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 SEPTEMBER 30, 1998
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)
1401 Eye Street, NW, Suite 900, Washington, D.C. 20005
- ------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 202/222-2600
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 November 6, 1998
----- ----------------
Common Stock ($0.01 par value) 15,224,580
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. . . . . . . . 22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. . . . . . . . . . . . . . . . . . . . 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities and Use of Proceeds. . . . . 30
Item 3. Defaults Upon Senior Securities. . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . . 30
Item 5. Other Matters. . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 31
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA SALLE HOTEL PROPERTIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
(Unaudited)
September 30,
1998
-------------
ASSETS
------
Investment in hotel properties, net . . . . . . . . $ 472,207
Investment in affiliated lessee . . . . . . . . . . 13
Cash and cash equivalents . . . . . . . . . . . . . 3,321
Restricted cash reserves. . . . . . . . . . . . . . 8,165
Rent receivable from lessees:
Affiliated lessee . . . . . . . . . . . . . . . . 4,323
Other lessees . . . . . . . . . . . . . . . . . . 4,627
Notes receivable:
Affiliated lessee . . . . . . . . . . . . . . . . 1,500
Other lessees . . . . . . . . . . . . . . . . . . 3,451
Deferred financing costs, net . . . . . . . . . . . 1,449
Prepaid expenses and other assets . . . . . . . . . 2,204
----------
Total assets. . . . . . . . . . . . . . . $ 501,260
==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Borrowings under credit facility. . . . . . . . . . $ 162,900
Bonds payable, net. . . . . . . . . . . . . . . . . 43,142
Due to LaSalle. . . . . . . . . . . . . . . . . . . 1,541
Accounts payable and accrued expenses . . . . . . . 6,368
Minority interest in Operating Partnership. . . . . 52,824
Minority interest in other partnerships . . . . . . 10
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred shares of beneficial interest,
$.01 par value, 20,000,000 shares
authorized, no shares issued and
outstanding at September 30, 1998 . . . . . . . --
Common shares of beneficial interest,
$.01 par value, 100,000,000 shares
authorized 15,224,580 shares
issued and outstanding at
September 30, 1998. . . . . . . . . . . . . . . 152
Additional paid-in capital. . . . . . . . . . . . 228,174
Retained earnings . . . . . . . . . . . . . . . . 6,149
----------
Total shareholders' equity. . . . . . . . 234,475
----------
Total liabilities and
shareholders' equity. . . . . . . . . . $ 501,260
==========
See accompanying notes to consolidated financial statements
LA SALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
For the Period
from April 29,
For the three 1998 (inception)
months ended through
September 30, September 30,
1998 1998
-------------- ----------------
Revenues:
Participating lease revenue:
Affiliated lessee . . . . . $ 8,736 $ 13,747
Other lessees . . . . . . . 10,881 17,477
Interest income:
Affiliated lessee . . . . . 21 33
Other lessees . . . . . . . 50 84
Equity in (loss) of
affiliated lessee. . . . . . (38) (25)
Other income. . . . . . . . . 170 231
---------- ----------
Total revenues. . . . . 19,820 31,547
---------- ----------
Expenses:
Depreciation. . . . . . . . . 5,470 7,901
Real estate, personal
property taxes
and insurance . . . . . . . 1,972 3,168
Ground rent . . . . . . . . . 999 1,261
General and administrative. . 194 320
Interest. . . . . . . . . . . 3,709 4,998
Amortization of deferred
financing costs . . . . . . 188 294
Advisory fee. . . . . . . . . 869 1,376
---------- ----------
Total expenses. . . . . 13,401 19,318
---------- ----------
Income before minority
interest. . . . . . . . . . . 6,419 12,229
Minority interest in
Operating Partnership . . . . 1,116 2,121
---------- ----------
Net income applicable
to common shareholders. . . . $ 5,303 $ 10,108
========== ==========
Net income applicable
to common shareholders
per weighted average
common share outstanding
- basic and diluted . . . . . $ 0.35 $ 0.66
========== ==========
Weighted average number
of common shares
outstanding - basic
and diluted . . . . . . . . . 15,244,580 15,200,637
