the net historical cost basis of the Company’s 20 wholly owned hotels that were transferred to the Buyer and have been recorded in Investment in ARC Hotels (see Note (j) below). |
| (b) | Represents the decrease in the recorded value of the Company’s 3% interest in Senior Mezz as a result of the WNT Hotel Transfer. |
| (c) | Represents the release of reserves related to the Company’s notes payable ($2,809) (see note (d) below) and net cash received from the Company Hotel Transfer ($22,231). |
| (d) | Represents the release of reserves related to the Company’s notes payable. |
| (e) | Represents the accounts receivable transferred to the Buyer in the Company Hotel Transfer. |
| (f) | Represents the other assets transferred to the Buyer in the Company Hotel Transfer. |
| (g) | Represents the write-off of deferred financing costs related to the Company’s notes payable that were repaid in connection with the Company Hotel Transfer. |
| (h) | Represents the write-off of deferred franchise fees related to the Company’s hotels that were transferred in the Company Hotel Transfer. |
| (i) | Represents the Debt Repayment. |
| (j) | Represents the net book value of the hotels (see Note (a) above, $240,830) transferred less the cash received from the Company Hotel Transfer ($247,039). |
| (k) | Represents disposition fee payable to Goldman Sachs Realty Management, L.P. under its asset management agreement with the Company. |
| (l) | Represents the payment of accrued interest in connection with the Debt Repayment. |
| (m) | Represents the decrease in equity from the Company Hotel Transfer and the Debt Repayment in which the Company has an effective interest of 2% and non-controlling interest effective interest of 98% and the WNT Hotel Transfer in which the Company has an effective interest of 1% and non-controlling interest effective interest of 99%. |
W2007 GRACE ACQUISITION I, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | As Reported | | | Purchase Option
Exercise (a) | | | Company Hotel
Transfer (b) | | | Other Pro Forma
Adjustments | | | Pro Forma | |
REVENUES: | | | | | | | | | | | | | | | | | | | | |
Rooms | | $ | 173,222 | | | $ | (97,011 | ) | | $ | (76,211 | ) | | $ | — | | | $ | — | |
Food and beverage | | | 3,522 | | | | (2,050 | ) | | | (1,472 | ) | | | — | | | | — | |
Other | | | 2,883 | | | | (1,745 | ) | | | (1,138 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total hotel revenues | | | 179,627 | | | | (100,806 | ) | | | (78,821 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | |
Direct hotel expenses: | | | | | | | | | | | | | | | | | | | | |
Rooms | | | 42,743 | | | | (24,094 | ) | | | (18,649 | ) | | | — | | | | — | |
Food and beverage | | | 3,167 | | | | (1,777 | ) | | | (1,390 | ) | | | — | | | | — | |
Other | | | 1,708 | | | | (1,014 | ) | | | (694 | ) | | | — | | | | — | |
Non-departmental | | | 55,829 | | | | (32,101 | ) | | | (23,728 | ) | | | — | | | | — | |
Property tax, ground lease, insurance and property management fees | | | 13,064 | | | | (7,507 | ) | | | (5,557 | ) | | | — | | | | — | |
Corporate overhead | | | 5,967 | | | | (1,141 | ) | | | (403 | ) | | | — | | | | 4,423 | |
Asset management fees | | | 3,073 | | | | (1,717 | ) | | | (256 | ) | | | — | | | | 1,100 | |
Depreciation and amortization | | | 33,308 | | | | (19,344 | ) | | | — | | | | — | | | | 13,964 | |
Impairment charges | | | 9,036 | | | | — | | | | (9,036 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 167,895 | | | | (88,695 | ) | | | (59,713 | ) | | | — | | | | 19,487 | |
| | | | | | | | | | | | | | | | | | | | |
OPERATING INCOME (LOSS) | | | 11,732 | | | | (12,111 | ) | | | (19,108 | ) | | | — | | | | (19,487 | ) |
Equity in income (loss) from Senior Mezz | | | (1,429 | ) | | | — | | | | — | | | | (190 | )(c) | | | (1,619 | ) |
Interest income | | | 76 | | | | — | | | | — | | | | — | | | | 76 | |
Interest expense | | | (31,325 | ) | | | 19,430 | | | | 10,283 | | | | 1,612 | (d) | | | — | |
Other income | | | 112 | | | | (3 | ) | | | (20 | ) | | | — | | | | 89 | |
Contingent loss on Litigation settlement | | | (24,250 | ) | | | — | | | | — | | | | — | | | | (24,250 | ) |
Gain on sale of investment in real estate | | | 221 | | | | | | | | — | | | | — | | | | 221 | |
Gain on extinguishment of debt | | | 13,199 | | | | (13,199 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
NET INCOME (LOSS) | | | (31,664 | ) | | | (5,883 | ) | | | (8,845 | ) | | | 1,422 | | | | (44,970 | ) |
Net (income) loss attributable tonon-controlling interest | | | 4,384 | | | | 5,824 | (f) | | | 8,668 | (f) | | | (1,408 | )(e) | | | 17,468 | |
| | | | | | | | | | | | | | | | | | | | |
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | | $ | (27,280 | ) | | $ | (59 | ) | | $ | (177 | ) | | $ | 14 | | | $ | (27,502 | ) |
| | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of this unaudited pro forma condensed consolidated statement of operations.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
| (a) | The “Purchase Option Exercise” column reflects amounts included in the “As Reported” column that are the historical results of the 106 hotels owned by Senior Mezz that were subject to the Purchase Option Exercise, which were included in the Company’s historical consolidated statement of operations from January 1, 2014 to April 10, 2014. Effective with the Purchase Option Exercise on April 11, 2014, the Company deconsolidated the 106 hotels owned by Senior Mezz and began recognizing its 3% interest in Senior Mezz using the equity method. |
| (b) | The “Company Hotel Transfer” column reflects amounts included in the “As Reported” column that are the historical results of the Company’s 20 wholly owned hotels, which were included in the Company’s historical consolidated statements of operations. |
| (c) | Reflects the Company’s 3% interest in the pro forma results of operations from Senior Mezz as a result of the WNT Hotel Transfer. |
| (d) | Reflects the elimination of interest expense related to the junior subordinated debt that was repaid in connection with the Company Hotel Transfer. |
| (e) | Represents the net (income) loss attributable to non-controlling interest which for the Purchase Option Exercise is an effective interest of 99%, for the Company Hotel Transfer is an effective interest of 98% and for the other pro forma adjustments is an effective interest of 99%. |
