UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 1-14045
LASALLE HOTEL PROPERTIES
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 36-4219376
------------------------- ---------------------------------
(State or other jurisdic- (IRS Employer Identification No.)
tion of incorporation or
organization)
4800 Montgomery Lane, Suite M25, Bethesda, MD 20814
- ------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 301/941-1500
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. Yes [ X ] No [ ]
Indicate the number of common shares of beneficial interest of each class
outstanding as of the latest practicable date.
Outstanding at
Class August 9, 2001
----- ---------------
Common Shares of Beneficial 18,439,098
Interest ($0.01 par value)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 35
Item 2. Changes in Securities and Use of Proceeds . . . . . 35
Item 3. Defaults Upon Senior Securities . . . . . . . . . . 35
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . 35
Item 5. Other Information . . . . . . . . . . . . . . . . . 36
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 37
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASALLE HOTEL PROPERTIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
------
Investment in hotel properties, net . . . . . $ 566,960 $ 486,184
Investment in Affiliated Lessee . . . . . . . -- 13
Investment in Joint Ventures. . . . . . . . . 5,337 5,647
Cash and cash equivalents . . . . . . . . . . 6,774 1,414
Restricted cash reserves. . . . . . . . . . . 5,618 14,640
Rent receivable from lessees:
Affiliated Lessee . . . . . . . . . . . . . -- 2,344
Other Lessees . . . . . . . . . . . . . . . 6,279 6,816
Notes receivable:
Affiliated Lessee . . . . . . . . . . . . . -- 3,900
Other . . . . . . . . . . . . . . . . . . . 3,989 4,023
Hotel receivables (net of allowance for
doubtful accounts of $126). . . . . . . . . 6,190 --
Deferred financing costs, net . . . . . . . . 4,892 4,415
Prepaid expenses and other assets . . . . . . 10,047 2,497
---------- ----------
Total assets. . . . . . . . . . . . $ 616,086 $ 531,893
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings under credit facilities. . . . . . $ 198,186 $ 113,500
Bonds payable, net. . . . . . . . . . . . . . 42,500 40,314
Mortgage loans. . . . . . . . . . . . . . . . 119,269 119,964
Due to JLL. . . . . . . . . . . . . . . . . . -- 966
Due to Affiliated Lessee. . . . . . . . . . . -- 756
Accounts payable and accrued expenses . . . . 11,276 2,900
Advance deposits. . . . . . . . . . . . . . . 2,226 --
Accrued interest. . . . . . . . . . . . . . . 887 2,536
Distributions payable . . . . . . . . . . . . -- 7,131
---------- ----------
Total liabilities . . . . . . . . . 374,344 288,067
Minority interest in Operating Partnership. . 5,707 20,288
Minority interest in other partnerships . . . 10 10
Commitments and contingencies
LASALLE HOTEL PROPERTIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
June 30, December 31,
2001 2000
------------- ------------
(Unaudited)
SHAREHOLDERS' EQUITY:
Preferred shares of beneficial interest,
$.01 par value, 20,000,000 shares
authorized, no shares issued and
outstanding at June 30, 2001 and
December 31, 2000 . . . . . . . . . . . . -- --
Common shares of beneficial interest,
$.01 par value, 100,000,000 shares
authorized, 18,439,098 and 16,982,416
shares issued and outstanding at
June 30, 2001 and December 31, 2000,
respectively. . . . . . . . . . . . . . . 184 170
Additional paid-in capital. . . . . . . . . 276,058 256,950
Deferred compensation . . . . . . . . . . . (887) --
Accumulated other comprehensive loss. . . . (4) --
Distributions in excess of
Retained Earnings . . . . . . . . . . . . (39,326) (33,592)
---------- ----------
Total shareholders' equity. . . . . 236,025 223,528
---------- ----------
Total liabilities and
shareholders' equity. . . . . . . $ 616,086 $ 531,893
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
_ LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the six months ended
June 30,
--------------------------
2001 2000
---------- ----------
Revenues:
Hotel operating revenue:
Room revenue. . . . . . . . . . . . . $ 34,104 $ --
Food and beverage revenue . . . . . . 16,153 --
Other operating department revenue. . 5,255 --
Participating lease revenue:
Affiliated Lessee . . . . . . . . . . -- 13,131
Other Lessees . . . . . . . . . . . . 26,102 25,597
Interest income:
Affiliated Lessee . . . . . . . . . . -- 114
Other . . . . . . . . . . . . . . . . 448 457
Equity in income of Affiliated
Lessee. . . . . . . . . . . . . . . . -- 22
Equity in income of Joint Ventures. . . 139 408
Other income. . . . . . . . . . . . . . 186 56
---------- ----------
Total revenues. . . . . . . . . 82,387 39,785
---------- ----------
Expenses:
Hotel operating expenses:
Room. . . . . . . . . . . . . . . . . 8,293 --
Food and beverage . . . . . . . . . . 12,037 --
Other direct. . . . . . . . . . . . . 3,171 --
Other indirect. . . . . . . . . . . . 16,159 --
Depreciation and other
amortization. . . . . . . . . . . . . 15,103 14,233
Real estate, personal property taxes
and insurance . . . . . . . . . . . . 4,941 4,334
Ground rent . . . . . . . . . . . . . . 1,974 1,509
General and administrative. . . . . . . 2,808 534
Interest. . . . . . . . . . . . . . . . 10,863 9,755
Amortization of deferred financing
costs . . . . . . . . . . . . . . . . 910 518
Advisory fee. . . . . . . . . . . . . . -- 1,723
Lease termination, advisory trans-
action and subsidiary purchase
expenses. . . . . . . . . . . . . . . 1,923 --
Other expenses. . . . . . . . . . . . . 3 12
---------- ----------
Total expenses. . . . . . . . . 78,185 32,618
---------- ----------
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(Dollars in thousands, except per share data)
(Unaudited)
For the six months ended
June 30,
--------------------------
2001 2000
---------- ----------
Income before minority interest,
writedown of property held for sale,
extraordinary item and income
tax expense . . . . . . . . . . . . . . 4,202 7,167
Minority interest in Operating
Partnership . . . . . . . . . . . . . . (39) (501)
---------- ----------
Income before writedown of property
held for sale, extraordinary item
and income tax expense. . . . . . . . . 4,163 6,666
Writedown of property held for sale . . . (1,843) (1,266)
---------- ----------
Income before extraordinary item and
income tax expense. . . . . . . . . . . 2,320 5,400
Extraordinary loss. . . . . . . . . . . . (973) --
---------- ----------
Income before income tax expense. . . . . 1,347 5,400
Income tax expense. . . . . . . . . . . . (32) --
---------- ----------
Net income applicable to
common shareholders . . . . . . . . . . $ 1,315 $ 5,400
========== ==========
Earnings per Common Share - Basic:
Income before extraordinary item. . . . $ 0.12 $ 0.32
Extraordinary loss. . . . . . . . . . . (0.05) --
---------- ----------
Net income. . . . . . . . . . . . . . . $ 0.07 $ 0.32
========== ==========
Earnings per Common Share - Diluted:
Income before extraordinary item. . . . $ 0.12 $ 0.32
Extraordinary loss. . . . . . . . . . . (0.05) --
---------- ----------
Net income. . . . . . . . . . . . . . . $ 0.07 $ 0.32
========== ==========
Weighted average common shares
outstanding:
- basic. . . . . . . . . . . . . . . . 18,250,968 16,891,746
- diluted. . . . . . . . . . . . . . . 18,333,257 16,923,669
The accompanying notes are an integral part of these
consolidated financial statements.
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the three months ended
June 30,
--------------------------
2001 2000
---------- ----------
Revenues:
Hotel operating revenue:
Room revenue. . . . . . . . . . . . . $ 22,450 $ --
Food and beverage revenue . . . . . . 10,229 --
Other operating department revenue. . 3,819 --
Participating lease revenue:
Affiliated Lessee . . . . . . . . . . -- 8,565
Other Lessees . . . . . . . . . . . . 12,068 13,286
Interest income:
Affiliated Lessee . . . . . . . . . . -- 57
Other . . . . . . . . . . . . . . . . 172 224
Equity in income of Affiliated
Lessee. . . . . . . . . . . . . . . . -- 75
Equity in income of Joint Ventures. . . 258 432
Other income. . . . . . . . . . . . . . 95 --
---------- ----------
Total revenues. . . . . . . . . 49,091 22,639
---------- ----------
Expenses:
Hotel operating expenses:
Room. . . . . . . . . . . . . . . . . 5,045 --
Food and beverage . . . . . . . . . . 7,157 --
Other direct. . . . . . . . . . . . . 2,061 --
Other indirect. . . . . . . . . . . . 9,780 --
Depreciation and other
amortization. . . . . . . . . . . . . 7,765 7,262
Real estate, personal property taxes
and insurance . . . . . . . . . . . . 2,563 2,381
Ground rent . . . . . . . . . . . . . . 1,067 923
General and administrative. . . . . . . 1,402 241
Interest. . . . . . . . . . . . . . . . 5,526 5,301
Amortization of deferred financing
costs . . . . . . . . . . . . . . . . 560 259
Advisory fee. . . . . . . . . . . . . . -- 954
Lease termination, advisory trans-
action and subsidiary purchase
expenses. . . . . . . . . . . . . . . 5 --
Other expenses. . . . . . . . . . . . . -- 8
---------- ----------
Total expenses. . . . . . . . . 42,931 17,329
---------- ----------
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(Dollars in thousands, except per share data)
(Unaudited)
For the three months ended
June 30,
--------------------------
2001 2000
---------- ----------
Income before minority interest,
writedown of property held for sale,
extraordinary item and income
tax expense . . . . . . . . . . . . . . 6,160 5,310
Minority interest in Operating
Partnership . . . . . . . . . . . . . . (113) (338)
---------- ----------
Income before writedown of property
held for sale, extraordinary
item income tax expense . . . . . . . . 6,047 4,972
Writedown of property held for sale . . . (1,843) (1,266)
---------- ----------
Income before extraordinary item and
income tax expense. . . . . . . . . . . 4,204 3,706
Extraordinary gain . . . . . . . . . . . 254 --
---------- ----------
Income before income tax expense. . . . . 4,458 3,706
Income tax expense. . . . . . . . . . . . (808) --
---------- ----------
Net income applicable to
common shareholders . . . . . . . . . . $ 3,650 $ 3,706
========== ==========
Earnings per Common Share - Basic:
Income before extraordinary item. . . . $ 0.19 $ 0.22
Extraordinary gain. . . . . . . . . . . 0.01 --
---------- ----------
Net income. . . . . . . . . . . . . . . $ 0.20 $ 0.22
========== ==========
Earnings per Common Share - Diluted:
Income before extraordinary item. . . . $ 0.19 $ 0.22
Extraordinary gain. . . . . . . . . . . 0.01 --
---------- ----------
Net income. . . . . . . . . . . . . . . $ 0.20 $ 0.22
========== ==========
Weighted average number of
common shares outstanding:
- basic. . . . . . . . . . . . . . . . 18,356,347 16,901,514
- diluted. . . . . . . . . . . . . . . 18,433,154 16,972,049
The accompanying notes are an integral part of these
consolidated financial statements.