========== ==========
See accompanying notes to consolidated financial statements
LA SALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands, except per share data)
(Unaudited)
For the Period
from April 29,
1998 (inception)
through
September 30,
1998
-----------------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . $ 10,108
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . 7,901
Amortization of deferred financing fees . . . . 294
Bond premium amortization . . . . . . . . . . . (338)
Minority interest in Operating Partnership. . . 2,121
Equity in income of Affiliated Lessee . . . . . 25
Changes in assets and liabilities:
Rent receivable from lessees. . . . . . . . . . (8,950)
Prepaid expenses and other assets . . . . . . . (1,496)
Due to LaSalle. . . . . . . . . . . . . . . . . 1,541
Accounts payable and accrued expenses . . . . . 2,265
----------
Net cash flow provided by
operating activities. . . . . . . . . . 13,471
----------
Cash flows from investing activities:
Acquisitions of hotel properties. . . . . . . . . (385,609)
Improvements and additions to hotel properties. . (4,029)
Funding of notes receivable . . . . . . . . . . . (4,951)
Funding of restricted cash reserves . . . . . . . (11,470)
Proceeds from restricted cash reserves. . . . . . 3,305
Proceeds from minority interest in other
partnerships. . . . . . . . . . . . . . . . . . 10
----------
Net cash flow used in
investing activities. . . . . . . . . . (402,744)
----------
Cash flows from financing activities:
Borrowings under credit facility. . . . . . . . . 162,900
Payment of deferred financing costs . . . . . . . (1,702)
Proceeds from issuance of common shares . . . . . 257,601
Offering costs paid . . . . . . . . . . . . . . . (21,419)
Distributions . . . . . . . . . . . . . . . . . . (4,786)
----------
Net cash flow provided by
financing activities. . . . . . . . . . 392,594
----------
Net change in cash and cash equivalents . . . . . . 3,321
Cash and cash equivalents at beginning of period. . --
----------
Cash and cash equivalents at end of period. . . . . $ 3,321
==========
See accompanying notes to consolidated financial statements
LA SALLE HOTEL PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 29, 1998 (INCEPTION) THROUGH SEPTEMBER 30, 1998
(Dollars in thousands, expect per share data)
(Unaudited)
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
LaSalle Hotel Properties (the Company) was organized in the state of
Maryland on January 15, 1998. The Company is a real estate investment
trust (REIT) as defined in the Internal Revenue Code. The Company was
formed to own hotel properties and to continue and expand the hotel
investment activities of LaSalle Partners Incorporated and certain of its
affiliates (collectively LaSalle). On April 23, 1998, the Company's
Registration Statement on Form S-11 was declared effective. The Company
had no operations prior to April 29, 1998. On April 29, 1998, the Company
completed an initial public offering of 14,200,000 common shares of
beneficial interest (the Initial Offering). The offering price of all
shares sold was $18 per common share, resulting in gross proceeds of
$255,600 and net proceeds (less the underwriters' discount and offering
expenses) of approximately $ 234,181. The Company contributed all of the
net proceeds of the Initial Offering to LaSalle Hotel Operating
Partnership, L.P., a limited partnership (the Operating Partnership), in
exchange for an approximate 82.6% general partnership interest in the
Operating Partnership. The Operating Partnership used the net proceeds
from the Company, the issuance of additional common shares of the Company
and the issuance of limited partnership interests, representing
approximately 17.4% of the Operating Partnership, to acquire ten upscale
and luxury full service hotels (the Initial Hotels).
As of September 30, 1998, the Company owned interests in 12 hotels
with an aggregate of 4,120 suites/rooms (the Hotels) located in nine
states. The Company owns 100% equity interests in 11 of the hotels and a
95.1% interest in a partnership which 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). Eight of the Hotels are leased to
unaffiliated lessees (affiliates of whom also operate these hotels) and
four of the Hotels are leased to LaSalle Hotel Lessee, Inc. (the Affiliated
Lessee).
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 Registration Statement on
Form S-11 (333-45647) filed with the Securities and Exchange Commission.
Readers of this quarterly report should refer to that financial
information, as certain footnote disclosures, which would substantially
duplicate those contained in the Registration Statement, have been omitted
from this report.
In the opinion of management, all adjustments consist of normal
recurring adjustments necessary to present fairly the financial position of
the Company as of September 30, 1998 and the results of its operations and
its cash flows for the period from April 29, 1998 (inception) through
September 30, 1998.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company, the Operating Partnership and its consolidated subsidiaries. All
significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles 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 HOTEL PROPERTIES
Hotel properties are stated at cost and are depreciated using the
straight-line method over estimated useful lives ranging from 22-30 years
for buildings and improvements and 2-5 years for furniture, fixtures and
equipment.
The Company periodically reviews the carrying value of each Hotel to
determine if circumstances exist indicating an impairment in the carrying
value of the investment in the hotel or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment,
the Company will prepare a projection of the undiscounted future cash
flows, without interest charges, of the specific hotel and determine if the
investment in such hotel is recoverable based on the undiscounted future
cash flows. If impairment is indicated, an adjustment will be made to the
carrying value of the hotel based on discounted future cash flows. The
Company does not believe that there are any factors or circumstances
indicating impairment of any of its investment in Hotels.
INVESTMENT IN AFFILIATED LESSEE
The Company owns a 9% interest in the Affiliated Lessee in which the
Company together with LaSalle and LPI Charities, a charitable corporation
organized under the laws of the state of Illinois, make all material
decisions concerning the business affairs and operations. Accordingly, the
Company does not control the Affiliated Lessee and carries its investment
at cost, plus its equity in net earnings, less distributions received since
the date of inception.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents.
DEFERRED FINANCING FEES
Deferred financing fees are recorded at cost and are amortized over
the three-year term of the related credit facility. Accumulated
amortization at September 30, 1998 was $254.
DISTRIBUTIONS
The Company intends to pay regular quarterly distributions to its
shareholders as directed by the Board of Trustees. The Company's ability
to pay distributions will be dependent on the receipt of distributions from
the Operating Partnership. A second quarter distribution totaling $4,786
was paid on August 14, 1998.
REVENUE RECOGNITION
The Company recognizes lease revenue on an accrual basis pursuant to
the terms of the respective Participating Leases. Base and incentive
participating rent is recognized based on quarterly thresholds, pursuant to
the lease agreements (see Note 8).
MINORITY INTEREST
Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership.
Income is allocated to minority interest based on the weighted average
percentage ownership throughout the year.
Minority interest in the Subsidiary Partnership (as defined in Note 4)
represents the limited partner's proportionate share of the equity in the
Subsidiary Partnership. Income is allocated to minority interest based on
the terms of the partnership agreement.
INCOME TAXES
The Company intends to qualify as a REIT under the Internal Revenue
Code (the Code), and will therefore not be subject to corporate income
taxes. Accordingly, no provision for income taxes has been included in the
accompanying consolidated financial statements.
EARNINGS PER SHARE
The Company's basic and diluted earnings per share for the three
months ended September 30, 1998 and for the period from April 29, 1998
(inception) through September 30, 1998 was $0.35 and $0.66, respectively.
Basic and diluted earnings per share are based on the weighted average
number of common shares outstanding during the period. There was no
adjustment to either the weighted average shares outstanding or the
reported amounts of income in computing diluted earnings per share because
the unexercised stock options were anti-dilutive. The weighted average
number of shares used in determining basic and diluted earnings per share
was 15,244,580 and 15,200,637 for the three months ended September 30, 1998
and for the period from April 29, 1998 (inception) through September 30,
1998, respectively.
The outstanding limited partners' units in the Operating Partnership
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.
3. NEW ACCOUNTING STANDARDS
During the second quarter of 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement, effective for fiscal
years beginning after June 15, 1999, establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in 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. Currently, the pronouncement has no impact on the Company, as the
Company has not utilized derivative instruments or entered into any hedging
activities.