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
(Unaudited)
For the six months ended
June 30,
--------------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . $ 1,315 $ 5,400
Adjustments to reconcile net
income to net cash flow provided
by (used in) operating activities:
Depreciation and other
amortization. . . . . . . . . . . . 15,103 14,233
Amortization of deferred
financing costs . . . . . . . . . . 910 518
Bond premium amortization . . . . . . (314) (628)
Minority interest in
Operating Partnership . . . . . . . 39 501
Options granted to advisor. . . . . . -- 53
Writedown of property held for
sale. . . . . . . . . . . . . . . . 1,843 1,266
Loss on investment in Affiliated
Lessee. . . . . . . . . . . . . . . 8 --
Income tax expense. . . . . . . . . . 32 --
Deferred compensation . . . . . . . . 64 --
Equity in (income) of Affiliated
Lessee. . . . . . . . . . . . . . . -- (22)
Equity in (income) of Joint
Ventures. . . . . . . . . . . . . . (139) (408)
Cost of early extinguishment
of debt . . . . . . . . . . . . . . 973 --
Changes in assets and liabilities:
Rent receivable from lessees. . . . . 2,821 (3,792)
Prepaid expenses and other
assets. . . . . . . . . . . . . . . 4,896 (1,009)
Hotel receivables . . . . . . . . . . (6,190) --
Due to JLL. . . . . . . . . . . . . . (966) 243
Accounts payable and accrued
expenses. . . . . . . . . . . . . . (5,491) 1,005
---------- ----------
Net cash flow provided by
operating activities. . . . . 14,904 17,360
---------- ----------
Cash flows from investing activities:
Improvements and additions to
hotel properties. . . . . . . . . . . (10,312) (19,945)
Acquisition of hotel properties . . . . (86,534) --
Acquisition of Affiliated Lessee. . . . (53) --
Investment in Joint Ventures. . . . . . -- (4,784)
Distributions from Joint Ventures . . . 449 --
Distributions from Affiliated
Lessee. . . . . . . . . . . . . . . . 5 31
Purchase of office furniture and
equipment . . . . . . . . . . . . . . (410) --
Repayment of notes receivable . . . . . 4,065 --
Funding of notes receivable . . . . . . (131) --
Funding of restricted cash reserves . . (2,669) (5,917)
Proceeds from restricted
cash reserves . . . . . . . . . . . . 12,279 7,246
---------- ----------
Net cash flow used in
investing activities. . . . . (83,311) (23,369)
---------- ----------
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands, except per share data)
(Unaudited)
For the six months ended
June 30,
--------------------------
2001 2000
---------- ----------
Cash flows from financing activities:
Borrowings under credit facility. . 115,067 28,800
Repayments under credit facility. . (30,381) (8,200)
Proceeds from issuance of bonds . . 42,500 --
Repayments under bond issues. . . . (40,000) --
Cost of early extinguishment
of debt . . . . . . . . . . . . . (973) --
Mortgage loans repayments . . . . . (695) (302)
Payment of deferred financing
costs . . . . . . . . . . . . . . (1,075) (50)
Proceeds from exercise of
stock options . . . . . . . . . . 3,725 107
Distributions . . . . . . . . . . . (14,401) (14,021)
---------- ----------
Net cash flow provided by
financing activities. . . 73,767 6,334
---------- ----------
Net change in cash and
cash equivalents. . . . . . . . . . 5,360 325
Cash and cash equivalents,
beginning of period . . . . . . . . 1,414 1,612
---------- ----------
Cash and cash equivalents,
end of period . . . . . . . . . . . $ 6,774 $ 1,937
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
LASALLE HOTEL PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(Dollars in thousands, except per share data)
(Unaudited)
1. ORGANIZATION
LaSalle Hotel Properties (the "Company") was organized as a Maryland
real estate investment trust under the laws of the state of Maryland on
January 15, 1998. The Company is a real estate investment trust ("REIT")
as defined in the Internal Revenue Code of 1986, as amended (the "Code").
The Company had no operations prior to April 29, 1998, at which time, the
Company completed its initial public offering (the "IPO").
The Company's operations are conducted primarily through LaSalle Hotel
Operating Partnership, L.P., (the "Operating Partnership") of which the
Company is the sole general partner with an approximate 97.6% ownership
interest as of June 30, 2001. Minority interest in the Company represents
the approximate 2.4% aggregate interest in the Operating Partnership held
by the limited partners thereof.
Effective January 1, 2001, the Company became a self-administered and
self-managed REIT. The Company terminated its advisory relationship with
LaSalle Hotel Advisors, Inc. (the "Advisor") in accordance with the
Termination and Services Agreement dated December 28, 2000. In connection
with the termination, the Advisor received $600 for 2001 transition
services. The Company purchased assets used to operate the Company at book
value of approximately $302 and paid $50 for informational technology
services. The entire management team of the Advisor became employees of
the Company and continues to oversee and manage all activities of the
Company under the new self-administered and self-managed structure.
As of June 30, 2001, the Company owned interests in 18 hotels with
approximately 6,150 suites/rooms (collectively, the "Hotels") located in
eleven states and the District of Columbia. The Company owns 100% equity
interests in 16 hotels, a 95.1% equity interest in a partnership which owns
one hotel and a 9.9% equity interest in the Chicago Hotel Venture (as
defined in Note 5) which also owns one hotel. All of the Hotels are leased
under participating leases ("Participating Leases") which provide for rent
based on hotel revenues and are managed by independent hotel operators
("Hotel Operators"). Seven of the Hotels are leased to unaffiliated
lessees (affiliates of whom also operate these hotels) and ten of the
Hotels are leased to LaSalle Hotel Lessee, Inc. ("LHL") or its wholly owned
subsidiaries (see Note 11). Lease revenue from LHL and its wholly owned
subsidiaries is eliminated in consolidation. As more fully described in
Note 5 below, the Hotel which is owned by the Chicago Hotel Venture is
leased to Chicago 540 Lessee in which the Company also has a 9.9% equity
interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim consolidated financial statements and related
notes have been prepared in accordance with the financial information and
accounting policies described in the Company's annual report on Form 10-K
for the year ended December 31, 2000 (the "2000 Form 10-K") and should be
read in conjunction with such financial statements and related notes. The
following notes to these interim financial statements highlight significant
changes to the notes included in the December 31, 2000 audited financial
statements included in the Company's 2000 Form 10-K and present interim
disclosures as required by the Securities and Exchange Commission.
In the opinion of management, all adjustments consist of normal
recurring adjustments necessary to present fairly the financial position of
the Company as of June 30, 2001, the results of its operations for the
three and six months ended June 30, 2001 and 2000 and its cash flows for
the six months ended June 30, 2001 and 2000.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company, the Operating Partnership and its consolidated subsidiaries and
partnerships. All significant intercompany balances and transactions have
been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the balance sheet date and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENT IN JOINT VENTURES
Investment in Joint Ventures represents the Company's 9.9% equity
interest in each of (i) the Chicago Hotel Venture and (ii) Chicago 540
Lessee (as defined in Note 5). The Company accounts for its Investment in
Joint Ventures under the equity method of accounting. Accordingly, the
Company carries its investment at cost, plus its equity in net earnings,
less distributions received since the date of acquisition. In addition,
pursuant to the joint venture agreement relating to the Chicago Hotel
Venture, the Company earns a preferred return based on the net operating
cash flow of the Chicago Marriott Downtown (the "Chicago Property").
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded on the
balance sheet as either an asset or liability measured at its fair value.
The statement also requires that the changes in the derivative's fair value
be recognized in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS 137 amended the effective date of SFAS 133 for fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS 138
amended SFAS 133 for the following items: normal purchases and normal sales
exception, hedging the benchmark interest rate, hedging recognized foreign
currency-denominated debt instruments and hedging with intercompany
derivatives.
The Company adopted SFAS 133, as amended by SFAS 137 and SFAS 138, on
January 1, 2001. Based upon the Company's application of SFAS 133, for the
six months ended June 30, 2001, the adoption had no materially adverse
effect on the Company's consolidated financial statements. On June 30,
2001, the fair market value of derivative instruments held was $(4).
DERIVATIVE/FINANCIAL INSTRUMENTS
In the normal course of business, the Company utilizes derivative
financial instruments to manage, or hedge, interest rate risk. The Company
requires that hedging derivative instruments are effective in reducing the
interest rate risk exposure that they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Some
derivative instruments are associated with the hedge of an anticipated
transaction. In those cases, hedge effectiveness criteria also require
that it be probable that the underlying transaction will occur.
Instruments that meet these hedging criteria are formally designated as
hedges at the inception of the derivative contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item
ceases to exist, all changes in the fair value of the instrument are
marked-to-market with changes in value included in net income each period
until the instrument matures. Any derivative instrument used for risk
management that does not meet the hedging criteria is marked-to-market each
period.