4. ACQUISITION OF HOTEL PROPERTIES
The Initial Hotels were previously owned by various limited and
general partnerships (the Existing Partnerships). In conjunction with the
Initial Offering and the related formation transactions, the Initial
Hotels, except for Radission Hotel South and Plaza Tower (previously owned
by LRP Bloomington Limited Partnership), were purchased by the Company from
their Existing Partnerships and were accounted for as purchase
transactions. LRP Bloomington Limited Partnership, the Existing
Partnership that retained the largest number and percentages of voting
rights of the Company after the formation transactions, was designated as
the predecessor for accounting purposes. Therefore, the Company accounted
for the purchase of the Radisson Hotel South and Plaza Tower using the
historical basis of accounting.
In June 1998, the Company acquired an interest in the San Diego
Princess Resort (the San Diego Property) through a subsidiary partnership,
LHO Mission Bay Hotel, L.P. (the Subsidiary Partnership). The Subsidiary
Partnership is a limited partnership of which the Operating Partnership
holds an approximate 95.1% general partnership interest. The 462-room San
Diego Property was renamed the San Diego Paradise Point Resort.
The San Diego Property was acquired for an aggregate purchase price of
$73 million funded with proceeds from a borrowing under the Company's 1998
Credit Facility and from the proceeds of the sale of 112,458 common shares
of beneficial interest to the limited partner of the Subsidiary Partnership
who will also operate the San Diego Property pursuant to the terms of a
participating lease.
Also in June 1998, the Company acquired a 100% interest in the 270-
room Harborside Hyatt Conference Center & Hotel in Boston (the Boston
Property) through an indirect subsidiary, LHO Harborside Hotel, L.L.C. (the
Subsidiary LLC). The Subsidiary LLC is a limited liability company, of
which the Operating Partnership is the sole member.
The Boston Property was acquired for an aggregate purchase price of
$73.5 million, including the $40 million of existing tax exempt industrial
revenue bonds to which the Boston Property remains subject. The remainder
of the purchase price was funded with proceeds from a borrowing under the
Company's 1998 Credit Facility. Hyatt Hotels Corporation continues to
operate the Boston Property under an existing management agreement.
5. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties as of September 30, 1998 consists of
the following:
Land . . . . . . . . . . . . . . . . . . $ 50,821
Buildings and improvements . . . . . . . 388,899
Furniture, fixtures and equipment. . . . 40,388
--------
480,108
Accumulated depreciation . . . . . . . . 7,901
--------
$472,207
========
The Hotels are located in California (3), Texas, Nebraska, Minnesota,
Louisiana, Florida (2), New Jersey, New York and Massachusetts.
6. LONG-TERM DEBT
CREDIT FACILITY
In April 1998, the Company obtained a three-year commitment for a $200
million senior unsecured revolving credit facility (the 1998 Credit
Facility) to be used for acquisitions, capital improvements, working
capital and general corporate purposes. Borrowings under the 1998 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 the Company. At September 30, 1998 the interest rate on LIBOR
borrowings was approximately 7.2%. The Company did not have any Adjusted
Base Rate borrowings outstanding at September 30, 1998. 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 basis
points. The Company has incurred an unused commitment fee of approximately
$57 for the period from April 29, 1998 (inception) through September 30,
1998. The 1998 Credit Facility matures on April 30, 2001 and contains
certain financial covenants relating to debt service coverage, market value
net worth and total funded indebtedness. As of September 30, 1998, the
Company had outstanding borrowings against the 1998 Credit Facility of
$162,900.
BONDS PAYABLE
On June 24, 1998 the Company, through the Subsidiary LLC, acquired the
Boston Property subject to $40,000 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). In conjunction with the Massport Bonds, the Company recorded a
premium of $3,480, of which $3,142 remains unamortized at September 30,
1998. The Massport Bonds are collateralized by the leasehold improvements
and bear interest at 10% per annum through the date of maturity, March 1,
2026. Interest payments are due semiannually on March 1 and September 1.
Interest expense, net of the premium amortization, for the period June 24,
1998 through September 30, 1998 totaled $740. The Massport Bonds shall 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 is
due in full. The Company has the option to prepay the Massport Bonds in
full beginning March 1, 2001 subject to a prepayment penalty which varies
depending on the date of prepayment.