To determine the fair values of derivative instruments, the Company
uses a variety of methods and assumptions that are based on market
conditions and risks existing as of each valuation date. For the majority
of financial instruments including most derivatives, long-term investments
and long-term debt, standard market conventions and techniques such as
discounted cash flow analysis, option pricing models, replacement cost, and
termination cost are used to determine fair value. All methods of assessing
fair value result in a general approximation of value, and such value may
never actually be realized.
RECLASSIFICATION
Certain 2000 items have been reclassified to conform to the 2001
presentation.
3. EARNINGS PER SHARE
The limited partners' outstanding units in the Operating Partnership
("Units") have been excluded from the diluted earnings per share
calculation as there would be no effect on the amounts since the minority
interests' share of income would also be added back to net income. The
computation of basic and diluted EPS is presented below:
For the For the
six months ended three months ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
NUMERATOR:
Income before
extraordinary
item. . . . . . $ 2,288 $ 5,400 $ 3,396 $ 3,706
Extraordinary
gain (loss) . . (973) -- 254 --
---------- ---------- ---------- ----------
Net income. . . $ 1,315 $ 5,400 $ 3,650 $ 3,706
========== ========== ========== ==========
For the For the
six months ended three months ended
June 30, June 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
DENOMINATOR:
Weighted average
number of
common shares
- Basic . . . . 18,250,968 16,891,746 18,356,347 16,901,514
Effect of
Dilutive
Securities:
Common Stock
Options . . . 82,289 31,923 76,807 70,535
---------- ---------- ---------- ----------
Weighted average
number of
common shares
- Diluted . . . 18,333,257 16,923,669 18,433,154 16,972,049
========== ========== ========== ==========
BASIC EPS:
Net income per
weighted
average
common share. . $ 0.07 $ 0.32 $ 0.20 $ 0.22
========== ========== ========== ==========
DILUTED EPS:
Net income per
weighted
average
common share. . $ 0.07 $ 0.32 $ 0.20 $ 0.22
========== ========== ========== ==========
4. INCOME TAXES
The components of the income tax benefit were as follows:
For the six months ended
June 30,
----------------------------
2001 2000
---------- ----------
Federal
Current. . . . . . . . . . . $ 116 $ --
State and local
Current. . . . . . . . . . . 95 --
---------- ----------
Total income
tax benefit . . . . . $ 211 $ --
========== ==========
The deferred-tax asset results from the allowance for doubtful
accounts. The deferred-tax asset of $45 at June 30, 2001 is considered
realizable given estimates of future income.
5. JOINT VENTURES
On January 25, 2000, the Company entered into a joint venture
agreement (the "Chicago Hotel Venture") with an institutional investor to
acquire the 1,176-room Chicago Property in Chicago, Illinois. The Company,
through the Operating Partnership, owns a 9.9% equity interest in the
Chicago Hotel Venture. The Company receives a preferred return based on
the net operating cash flow of the Chicago Property in addition to its pro
rata share of annual cash flow. The Company will also have the opportunity
to earn an incentive participation in net sale proceeds based upon the
achievement of certain overall investment returns, in addition to its pro
rata share of net sale or refinancing proceeds.
The Chicago Property is leased to Chicago 540 Lessee, Inc., ("Chicago
540 Lessee") in which the Company also owns a 9.9% equity interest. The
institutional investor owns a 90.1% controlling interest in both the
Chicago Hotel Venture and Chicago 540 Lessee. Marriott International
continues to operate and manage the Chicago Property.
6. ACQUISITION OF HOTEL PROPERTIES
On March 8, 2001, the Company acquired a 100% interest in four full-
service hotels (the "DC Boutique Collection") with a total of 502
guestrooms in Washington, D.C. for a net purchase price of approximately
$42.5 million. Each of the four hotels in the DC Boutique Collection was
originally constructed as an apartment building and as a result, features
large guestrooms or suites. The Company leases each of the hotels to
wholly owned subsidiaries of LHL. Each of the four hotels will be fully
renovated, improved and repositioned as a unique high-end, independent
boutique hotel. The Company is undertaking the redevelopment program,
currently projected to cost an aggregate of approximately $30.0 million, in
conjunction with the Kimpton Hotel & Restaurant Group, L.L.C., which has
also been retained to manage and operate each of the hotels in the DC
Boutique Collection as independent, non-branded, boutique hotels.
On June 1, 2001, the Company purchased all of the issued and
outstanding stock of I&G Capitol, Inc., which owns the Holiday Inn on the
Hill Hotel. The 343-guestroom upscale full-service hotel, located on
Capitol Hill in Washington, D.C., was acquired for a net purchase price of
approximately $45.0 million. LHO Washington Five Lessee, L.L.C., a wholly
owned subsidiary of LHL, will lease the property and has retained Crestline
Hotels & Resorts, Inc. ("Crestline") to manage the hotel. Crestline has
been the manager of the property since 1997. A renovation of the
guestrooms and public spaces of the hotel, currently projected to cost
approximately $4 to $5 million, is planned to be completed and coincide
with the opening of the new convention center, currently expected to be in
March 2003. Prior to the renovation of the hotel, the Company will
evaluate the potential economic benefits of up-branding the property, as
well as increasing the number of guestrooms at the hotel.
7. REAL ESTATE HELD FOR SALE
The Company is actively marketing the Radisson Hotel Tampa for sale.
The asset was classified as held for sale on December 6, 2000 at which time
depreciation was suspended. Based on initial pricing expectations, the
Company recognized a writedown of $11,030, reducing the net book value of
the asset to $17,027 in 2000, which included $200 of estimated accrued
closing costs. As of July 3, 2001, a purchase and sale agreement had been
entered into with expected net sales proceeds of $15,084. As a result, the
Company recognized an additional writedown of $1,843 in the second quarter
of 2001, which included an additional $216 of estimated accrued costs.
Closing is expected to occur in August 2001. Hotel properties are
considered held for sale when actively marketed and sale is expected to
occur within one year. There can be no assurance that real estate held for
sale will be sold.
Results of operations for the Radisson Hotel Tampa are as follows
For the six For the six
months ended months ended
June 30, 2001 June 30, 2000
------------- -------------
Total Revenues. . . . . . $1,942 $1,586
Total Expenses. . . . . . $ 222 $1,101
Income from Operations. . $1,720 $ 485
8. LONG-TERM DEBT
CREDIT FACILITY
In 1998, the Company obtained a three-year commitment for a $235
million senior unsecured revolving credit facility (the "1998 Amended
Credit Facility") to be used for acquisitions, capital improvements,
working capital and general corporate purposes. On November 13, 2000, the
Company amended the 1998 Amended Credit Facility. Under the Second Amended
and Restated Senior Unsecured Credit Agreement, as amended (the "1998
Second Amended Credit Facility"), the commitment was reduced by $35
million, bringing the total commitment under the facility to $200 million.
On June 26, 2001, the Company amended the 1998 Second Amended Credit
Facility. Under the Third Amended and Restated Senior Unsecured Credit
Agreement, as amended (the "1998 Third Amended Credit Facility"), the
commitment was increased by $10 million, bringing the total commitment
under the facility to $210 million. The increase was based on anticipated
usage over the life of the facility. Borrowings under the 1998 Third
Amended Credit Facility bear interest at floating rates equal to, at the
Company's option, either (i) LIBOR plus an applicable margin, or (ii) an
"Adjusted Base Rate" plus an applicable margin. For the three and six
months ended June 30, 2001, the weighted average interest rate on
borrowings under the 1998 Third Amended Credit Facility was 6.6% and 7.1%,
respectively. The Company did not have any Adjusted Base Rate borrowings
outstanding at June 30, 2001. Additionally, the Company is required to pay
an unused commitment fee which is variable, determined from a ratings based
pricing matrix, currently set at .25% of the unused potion of the 1998
Third Amended Credit Facility. The Company incurred an unused commitment
fee of approximately $22 and $70 for the three and six months ended June
30, 2001. The 1998 Third Amended Credit Facility matures on December 31,
2003 and contains certain financial covenants relating to debt service
coverage, market value net worth and total funded indebtedness. At June
30, 2001 and December 31, 2000, the Company had outstanding borrowings
against the 1998 Third Amended Credit Facility of $196,700 and $113,500,
respectively.
On January 3, 2001, LHL obtained a three-year commitment for a $5,000
senior unsecured revolving credit facility (the "LHL Credit Facility") to
be used for working capital and general corporate purposes. Borrowings
under the LHL Credit Facility bear interest at floating rates equal to, at
LHL's option, either (i) LIBOR plus an applicable margin, or (ii) an
"Adjusted Base Rate" plus an applicable margin. LHL is required to pay an
unused commitment fee which is variable, determined from a ratings based
pricing matrix, currently set at .25% of the unused portion of the LHL
Credit Facility. For the three and six months ended June 30, 2001, the
weighted average interest rate on borrowings under the LHL Credit Facility
was 6.5% and 6.6%, respectively. At June 30, 2001, the Company had
outstanding borrowings against the LHL Credit Facility of $1,486.
BONDS PAYABLE
On March 1, 2001, the Company redeemed the $40.0 million aggregate
principle amount of tax-exempt Massport Bonds, which bore interest at an
annual rate of 10.0%. Proceeds for the redemption were derived from $37.1
million of tax exempt and $5.4 million of taxable bonds, each having a
17-year maturity, bearing interest based on a weekly floating rate and
having no principal reductions for the life of the bonds. A call premium
of $792 and an interest expense of $435 associated with the escrows, which
was later offset by a $254 reimbursement of interest expense, were incurred
and are classified as an extraordinary item in the accompanying
consolidated financial statements. Interest expense, net of premium
amortization, for the three and six months ended June 30, 2001 totaled $370
and $849, respectively. The weighted average interest rate for the three
and six months ended June 30, 2001 was 3.5% and 4.0%, respectively. Due to
the nature of these bonds, they can be redeemed at any time without
penalty. The new bonds are secured by letters of credit issued by GE
Capital Corporation, for which the Company pays a 2% annual credit
enhancement fee. The letters of credit are collateralized by the
Harborside Hyatt Conference Center and Hotel. The excess proceeds of
approximately $1,900 and the $4,000 reserve fund from the original bonds
were used to pay down borrowings under the 1998 Third Amended Credit
Facility.