Under the terms of the Massport Bond Agreement, certain cash reserves
are required to be held in trust for payments of interest, credit
enhancement fees and ground rent. As of September 30, 1998, these reserves
totaled $4,716 and are included in Restricted Cash Reserves.
In addition, the Massport Bond Agreement was supplemented by a credit
enhancement agreement (the Massport Credit Enhancement Agreement).
Pursuant to the Massport Credit Enhancement Agreement, certain funds have
been set aside by Massport to provide additional deficit funding if the
amounts held in trust by the Company are not sufficient to cover the debt
service requirements on the outstanding Massport Bonds. In consideration
for the Massport Credit Enhancement Agreement, the Company is required to
pay an annual enhancement fee of $150, payable March 1 and September 1.
7. SHAREHOLDERS' EQUITY
COMMON SHARES OF BENEFICIAL INTEREST
In connection with the purchase of the San Diego Property (see
Note 4), the sole limited partner in the Subsidiary Partnership (which is
an affiliate of the hotel operator) acquired 112,458 common shares of
beneficial interest from the Company for a purchase price of $2 million.
The purchase and sale of the common shares was a condition to the selection
of the affiliate of the limited partner as operator of the San Diego
Property, and the common shares have been pledged to the Operating
Partnership to secure the limited partner's obligations under the related
Participating Lease.
As of September 30, 1998 the Company has reserved 757,000 common
shares for future issuance under the 1998 Share Option and Incentive Plan,
a total of 1,280,569 common shares for future issuance pursuant to rights
issued in connection with the Initial Offering, the acquisition of the
Initial Hotels and the formation of the Company, and 3,181,723 common
shares for issuance upon the conversion of the limited partners' interests
in Operating Partnership units.
OPERATING PARTNERSHIP UNITS
The outstanding units of limited partnership interest in the Operating
Partnership (Units) are redeemable at the option of the holder for a like
number of common shares of the Company or, at the option of the Company,
for the cash equivalent thereof.
8. PARTICIPATING LEASES
The Participating Leases have noncancelable remaining terms ranging
from six to 11 years, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each Participating
Lease is the greater of base rent, as defined, or participating rent.
Participating rent applicable to room and other hotel revenues varies by
lease and is calculated by multiplying fixed percentages by the total
amounts of such revenues over specified threshold amounts. Both the base
rent and the participating rent thresholds used in computing percentage
rents applicable to room and other hotel revenues, including food and
beverage revenues, are subject to annual adjustments based on increases in
the United States Consumer Price Index (CPI) published by the Bureau of
Labor Statistics of the United States of America Department of Labor, U.S.
City Average, Urban Wage Earners and Clerical Workers. Participating rents
applicable to food and beverage revenues are calculated by multiplying
fixed percentages by the total amounts of such revenues. Participating
Lease revenue for the period from April 29, 1998 (inception) through
September 30, 1998 was $31,224, of which approximately $11,295 was in
excess of base rent.
Future minimum rentals (without reflecting future CPI increases) to be
received by the Company pursuant to the Participating Leases for the
remainder of 1998 and for each of the years in the period 1999 to 2003 and
in total thereafter as follows:
Remainder of 1998. . . . . . . . . $ 11,738
1999 . . . . . . . . . . . . . . . 48,393
2000 . . . . . . . . . . . . . . . 48,224
2001 . . . . . . . . . . . . . . . 48,224
2002 . . . . . . . . . . . . . . . 48,224
2003 . . . . . . . . . . . . . . . 48,272
Thereafter . . . . . . . . . . . . 214,383
9. ADVISORY AGREEMENT
Upon completion of the Initial Offering, the Company entered into an
advisory agreement (the Advisory Agreement) with LaSalle Hotel Advisors,
Inc. (the Advisor), a wholly owned subsidiary of LaSalle, to provide
acquisition, investment management, advisory and administrative services
for the Company. The initial term of the Advisory Agreement extends
through December 31, 1999, subject to successive, automatic one year
renewals unless terminated according to the terms of the Advisory
Agreement. The Company may terminate the Advisory Agreement without
termination fees or penalties upon notice given at least 180 days prior to
the end of the then current term of the Advisory Agreement.