MORTGAGE LOANS
On July 29, 1999, the Company, through the newly formed LHO Financing
Partnership I, L.P. (the "Financing Partnership"), entered into a $46,500
mortgage loan (the "1999 Mortgage Loan"). The 1999 Mortgage Loan is
secured by the Radisson Convention Hotel located in Bloomington, Minnesota
and Le Meridien Dallas. The loan matures on July 31, 2009 and does not
allow for prepayment prior to January 31, 2009, without penalty. The loan
bears interest at a fixed rate of 8.1% and requires interest and principal
payments based on a 25-year amortization schedule. The loan agreement
requires the Financing Partnership to hold funds in escrow sufficient for
the payment of 50% of the annual insurance premiums and real estate taxes
on each of the Radisson Convention Hotel and Le Meridien Dallas. The 1999
Mortgage Loan also requires the Financing Partnership to maintain a certain
debt service coverage ratio. The 1999 Mortgage Loan had principal amounts
outstanding of $45,363 and $45,690 at June 30, 2001 and December 31, 2000,
respectively.
On July 27, 2000, the Company, through three newly formed
partnerships, LHO Hollywood LM, L.P., LHO New Orleans LM, L.P., and LHO Key
West HI, L.P. (the "2000 Financing Partnerships"), entered into three
ten-year mortgage loans totaling $74,500 (the "2000 Mortgage Loans"). The
2000 Mortgage Loans are secured by the Le Montrose All-Suite Hotel located
in West Hollywood, California, Le Meridien New Orleans and the Holiday Inn
Beachside Resort located in Key West, Florida. The loans bear interest at
a fixed rate of 8.08% and require interest and principal payments based on
a 27-year amortization schedule. The loan agreements require the 2000
Financing Partnerships to hold funds in escrow for the payment of 50% of
the annual insurance premiums and real estate taxes paid on each of the Le
Montrose All-Suite Hotel, Le Meridian New Orleans and Holiday Inn Beachside
Resort and with respect to Le Meridien New Orleans, one month's ground
rent. The 2000 Mortgage loans also require the 2000 Financing Partnerships
to maintain certain debt service coverage ratios. The 2000 Mortgage Loans
had principal amounts outstanding of $73,906 and $74,274 at June 30, 2001
and December 31, 2000, respectively.
9. SHAREHOLDER'S EQUITY
COMMON SHARES OF BENEFICIAL INTEREST
On January 15, 2001, the Company paid its regular fourth quarter
distribution of $0.385 per share/unit on its Common Shares and Units.
On February 1, 2001, an affiliate of the Advisor exercised 300,000
options. Proceeds from the options were used to reduce outstanding
borrowings on the 1998 Third Amended Credit Facility.
On April 24, 2001, the Company granted 57,444 restricted shares of
common stock to the Company's executive officers. The restricted shares
granted vest over three years. The Company measures compensation cost for
restricted shares based upon the fair market value of its common stock at
the grant date. Compensation cost is recognized on a straight line basis
over the vesting period. Compensation expense recognized for the
restricted shares was $64 for the six months ended June 30, 2001.
On May 15, 2001, the Company paid its regular distribution for the
quarter ended March 31, 2001 of $0.385 per share/unit on its Common Share
and Units.
OPERATING PARTNERSHIP UNITS
On January 1, 2001, the Advisor and its affiliates converted 964,334
Units into a similar number of Common Shares. On May 18, 2001, 124,130
Units were converted to Common Shares. On May 21, 2001, 7,500 Units were
converted to Common Shares. As of June 30, 2001, the Operating Partnership
has 443,183 Units outstanding, representing a 2.4% partnership interest
held by the limited partners.
10. SHARE OPTION AND INCENTIVE PLAN
On March 5, 2001, the Company issued 3,107 Common Shares to the
independent members of its Board of Trustees for 2000 compensation. The
Common Shares were issued in lieu of cash, at the trustee's election. These
Common Shares were issued under the 1998 Share Option and Incentive Plan
(the "1998 SIP").
On April 24, 2001, the Company granted 52,500 non-qualified stock
options at a strike price of $15.50 to its employees. The options granted
vest over three years and expire on January 30, 2011.
On April 24, 2001, the Company granted 57,444 restricted shares of
common stock to the Company's executive officers. The restricted shares
granted vest over three years. The Company measures compensation cost for
restricted shares based upon the fair market value of its common stock at
the grant date. Compensation cost is recognized on a straight line basis
over the vesting period. Compensation expense recognized for the
restricted shares was $64 for the six months ended June 30, 2001.
On May 16, 2001, the Company granted 30,000 non-qualified stock
options at a strike price of $16.51 to the independent members of its Board
of Trustees. The options granted vest over three years and expire on
March 15, 2011.
At June 30, 2001, 685,059 Common Shares were available for future
grant under the 1998 SIP.
11. LHL
A significant portion of the Company's revenue is a result of hotel
operating revenues from LHL. Included in other indirect hotel operating
expenses are the following items related to LHL:
For the For the
six months three months
ended ended
June 30, June 30,
2001 2001
---------- ------------
General and administrative. . . . . . . . $ 4,918 $ 2,912
Sales and marketing . . . . . . . . . . . 3,226 1,855
Repairs and maintenance . . . . . . . . . 2,368 1,271
Utilities and insurance . . . . . . . . . 2,145 1,046
Management and incentive fee. . . . . . . 3,037 2,377
Other expenses. . . . . . . . . . . . . . 465 319
-------- --------
Total other indirect expenses . . . . . $ 16,159 $ 9,780
======== ========
Prior to January 1, 2001, LHL was owned as follows: 9.0% by the
Company, 45.5% by Jones Lang LaSalle ("JLL") and 45.5% by LPI Charities, a
charitable organization organized under the laws of the state of Illinois.
Effective January 1, 2001, the Company purchased all of the issued and
outstanding shares of capital stock of LHL, held by JLL and LPI Charities,
for $500 in accordance with the Stock Purchase Agreement dated July 28,
2000. Effective January 1, 2001, LHL became a wholly owned subsidiary of
the Company as provided for under the taxable-REIT subsidiary provisions of
the Code. The cost associated with the transaction was expensed during the
first quarter of 2001 and is classified as an operating expense in the
accompanying consolidated financial statements. LHL leases the following
ten hotels owned by the Company:
Marriott Seaview Resort
LaGuardia Airport Marriott
Omaha Marriott
Harborside Hyatt Conference Center and Hotel
Hotel Viking
DC Boutique Collection (4 hotels)
Holiday Inn on the Hill Hotel
All of the remaining hotels in which the Company owns an interest are,
and are currently expected to continue to be, leased directly to affiliates
of the current operators of those respective hotels.
Effective January 1, 2001, the Company waived LHL's obligation under
the Participating Leases to deposit with the Company security deposits for
as long as LHL remains a wholly owned subsidiary of the Company. As a
result, on January 5, 2001, $370 of security deposits were returned to LHL.
On January 17, 2001, LHL paid the Company $3,900 pursuant to a note
between the Company and LHL. LHL financed the payment with cash, cash
equivalents and borrowings under the LHL Credit Facility.
On February 26, 2001, the Company terminated the operating lease on
the Hotel Viking with Bellevue Properties, Inc. and entered into a lease
with LHL on essentially the same terms. Bellevue Properties, Inc. received
$840 in payment relating to termination, tax settlement due under the
Purchase and Sale Agreement and other items. Of this amount, $785 was
expensed and classified as other expense on the accompanying consolidated
financial statements. Noble House Hotel and Resorts replaced Bellevue
Properties, Inc. as manager for the property.
On April 12, 2001, the Company and LHL, as the owner/lessee,
respectively, of the Marriott Seaview Hotel (the "Hotel"), Marriott
Ownership Resorts, Inc. ("MORI"), as the developer of timeshare units
adjacent to the Hotel (the "Villas"), and certain Marriott entities related
to MORI, entered into a Comprehensive Restructuring Agreement ("CRA"), an
Integration Agreement, and Fourth Amendment to Management Agreement
(collectively, with the CRA, the "Agreements"), all effective as of
December 30, 2000, which, in part, provide for the integration of the
operations of the Hotel and the Villas. Pursuant to the terms of the
Agreements, the Company will receive on an annual basis, along with the
benefits of the integration of both facilities, three percent (3%) of
timeshare sales at the Villas, five percent (5%) of transient rental income
from the rental of the Villas, and a performance guarantee which will be in
place for a minimum of seven (7) years. In exchange, the Company will, in
accordance with the CRA, conditionally release a six night minimum stay
provision at the Villas contained in (i) the management agreement, (ii) the
ground lease for the "Pines Golf Course", and (iii) the deed for the
Villas.
12. FINANCIAL INSTRUMENTS: DERIVATIVES AND HEDGING
On April 6, 2001, the Company entered into a two-year, nine-month
fixed interest rate swap at 4.87 percent for $30.0 million of the balance
outstanding on its 1998 Third Amended Credit Facility, which currently
fixes the interest rate at 6.87 percent including the Company's current
spread, which varies with its leverage ratio.
In the normal course of business, the Company is exposed to the effect
of interest rate changes. The Company limits these risks by following
established risk management policies and procedures including the use of
derivatives. For interest rate exposures, derivatives are used primarily
to align rate movements between interest rates associated with the
Company's hotel operating revenue, participating lease revenue and other
financial assets with interest rates on related debt, and manage the cost
of borrowing obligations.
The Company has a policy of only entering into contracts with major
financial institutions based upon their credit ratings and other factors.
When viewed in conjunction with the underlying and offsetting exposure that
the derivatives are designed to hedge, the Company has not sustained a
material loss from those instruments nor does it anticipate any material
adverse effect on its net income or financial position in the future from
the use of derivatives.
To manage interest rate risk, the Company may employ options,
forwards, interest rate swaps, caps and floors or a combination thereof
depending on the underlying exposure. The Company utilizes a variety of
borrowings including lines of credit and medium- and long-term financings.
To reduce overall interest cost, the Company uses interest rate
instruments, typically interest rate swaps, to convert a portion of its
variable rate debt to fixed rate debt. Interest rate differentials that
arise under these swap contracts are recognized in interest expense over
the life of the contracts. The resulting cost of funds is usually lower
than that which would have been available if debt with matching
characteristics was issued directly.
The Company employs interest rate swaps to hedge against interest rate
fluctuations. Unrealized gains and losses are reported in other
comprehensive income with no effect recognized in earnings as long as the
characteristics of the swap and the hedged item are closely matched. As of
June 30, 2001, there was $4 in unrealized losses included in Accumulated
Other Comprehensive Income, a component of shareholders' equity.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments. The notional value at
June 30, 2001 provides an indication of the extent of the Company's
involvement in these instruments at that time, but does not represent
exposure to credit, interest rate or market risks.
At June 30, 2001:
Interest
Hedge Type Notional Value Rate Maturity Fair Value
---------- -------------- -------- -------- ----------
Swap-Cash Flow $30,000,000 4.868% 12/31/03 $(4)
At June 30, 2001, the derivative instrument was reported at its fair
value as Other Liabilities of $4.
Interest rate hedges that are designated as cash flow hedges hedge the
future cash outflows on debt. Interest rate swaps that convert variable
payments to fixed payments, interest rate caps, floors, collars, and
forwards are cash flow hedges. The unrealized gains/losses in the fair
value of these hedges are reported on the balance sheet with a
corresponding adjustment to either accumulated other comprehensive income
or in earnings depending on the type of hedging relationship. If the
hedging transaction is a cash flow hedge, then the offsetting gains and
losses are reported in accumulated other comprehensive income. Over time,
the unrealized gains and losses held in accumulated other comprehensive
income will be reclassified to earnings. This reclassification is
consistent with when the hedged items are also recognized in earnings.
Within the next twelve months, the amount the Company expects to reclassify
to earnings is considered immaterial.
13. COMMITMENTS AND CONTINGENCIES
The Company is obligated to make funds available to the Hotels for
capital expenditures (the "Reserve Funds"), as determined in accordance
with the Participating Leases. The Reserve Funds have not been recorded on
the books and records of the Company as such amounts will be capitalized as
incurred. The amounts obligated under the Reserve Funds are subject to
increases ranging from 4.0% to 5.5% of the individual Hotel's total
revenues. As of June 30, 2001, the total amount that the Company is
obligated to fund under the Reserve Funds is approximately $12,419, of
which $3,422 is available in restricted cash reserves for future capital
expenditures. Purchase orders and letters of commitment totaling
approximately $15,700 have been issued for renovations at the Hotels.
The nature of the operations of the Hotels exposes them to the risk of
claims and litigation in the normal course of their business. Although the
outcome of these matters cannot be determined, management does not expect
the ultimate resolution of these matters to have a material adverse effect
on the financial position, operations or liquidity of the Hotels.
14. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
For the six months ended
June 30,
--------------------------
2001 2000
---------- ----------
Interest paid, net of capitalized
interest. . . . . . . . . . . . . . . $ 12,935 $ 9,931
========== ==========
Interest capitalized. . . . . . . . . . . $ 147 $ 682
========== ==========
Issuance of Units in conjunction
with the investment in Chicago
Hotel Venture . . . . . . . . . . . . . $ -- $ 300
========== ==========
Issuance of Common Shares for
Board of Directors compensation . . . . $ 46 $ --
========== ==========
Exchange of Units for Common Shares
Minority interest . . . . . . . . . . . $ (14,399) $ --
Common stock. . . . . . . . . . . . . . 11 --
Additional paid in capital. . . . . . . 14,388 --
---------- ----------
$ -- $ --
========== ==========
In conjunction with the hotel acquisi-
tions, the Company assumed the
following assets and liabilities:
Purchase of real estate . . . . . . . . $ 87,743 $ --
Liabilities, net of other assets. . . . (1,209) --
---------- ----------
Acquisition of hotel properties . . . $ 86,534 $ --
========== ==========
In conjunction with the LHL acqui-
sition, the Company assumed the
following assets and liabilities:
Accounts receivable, net. . . . . . . $ 4,375 $ --
Other assets purchased. . . . . . . . 8,512 --
Liabilities . . . . . . . . . . . . . (12,834) --
---------- ----------
Total net assets. . . . . . . . . $ 53 $ --
========== ==========
15. SUBSEQUENT EVENTS
On July 13, 2001, the Company declared its regular distribution for
the quarter ended June 30, 2001 of $0.39 per Common Share and Unit. The
distribution is payable on August 15, 2001 to shareholders and unitholders
of record at the close of business on July 31, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in
this Form 10-Q.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2001 TO THE THREE MONTHS
ENDED JUNE 30, 2000
For the quarter ended June 30, 2001, total revenues increased by
approximately $26.5 million from $22.6 million to $49.1 million.
Approximately $27.9 million of this increase is due to the impact of
consolidating LHL's operations as a result of becoming a wholly owned
subsidiary of the Company on January 1, 2001. Participating lease revenue
from unaffiliated lessees decreased by approximately $1.2 million from
$13.3 million to $12.1 million. This decrease is primarily due to the sale
of Holiday Inn Plaza Park which occurred during the third quarter of 2000,
and decreased occupancy at Le Meridien Dallas, which is the result of
softened demand in the Dallas market and the closing of the Dallas
convention center for renovation. Increased revenues at San Diego Paradise
Point Resort, which continues to benefit from renovations that were
substantially completed in 2000, and strong transient leisure demand in the
San Diego market has partly offset the decrease in participating lease
revenue. Management anticipates continued pressures on revenues over the
next twelve months due to decreased occupancy and general economic
conditions.
Hotel operating expenses were approximately $24.0 million for the
three months ended June 30, 2001. This is due to the impact of
consolidating LHL's operation as a result of becoming a wholly owned
subsidiary of the Company on January 1, 2001. There was no consolidation
of LHL's operations for 2000.
Depreciation and other amortization expense increased by approximately
$0.5 million from $7.3 million to $7.8 million due primarily to additional
depreciation on capital improvements incurred and placed into service
subsequent to June 30, 2000 and the acquisitions of the DC Boutique
Collection on March 8, 2001 and the Holiday Inn on the Hill Hotel on
June 1, 2001. Partly offsetting the increase in depreciation expense is
Radisson Hotel Tampa, which was classified as held for sale on December 6,
2000 and accordingly is no longer being depreciated.
Real estate and personal property taxes, insurance and ground rent
increased by approximately $0.3 million from $3.3 million to $3.6 million.
This increase is due primarily to the acquisition of the DC Boutique
Collection and Holiday Inn on the Hill during the first and second quarter
of 2001, respectively, and increased insurance premiums overall for the
Hotels
General and administrative expense increased by approximately $1.2
million from $0.2 million to $1.4 million due primarily to incurring
corporate expenses as a self-managed REIT effective January 1, 2001.
General and administrative expenses were incurred by the advisor in 2000.
Interest expense increased by approximately $0.2 million from $5.3
million to $5.5 million primarily due to an increase in weighted average
debt outstanding from $268.8 million for the quarter ended June 30, 2000 to
$328.8 million for the quarter ended June 31, 2001. The increase in debt
outstanding is a result of the acquisition of the DC Boutique Collection
and the Holiday Inn on the Hill Hotel in Washington, D.C., which were
financed with borrowings under the 1998 Third Amended Credit Facility, as
well as additional borrowings under the 1998 Third Amended Credit Facility
to finance capital improvements during the remainder of 2000 and through
the second quarter of 2001. Partly offsetting the increase was a decrease
in the weighted average interest rate to 6.7% for the quarter ended
June 30, 2001 from 7.9% for the quarter ended June 30, 2000. The increase
in interest expense for the quarter ended June 30, 2001 was partly offset
by $0.1 million of capitalized interest, as a result of renovations at two
of the hotels in the DC Boutique Collection during the second quarter of
2001. For the quarter ended June 30, 2000, interest expense was partly
offset by $0.1 million of capitalized interest, as a result of the
renovations at San Diego Paradise Point Resort during the second quarter of
2000.
There were no Advisory fees for the second quarter of 2001 compared to
$1.0 million for the second quarter of 2000. This is due to the Company
becoming self-managed effective January 1, 2001 and terminating the
advisory relationship with the Advisor.
Minority interest decreased approximately $0.2 million from $0.3
million to $0.1 million due primarily to fewer Operating Partnership Units
("Units") outstanding as a result of approximately 1.1 million Units
converting to Common Shares subsequent to June 30, 2000. This decrease was
also a result of a decrease in income before minority interest of
approximately $0.2 million from $4.0 million for the quarter ended June 30,
2000 to $3.8 million for the quarter ended June 30, 2001. The weighted
average number of Units outstanding decreased from approximately 1.6
million Units for second quarter of 2000, to 0.5 million Units for the
second quarter of 2001
The extraordinary item of $0.3 million for the quarter represents the
reimbursement of costs related to the redemption of the Massport Bonds on
March 1, 2001.
As a result of the foregoing items, net income to common shareholders
decreased approximately $0.1 million from $3.7 million for the second
quarter of 2000 to $3.6 million for the second quarter of 2001.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 TO THE SIX MONTHS
ENDED JUNE 30, 2000
For the six months ended June 30, 2001, total revenues increased by
approximately $42.6 million from $39.8 million to $82.4 million.
Approximately $42.3 million of this increase is due to the impact of
consolidating LHL's operations as a result of becoming a wholly owned
subsidiary of the Company on January 1, 2001. Participating lease revenue
from unaffiliated lessees increased by approximately $0.5 million from
$25.6 million to $26.1 million. This increase is primarily due to increased
revenues at San Diego Paradise Point Resort, which continues to benefit
from renovations that were substantially completed in 2000, and strong
transient leisure demand in the San Diego market. Partly offsetting this
increase was reduced occupancy at Le Meridien Dallas as a result of
softened demand in the Dallas market and the closing of the Dallas
convention center for renovation. In addition, Holiday Inn Beachside Resort
in Key West experienced reduced occupancy as a result of softness in
leisure demand. Also, offsetting the increase was the sale of Holiday Inn
Plaza Park which occurred during the third quarter of 2000. Management
anticipates continued pressures on revenues over the next twelve months due
to decreased occupancy and general economic condition.