The Advisory Agreement provides for payment of a base fee, payable
quarterly, starting at 5% of the first $100 million of net operating income
(NOI) (as defined). The percentage of NOI used to calculate the base fee
is reduced by .2% for every incremental $125 million of NOI above $100
million until $600 million, at which point any excess NOI above $600
million is subject to a base fee of 4%.
In addition, the Advisory Agreement provides for payment of an annual
incentive fee to be paid by the Company in arrears. The annual incentive
fee is equal to 25% of the product of (i) the amount by which the funds
from operations (FFO) per common share/Unit (as defined) for the calendar
year then ended (the Measurement Year) exceeds a growth rate of 7% per
annum of the FFO per common share/Unit for the prior calendar year and (ii)
the common shares/Units outstanding for the Measurement Year. For partial
years, the incentive fee shall be calculated on a pro rata basis for only
that portion of the year that the Advisory Agreement was in effect.
Payment of the incentive fee will be in common shares or Units at the
option of the Advisor.
10. SHARE OPTION AND INCENTIVE PLAN
In April 1998, the Board of Trustees adopted and the then current
shareholder approved the 1998 Share Option and Incentive Plan (the 1998
SIP) which is currently administered by the Compensation Committee of the
Board of Trustees. The Advisor and its employees and the Hotel Operators
and their employees generally are eligible to participate in the 1998 SIP.
Independent Trustees continuing in office after an annual meeting of
shareholders of the Company receive automatic annual grants of options to
purchase 1,000 common shares at a per share exercise price equal to the
fair market value of a common share on the date of the meeting.
The 1998 SIP authorizes, among other things, (i) the grant of share
options that qualify as incentive options under the Code, (ii) the grant of
share options that do not so qualify, (iii) the grant of share options in
lieu of cash Trustees' fees, (iv) grants of common shares in lieu of cash
compensation and (v) the making of loans to acquire common shares in lieu
of compensation. The exercise price of share options will be determined by
the Compensation Committee, but may not be less than 100% of the fair
market value of the common shares on the date of grant. As of
September 30, 1998, the Company has authorized 757,000 shares for issuance
under the 1998 SIP, of which 676,000 shares are available for future
grants.
11. AFFILIATED LESSEE
A significant portion of the Company's participating lease revenue is
derived from the Participating Leases with the Affiliated Lessee. Certain
condensed financial information, related to the Affiliated Lessee's
financial statements, is as follows:
September 30, 1998
------------------
Balance Sheet Information:
Cash and cash equivalents . . . . . . . . . . . . $ 2,598
Total assets. . . . . . . . . . . . . . . . . . . 11,452
Due to LaSalle Hotel Properties . . . . . . . . . 4,323
Notes payable to LaSalle Hotel Properties . . . . 1,500
Shareholders' equity. . . . . . . . . . . . . . . 147
Total liabilities and shareholders' equity. . . . 11,452
For the Period from
April 29, 1998
(inception) through
September 30,
1998
-------------------
Statement of Operations Information:
Total revenues. . . . . . . . . . . . . . . . . . $ 43,932
Participating lease expense . . . . . . . . . . . 13,747
Net (loss). . . . . . . . . . . . . . . . . . . . (278)
12. SUPPLEMENTAL CASH FLOW DISCLOSURE
For the Period from
April 29, 1998
(inception) through
September 30,
1998
-------------------
Supplemental disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . $ 4,890
In conjunction with the hotel acquisitions, the
Company assumed the following assets and
liabilities:
Purchase of real estate . . . . . . . . . . . . . $476,079
Adjustment required to reflect predecessor's
basis . . . . . . . . . . . . . . . . . . . . . 33,012
Liabilities, net of other assets. . . . . . . . . (3,316)
Bonds payable . . . . . . . . . . . . . . . . . . (43,480)