Hotel operating expenses were approximately $39.7 million for the six
months ended June 30, 2001. This is due to the impact of consolidating
LHL's operation as a result of becoming a wholly owned subsidiary of the
Company on January 1, 2001. There was no consolidation of LHL's operations
for 2000.
Depreciation and other amortization expense increased by approximately
$0.9 million from $14.2 million to $15.1 million due primarily to
additional depreciation on capital improvements incurred and placed into
service subsequent to June 30, 2000 and the acquisition of the DC Boutique
Collection in Washington D.C. on March 8, 2001 and the Holiday Inn on the
Hill Hotel on June 1, 2001. Partly offsetting the increase is Radisson
Tampa, which was classified as held for sale on December 6, 2000 and
accordingly is no longer being depreciated.
Real estate and personal property taxes, insurance and ground rent
increased by approximately $1.1 million from $5.8 million to $6.9 million.
This increase is due primarily to the acquisition of the DC Boutique
Collection and Holiday Inn on the Hill Hotel during the first and second
quarters of 2001, respectively, and increased insurance premiums overall
for the Hotels.
General and administrative expense increased by approximately $2.3
million from $0.5 million to $2.8 million due primarily to incurring
corporate expenses as a self-managed REIT effective January 1, 2001.
General and administrative expenses were incurred by the advisor in 2000.
Interest expense increased by approximately $1.1 million from $9.8
million to $10.9 million primarily due to an increase in weighted average
debt outstanding from $265.1 million for the six months ended June 30, 2000
to $307.1 million for the six months ended June 30, 2001. The increase in
debt outstanding is a result of the acquisition of the DC Boutique
Collection and the Holiday Inn on the Hill Hotel in Washington, D.C., which
were financed with borrowings under the 1998 Third Amended Credit Facility,
as well as additional borrowings under the 1998 Third Amended Credit
Facility to finance capital improvements during the remainder of 2000 and
through the second quarter of 2001. Partly offsetting the increase was a
decrease in the weighted average interest rate to 7.1% for the six months
ended June 30, 2001 from 7.7% for the six months ended June 30, 2000. The
increase in interest expense for the six months ended June 30, 2001 was
partly offset by $0.1 million of capitalized interest, as a result of
renovations at two of the hotels in the DC Boutique Collection during the
second quarter of 2001. For the six months ended June 30, 2000, interest
expense was partly offset by $0.7 million of capitalized interest, which
was primarily a result of the renovation and expansion of the Hotel Viking
and the continuing renovations at San Diego Paradise Point Resort during
the first six months of 2000.
There were no Advisory fees for the first six months of 2001 compared
to $1.7 million for the first six months of 2000. This is due to the
Company becoming self-managed effective January 1, 2001 and terminating the
advisory relationship with the Advisor.
Lease termination, advisory transaction and subsidiary purchase
expenses of $1.9 million for the six months ended June 30, 2001 includes
LHL acquisition costs, one-time expenses associated with becoming a self-
managed REIT, and the cost of terminating the Hotel Viking lease. These
costs were not incurred in 2000.
Minority interest decreased approximately $0.4 million from $0.5
million to less than $0.1 million due primarily to fewer Units outstanding
as a result of approximately 1.1 million Units converting to Common Shares
subsequent to June 30, 2000. This decrease was also a result of a decrease
in income before minority interest of approximately $4.5 million from $5.9
million for the six months ended June 30, 2000 to $1.4 million for the six
months ended June 30, 2001. The weighted average number of Units
outstanding decreased from approximately 1.6 million Units for first six
months of 2000 to 0.5 million Units for the first six months of 2001.
Extraordinary loss of $1.0 million for the six months ended June 30,
2001 represents the costs related to the redemption of the Massport Bonds
on March 1, 2001.
As a result of the foregoing items, net income to common shareholders
decreased approximately $4.1 million from $5.4 million for the first six
months of 2000 to $1.3 million for the first six months of 2001.
COMPARABLE FUNDS FROM OPERATIONS AND COMPARABLE EBITDA
The Company considers Comparable Funds From Operations ("Comparable
FFO") and Comparable Earnings Before Interest, Taxes, Depreciation and
Amortization ("Comparable EBITDA") to be key measures of a REIT's
performance and should be considered along with, but not as an alternative
to, net income and cash flow as a measure of the Company's operating
performance and liquidity.
The Company believes that Funds From Operations ("FFO") and EBITDA are
helpful to investors as a measure of the performance of an equity REIT
because, along with cash flow from operating activities, financing
activities and investing activities, they provide investors with an
indication of the ability of the Company to incur and service debt, to make
capital expenditures and to fund other cash needs. The White Paper on FFO
approved by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") in October 1999 defines FFO as net
income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties, plus real estate
related depreciation and amortization (excluding amortization of deferred
finance cost) and after comparable adjustments for the Company's portion of
these items related to unconsolidated entities and joint ventures. The
Company computes FFO in accordance with standards established by NAREIT,
which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. FFO
and EBITDA do not represent cash generated from operating activities
determined by GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor are they indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions. FFO and
EBITDA may include funds that may not be available for management's
discretionary use due to functional requirements to conserve funds for
capital expenditures and property acquisitions, and other commitments and
uncertainties.
Comparable FFO is defined as FFO before one-time items including the
purchase of LHL, the transition expenses associated with becoming a self-
managed REIT, and the costs associated with terminating the Hotel Viking
lease with Bellevue Properties, Inc. Comparable EBITDA is defined as
earnings before interest, taxes, depreciation, amortized expenses, the
writedown of properties held for disposition, extraordinary items and one-
time charges related to the acquisition of LHL, transition costs associated
with becoming a self-managed REIT, and the termination costs associated
with the Hotel Viking lease.
The following is a reconciliation between net income and Comparable
FFO (in thousands, except share data):
For the For the
six months ended three months ended
June 30, June 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
COMPARABLE FUNDS
FROM OPERATIONS
(FFO):
Net income. . . . $ 1,315 $ 5,400 $ 3,650 $ 3,706
Depreciation. . . 15,064 14,229 7,751 7,260
Equity in depre-
ciation of
Joint Venture. . 463 356 235 206
Writedown of
property held
for sale . . . . 1,843 1,266 1,843 1,266
Amortization of
deferred lease
costs. . . . . . 25 -- 6 --
Extraordinary
item . . . . . . 973 -- (254) --
Minority
interest . . . . 39 501 113 338
---------- ---------- ---------- ----------
FFO. . . . . . 19,722 21,752 13,344 12,776
Advisory tran-
sition expense . 600 -- -- --
Lease termina-
tion expense. . 790 -- 5 --
Subsidiary
purchase cost . 533 -- -- --
---------- ---------- ---------- ----------
Comparable
FFO. . . . . $ 21,645 $ 21,752 $ 13,349 $ 12,776
========== ========== ========== ==========
Weighted average
number of
common shares
and units
outstanding:
- Basic. . . . . 18,793,907 18,465,450 18,867,762 18,477,415
- Diluted. . . . 18,876,196 18,497,373 18,944,569 18,547,950
The following is a reconciliation between net income (loss) and
Comparable EBITDA (in thousands):
For the For the
six months ended three months ended
June 30, June 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
COMPARABLE EBITDA:
Net income. . . . $ 1,315 $ 5,400 $ 3,650 $ 3,706
Interest. . . . . 10,863 9,755 5,526 5,301
Depreciation and
other amortiza-
tion. . . . . . 15,103 14,233 7,765 7,262
Amortization of
deferred financ-
ing costs . . . 910 518 560 259
Equity in depre-
ciation/amorti-
zation of Joint
Venture . . . . 493 381 250 220
Equity in interest
expense of
Joint Venture . 473 463 218 272
Income tax
provision . . . 32 -- 808 --
Minority
interest. . . . 39 501 113 338
Writedown of
property held
for sale. . . . 1,843 1,266 1,843 1,266
---------- ---------- ---------- ----------
EBITDA. . . . 31,071 32,517 20,733 18,624
Advisory transi-
tion expense. . 600 -- -- --
Lease termination
expense . . . . 790 -- 5 --
Subsidiary
purchase cost . 533 -- -- --
---------- ---------- ---------- ----------
Comparable
EBITDA. . . $ 32,994 $ 32,517 $ 20,738 $ 18,624
========== ========== ========== ==========
THE HOTELS
The following table sets forth historical comparative information with
respect to occupancy, average daily rate ("ADR") and room revenue per
available room ("REVPAR") for the total Hotel portfolio for the three and
six months ended June 30, 2001 and 2000.
For the six months ended For the three months ended
June 30, June 30,
--------------------------- ----------------------------
2001 2000 Variance 2001 2000 Variance
---- ---- -------- ---- ---- --------
TOTAL
PORTFOLIO
Occupancy 69.7% 73.4% (5.0%) 70.2% 77.3% (9.2%)
ADR $148.96 $143.18 4.0% $151.45 $146.62 3.3%
REVPAR $103.83 $105.12 (1.2%) $106.35 $113.33 (6.2%)
For the quarter ended June 30, 2001, the Company experienced a RevPAR
decrease of 6.2% for its portfolio compared to the quarter ended June 30,
2000. For the six months ended June 30, 2001, the Company experienced a
REVPAR decrease of 1.2% for its portfolio compared to the six months ended
June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its pro rata share of the
Operating Partnership's cash flow from the Participating Leases. Except for
the security deposits required under the Participating Leases, the Lessees'
obligations under the Participating Leases are unsecured and the Lessees'
abilities to make rent payments to the Operating Partnership, and the
Company's liquidity, including its ability to make distributions to
shareholders, will be dependent on the Lessees' abilities to generate
sufficient cash flow from the operations of the Hotels.
In 1998, the Company entered into a $235 million senior unsecured
revolving credit facility (the "1998 Amended Credit Facility") to be used
for acquisitions, capital improvements, working capital and general
corporate purposes. On November 13, 2000, the Company amended the 1998
Amended Credit Facility. Under the Second Amended and Restated Senior
Unsecured Credit Agreement (the "1998 Second Amended Credit Facility"), the
total commitment was reduced by $35 million, from $235 million to $200
million. On June 26, 2001, the Company amended the 1998 Second Amended
Credit Facility. Under the Third Amended and Restated Senior Unsecured
Credit Agreement, as amended (the "1998 Third Amended Credit Facility"),
the commitment was increased by $10 million, bringing the total commitment
under the facility to $210 million. Borrowings under the 1998 Third
Amended Credit Facility bear interest at floating rates equal to, at the
Company's option, either (i) LIBOR plus an applicable margin, or (ii) an
"Adjusted Base Rate" plus an applicable margin. For the three and six
months ended June 30, 2001, the weighted average interest rate was
approximately 6.6% and 7.1%, respectively. The Company did not have any
Adjusted Base Rate borrowings outstanding at June 30, 2001. Additionally,
the Company is required to pay an unused commitment fee which is variable,
determined from a ratings or leverage based pricing matrix and is currently
set at .25% of the unused portion of the 1998 Third Amended Credit
Facility. The 1998 Third Amended Credit Facility matures on December 31,
2003 and contains certain financial covenants relating to debt service
coverage, market value net worth and total funded indebtedness.
On January 3, 2001, LHL obtained a three-year commitment for a $5
million senior unsecured revolving credit facility (the "LHL Credit
Facility") to be used for working capital and general corporate purposes.
Borrowings under the LHL Credit Facility bear interest at floating rates
equal to, at LHL's option, either (i) LIBOR plus an applicable margin, or
(ii) an "Adjusted Base Rate" plus an applicable margin. At June 30, 2001,
the Company's outstanding borrowings under the LHL Credit Facility were
$1.5 million. The weighted average interest rate under the facility for
the three and six months ended June 30, 2001 was 6.5% and 6.6%,
respectively. LHL is required to pay an unused commitment fee which is
variable, determined from a ratings based pricing matrix, currently set at
.25% of the unused portion of the LHL Credit Facility.
In conjunction with the June 1998 acquisition of the Harborside Hyatt
Conference Center and Hotel, the Company assumed $40 million of special
project revenue bonds ("Massport Bonds") previously issued under the loan
and trust agreement with the Massachusetts Port Authority ("Massport"), as
amended ("Massport Bond Agreement"). The Massport Bonds were to be
redeemed in part commencing March 1, 2001 and annually until March 1, 2026,
at which time the remaining principal and any accrued interest thereon were
due in full. The Company had the option to prepay the Massport Bonds in
full beginning March 1, 2001 subject to a prepayment penalty which varied
depending on the date of prepayment. On March 1, 2001, the Company
redeemed the $40.0 million aggregate principal amount of tax-exempt
Massport Bonds, which bore interest at an annual rate of 10.0%. Proceeds
for the redemption were derived from $37.1 million of tax-exempt and $5.4
million of taxable bonds, each having a 17-year maturity, bearing interest
based on a weekly floating rate and having no principal reductions for the
life of the bonds. A call premium of $792 and an interest expense of $435
associated with the escrows, which was later offset by a $254 reimbursement
of interest expense, were incurred and are classified as an extraordinary
item in the accompanying consolidated financial statements. Interest
expense, net of the premium amortization for the three and six months ended
June 30, 2001 was $0.4 million and $0.8 million, respectively. Due to the
nature of these bonds, they can be redeemed at any time without penalty.
The new bonds are secured by letters of credit issued by GE Capital
Corporation. The letters of credit are collateralized by the Harborside
Hyatt Conference Center and Hotel. The excess proceeds of approximately
$1,900 and the $4,000 reserve fund from the original bonds were used to pay
down borrowings under the 1998 Third Amended Credit facility.
On July 29, 1999, the Company entered into a $46.5 million mortgage
loan (the "1999 Mortgage Loan"). The loan is subject to a fixed interest
rate of 8.1%, matures on July 31, 2009, and requires interest and principal
payments based on a 25-year amortization schedule. The 1999 Mortgage Loan
is collateralized by the Radisson Convention hotel located in Bloomington,
Minnesota and the Le Meridien Dallas. Interest expense for the three and
six months ended June 30, 2001 was $0.9 million and $1.8 million,
respectively. The 1999 Mortgage Loan had an outstanding balance of $45.4
million at June 30, 2001.
On July 27, 2000, the Company, entered into three ten-year mortgage
loans totaling $74.5 million (the "2000 Mortgage Loans"). The loans are
subject to a fixed interest rate of 8.08% and require interest and
principal payments based on a 27-year amortization schedule. The 2000
Mortgage Loans are secured by the Le Montrose All-Suite Hotel located in
West Hollywood, California, Le Meridien New Orleans and the Holiday Inn
Beachside Resort located in Key West, Florida. Interest expense for the
three and six months ended June 30, 2001 was $1.5 and $3.0 million,
respectively. The 2000 Mortgage Loans had an outstanding balance of $73.9
million at June 30, 2001.
On June 30, 2001, the Company had approximately $6.8 million of cash
and cash equivalents and had approximately $198.2 million outstanding under
its 1998 Third Amended Credit Facility and LHL Credit Facility.
Net cash provided by operating activities was approximately $14.9
million for the six months ended June 30, 2001, primarily due to the
collections of hotel operating revenues from LHL and Participating Lease
revenues, which were offset by payments for real estate taxes, personal
property taxes, insurance, ground rent and the fourth quarter 2000 base and
incentive advisory fee.
Net cash used in investing activities was approximately $83.3 million
for the six months ended June 30, 2001 due primarily to outflows for the
acquisition of hotel properties and improvements and additions at the
Hotels, offset by proceeds from restricted cash reserves and the payment of
notes receivable.
Net cash provided by financing activities was approximately $73.8
million for the six months ended June 30, 2001, attributable to net
borrowings under the 1998 Third Amended Credit Facility to finance the
acquisition of hotel properties and renovations at the Hotels, proceeds
from the issuance of bonds, offset by the payment of the fourth quarter
2000 and first quarter 2001 distribution to shareholders and unitholders.
The Company is obligated to make funds available to the Hotels for
capital expenditures (the Reserve Funds), as determined in accordance with
the Participating Leases. The Reserve Funds have not been recorded on the
books and records of the Company as such amounts will be capitalized as
incurred. The amounts obligated under the Reserve Funds are subject to
increases ranging from 4.0% to 5.5% of the individual Hotel's total
revenues. The total amount obligated by the Company under the Reserve
Funds is approximately $12.4 million at June 30, 2001, of which $3.4
million is available in restricted cash reserves for future capital
expenditures. Purchase orders and letters of commitment totaling
approximately $15.7 million have been issued for renovations at the Hotels.
The Company's debt policy is to incur debt only if upon such
incurrence the Company's total funded indebtedness would not exceed 50% of
"Aggregate Asset Value." For purposes of this policy, Aggregate Asset Value
is defined as the sum of (a) all the Company's properties owned for more
than four quarters ("Seasoned Properties"), the EBITDA (reduced by the
aggregate FF&E reserves for the relevant period in respect of the Seasoned
Properties) of the Seasoned Properties for the proceeding four quarters
times 10, (b) all Properties owned for less than four quarters ("New
Properties"), the investment amount (which shall include the purchase
price, including assumed indebtedness, and all acquisition costs) of the
New Properties and 95% of all the capital expenditures with respect to the
New Properties, (c) liquid investments, and (d) investments in
unconsolidated entities. In connection with the 1998 Third Amended Credit
Facility, which allows the Company to increase total funded indebtedness to
55% of aggregate Asset Value through November 15, 2001, the Board of
Trustees granted the Company a waiver to the 50% policy through July 2002
allowing total funded indebtedness not to exceed 53%. The Board of
Trustees can modify this waiver or otherwise change this policy at any time
without shareholder approval.
The Company has considered its short-term (one year or less) liquidity
needs and the adequacy of its estimated cash flow from operations and other
expected liquidity sources to meet these needs. The Company believes that
its principal short-term liquidity needs are to fund normal recurring
expenses, debt service requirements and the minimum distribution required
to maintain the Company's REIT qualification under the Code. The Company
anticipates that these needs will be met with cash flows provided by
operating activities. The Company has also considered capital improvements
and property acquisitions as short-term needs that will be funded either
with cash flows provided by operating activities, under the 1998 Third
Amended Credit Facility or other indebtedness, or the issuance of
additional equity securities.
The Company expects to meet long-term (greater than one year)
liquidity requirements such as property acquisitions, scheduled debt
maturities, major renovations, expansions and other nonrecurring capital
improvements through the 1998 Third Amended Credit Facility, long-term
unsecured and secured indebtedness and the issuance of additional equity
securities. The Company will acquire or develop additional hotel
properties only as suitable opportunities arise, and the Company will not
undertake acquisition or development of properties unless stringent
acquisition criteria have been achieved.
LHL was owned as follows: 9.0% by the Company, 45.5% by JLL and 45.5%
by LPI Charities, a charitable organization organized under the laws of the
state of Illinois. Effective January 1, 2001, the Company purchased all of
the issued and outstanding shares of capital stock of LHL held by JLL and
LIP Charities for $500 in accordance with the Stock Purchase Agreement
dated July 28, 2000. Effective January 1, 2001, LHL is a wholly owned
subsidiary of the company as provided for under the taxable-REIT subsidiary
provisions of the Code. The cost associated with the transaction was
expensed during the first quarter of 2001 and is classified as an operating
expense in the accompanying consolidated financial statements. LHL leases
the following ten hotels owned by the Company:
Marriott Seaview Resort
LaGuardia Airport Marriott
Omaha Marriott
Harborside Hyatt Conference Center and Hotel
Hotel Viking
DC Boutique Collection (4 hotels)
Holiday Inn on the Hill Hotel
All of the Company's remaining owned hotels are, and are currently
expected to continue to be, leased directly to affiliates of the current
operators of those respective hotels.
INFLATION
The Company's revenues come primarily from hotel operating revenue
from LHL and the Participating Leases, which will result in changes in the
Company's revenues based on changes in the underlying Hotels' revenues.
Therefore, the Company relies entirely on the performance of the Hotels and
the lessees' abilities to increase revenues to keep pace with inflation.
The hotel operators can change room rates quickly, but competitive
pressures may limit the Lessees' and the Hotel Operators abilities to raise
rates faster than inflation or even at the same rate.
The Company's expenses are subject to inflation. These expenses (real
estate and personal property taxes, property and casualty insurance) are
expected to grow with the general rate of inflation, except for instances
in which the properties are subject to periodic real estate tax
reassessments.
SEASONALITY
The Hotels' operations historically have been seasonal. Eight of the
Hotels maintain higher occupancy rates during the second and third
quarters. The Marriott Seaview Resort generates a large portion of its
revenue from golf related business and, as a result, revenues fluctuate
according to the season and the weather. Radisson Hotel Tampa, Le Montrose
All Suite Hotel and Le Meridien Dallas experience their highest occupancies
in the first quarter, while Holiday Inn Beachside Resort and Le Meridien
New Orleans experience their highest occupancies in the first and second
quarters. This seasonality pattern can be expected to cause fluctuations
in the Company's quarterly lease revenue under the Participating Leases.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded on the
balance sheet as either an asset or liability measured at its fair value.
The statement also requires that the changes in the derivative's fair value
be recognized in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS 137 amended the effective date of SFAS 133 for fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." SFAS 138
amended SFAS 133 for the following items: normal purchases and normal sales
exception, hedging the benchmark interest rate, hedging recognized foreign
currency-denominated debt instruments and hedging with intercompany
derivatives.
The Company adopted SFAS 133, as amended by SFAS 137 and SFAS 138, on
January 1, 2001. Based upon the Company's application of SFAS 133, for the
six months ended June 30, 2001, the adoption had no materially adverse
effect on the Company's consolidated financial statements. On June 30,
2001, the fair market value of derivative instruments held was $(4).
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The Staff determined that a lessor should defer recognition
of contingent rental income until the specified target that triggers the
contingent rental income is achieved. The Company recognizes lease revenue
on an accrual basis pursuant to the terms of the respective Participating
Leases in which Participating Rent is calculated using quarterly
thresholds. Accordingly, SAB No. 101 did not have an impact on the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates.
The Company's interest rate risk management objective is to limit the
impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve these objectives, the Company borrows
at a combination of fixed and variable rates.
In 1998, the Company obtained the 1998 Third Amended Credit Facility,
which provides for a maximum borrowing amount of up to $210 million.
Borrowings under the 1998 Third Amended Credit Facility bear interest at
variable market rates. At June 30, 2001, the Company's outstanding
borrowings under the 1998 Third Amended Credit Facility were $196.7
million. The weighted average interest rate under the facility for the
three and six months ended June 30, 2001 was approximately 6.6% and 7.1%,
respectively. A 0.25% change in interest rates would have changed interest
expense by $0.2 million for the six months ended June 30, 2001. This
change is based upon the weighted average borrowings under the 1998 Third
Amended Credit Facility for the six months ended June 30, 2001, which were
$144.0 million.
In 1999, the Company entered into a $46.5 million mortgage loan (the
"1999 Mortgage Loan"). The loan is subject to a fixed interest rate of
8.1%, matures on July 31, 2009 and requires interest and principal payments
based on a 25-year amortization schedule. At June 30, 2001, the 1999
Mortgage Loan had a balance of $45.4 million. At June 30, 2001, the
carrying value of the 1999 Mortgage Loan approximated its fair value.
On July 2000, the Company entered into three ten-year mortgage loans
totaling $74.5 million (the "2000 Mortgage Loans"). The loans are subject
to a fixed interest rate of 8.08% and require interest and principal
payments based on a 27-year amortization schedule. At June 30, 2001, the
2000 Mortgage Loans had a balance of $73.9 million. At June 30, 2001, the
carrying value of the 2000 Mortgage Loans approximated its fair value.
On January 3, 2001, LHL obtained a three-year commitment for a $5.0
million senior unsecured revolving credit facility (the "LHL Credit
Facility") to be used for working capital and general corporate purposes.
Borrowings under the LHL Credit Facility bear interest at floating rates
equal to LIBOR plus an applicable margin or an "Adjusted Base Rate" plus an
applicable margin, at the election of LHL. At June 30, 2001, the Company's
outstanding borrowings under the LHL Credit Facility were $1.5 million.
The weighted average interest rate under the facility for the three and six
months ended June 30, 2001 was approximately 6.5% and 6.6%, respectively.
A 0.25% change would have an immaterial change in interest expense for the
six months ended June 30, 2001. This change is based upon the weighted
average borrowings under the LHL Credit Facility for the six months ended
June 30, 2001, which were $1.6 million.
At June 30, 2001, the Company also had outstanding bonds payable of
$42.5 million. The bonds bear interest based on weekly floating rates and
have no principal reductions for the life of the bonds. The weighted
average rate for all bonds that were outstanding during six months ended
June 30, 2001 was 4.0%. A 0.25% change in the interest rates would have an
immaterial change on interest expense by an amount significantly less than
$0.1 million for the six months ended June 30, 2001. This change is based
upon the weighted average borrowings under the bonds for the six months
ended June 30, 2001, which were $42.1 million.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither the Company nor the Operating Partnership is currently
involved in any litigation of which the ultimate resolution, in the opinion
of the Company, is expected to have a material adverse effect on the
financial position, operations or liquidity of the Company and the
Operating Partnership.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
NOT APPLICABLE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2001, the Company held its Annual Meeting of Shareholders.
The matters on which the shareholders voted, in person or by proxy, were:
(i) for the election of three Class III trustees of the Company to
serve until the 2004 Annual meeting of Shareholders and until their
successors are duly elected and qualified;
(ii) the ratification of the appointment KPMG LLP as independent
auditors of the Company for the fiscal year ending December 31, 2001;
(iii) the approval of an amendment to the Company's 1998 Share Option
and Incentive Plan, as amended.
The three nominees were elected and the ratification of the
appointment of the independent auditors and the amendment to the Share
Option and Incentive Plan, as amended, were approved. The results of the
voting were as follows:
ELECTION OF TRUSTEES:
Trustee Votes For Votes Against Votes Withheld
- ------- ---------- ------------- --------------
George F. Little, II 14,925,524 0 280,875
Donald S. Perkins 14,920,024 0 286,375
Stuart L. Scott 14,926,124 0 280,275
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS:
Votes For Votes Against Votes Withheld
---------- ------------- --------------
14,913,487 265,011 27,901
AMENDMENT OF 1998 SHARE OPTION AND INCENTIVE PLAN, AS AMENDED:
Votes For Votes Against Votes Withheld
---------- ------------- --------------
13,612,484 1,491,386 102,529
ITEM 5. OTHER INFORMATION.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995: Certain statements in this filing and elsewhere (such as in
other filings by the Company with the Securities and Exchange Commission,
press releases, presentations and communications by the Company or its
management and written and oral statements) constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance, achievements, plans and objectives of the Company to be
materially different from any future results, performance, achievements,
plans and objectives expressed or implied by such forward-looking
statements. Such factors are discussed under "Business", Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Quantitative and Qualitative Disclosure about Market Risk" and elsewhere
in the Company's annual report on Form 10-K for the year ended December 31,
2000, under "Management's Discussion and Analysis of Financial Condition
and Results of Operations", "Quantitative and Qualitative Disclosure About
Market Risk" and elsewhere in the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2001, under "Certain Relationships and
Related Transactions" and elsewhere in the Company's March 31, 2001 proxy
statement with respect to the annual meeting of shareholders held on
May 16, 2001, under "Risk Factors" and elsewhere in the Company's
Registration Statement (No. 333-77371), under "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Quantitative
and Qualitative Disclosure About Market Risk" and elsewhere in this Report,
and in other reports filed by the Company with the Securities and Exchange
Commission. The Company expressly disclaims any obligation or undertaking
to update or revise any forward-looking statements to reflect any change in
events or circumstances or in the Company's expectations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports of Form 8-K.
A report on Form 8-K dated December 30, 2000 was filed on
April 20, 2001 reporting a Regulation FD Disclosure under Item 9. The
report announced that LaSalle Hotel Operating Partnership, L.P. and LaSalle
Hotel Lessee, Inc., as the owner/lessee, respectively, of the Marriott
Seaview Hotel (the "Hotel"), Marriott Ownership Resorts, Inc. ("MORI"), as
the developer of timeshare units adjacent to the Hotel, and certain
Marriott entities related to MORI, entered into a Comprehensive
Restructuring Agreement, Integration Agreement, and Fourth Amendment to
Management Agreement effective as of December 30, 2000. The agreement
provides for the integration of the operations of the Hotel and the
timeshare units.
A report on Form 8-K dated April 27, 2001 was filed on
April 27, 2001 reporting a Regulation FD Disclosure under Item 9. The
report announced the Company's conference call to be held on May 3, 2001,
to discuss the Company's results for the quarter ended March 31, 2001 and
its outlook for the remainder of year 2001.
A report on Form 8-K dated January 1, 2001 was filed on
May 2, 2001 reporting Proforma Financial Statements and Exhibits under Item
7 and a Regulation FD Disclosure under Item 9. The report included
unaudited pro forma quarterly statements presented as if the acquisition of
LHL occurred and the company became self-managed as of January 1, 2001.
A report on Form 8-K dated May 2, 2001 was filed on
May 3, 2001 reporting Financial Statements and Exhibits under Item 7 and a
Regulation FD Disclosure under Item 9. The report included the Company's
press release dated May 2, 2001, which reported earnings for the quarter
ended March 31, 2001 and its outlook for the remainder of year 2001.
A report on Form 8-K dated June 1, 2001 was filed on
June 1, 2001 reporting Financial Statements and Exhibits under Item 7 and a
Regulation FD Disclosure under Item 9. The report included the Company's
press release dated June 1, 2001, which announced the acquisition of I&G
Capitol, Inc., which owned the Holiday Inn on the Hill Hotel in Washington,
D.C.
SIGNATURES
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.
LASALLE HOTEL PROPERTIES
Dated: August 9, 2001 BY: /s/ HANS S. WEGER
------------------------------
Hans S. Weger
Executive Vice President,
Treasurer and Chief
Financial Officer