Issuance of shares/units. . . . . . . . . . . . . (76,686)
--------
Investment in hotel properties. . . . . . . . . . $385,609
========
13. COMMITMENTS AND CONTINGENCIES
Three of the Hotels are subject to ground leases under noncancelable
operating leases with terms ranging out to May 2081. Total lease expense
for the period April 29, 1998 (inception) through September 30, 1998 was
$1,261. Future minimum lease payments are as follows:
Remainder of 1998 . . . . . . . . . $ 441
1999. . . . . . . . . . . . . . . . 1,763
2000. . . . . . . . . . . . . . . . 1,763
2001. . . . . . . . . . . . . . . . 1,763
2002. . . . . . . . . . . . . . . . 1,763
2003. . . . . . . . . . . . . . . . 1,763
Thereafter. . . . . . . . . . . . . 79,103
-------
$88,359
=======
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 $11.5 million at September 30, 1998, of which $3.4
million is available in restricted cash reserves for future capital
expenditures. Purchase orders and letters of commitment totaling approxi-
mately $8.8 million have been issued for renovations at the Hotels.
The nature of the operations of the Hotels expose 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
that the ultimate resolution of these matters to have a material adverse
effect on the financial position, operations or liquidity of the Hotels.
On behalf of the Company, the Advisor seeks opportunities for the
purchase of additional full service hotel properties located primarily in
convention, resort, urban and major business markets. From time to time,
the Company may enter into purchase contracts for the acquisition of hotel
properties. The consummation of each acquisition will be subject to
satisfactory completion of due diligence.
14. RELATED PARTY TRANSACTIONS
At September 30, 1998, the Company had a payable to LaSalle of $1,541,
primarily for the third quarter advisory fee.
15. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information set forth below is presented as if
(i) the Initial Offering and the related formation transactions and (ii)
the acquisitions of the hotels discussed in Note 4 had been consummated and
leased as of January 1, 1997. The pro forma financial information is not
necessarily indicative of what actual results of operations of the Company
would have been assuming the Initial Offering and the related formation
transactions and the acquisitions had been consummated and all the Hotels
had been leased as of January 1, 1997, nor does it purport to represent the
results of operations for future periods.
For the
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
Total revenues. . . . . . . . . . . . . . . $ 57,037 $ 51,121
---------- ----------
Depreciation. . . . . . . . . . . . . . . . 15,123 15,123
Real estate and personal property taxes
and insurance . . . . . . . . . . . . . . 5,705 5,282
General and administrative. . . . . . . . . 536 536
Interest expense. . . . . . . . . . . . . . 10,900 10,926
Amortization of deferred financing costs. . 563 563
Advisory fees . . . . . . . . . . . . . . . 2,896 2,582
Ground rent . . . . . . . . . . . . . . . . 2,530 2,260
---------- ----------
Income before minority interest . . . . . . 18,784 13,849
Minority interest . . . . . . . . . . . . . 3,247 2,394
---------- ----------
Net income applicable to
common shareholders . . . . . . . . . . . $ 15,537 $ 11,455
========== ==========
Net income applicable to common
shareholders per share -
basic and diluted . . . . . . . . . . . . $ 1.02 $ 0.75
========== ==========
Weighted average number of common
shares outstanding -
basic and diluted . . . . . . . . . . . . 15,244,580 15,244,580
========== ==========
For the
Year Ended
December 31,
1997
------------
Total revenues. . . . . . . . . . . . . . . $ 70,736
----------
Depreciation. . . . . . . . . . . . . . . . 20,219
Real estate and personal property taxes
and insurance . . . . . . . . . . . . . . 7,302
General and administrative. . . . . . . . . 689
Interest expense. . . . . . . . . . . . . . 15,887
Amortization of deferred financing costs. . 601
Advisory fees . . . . . . . . . . . . . . . 3,612
Ground rent . . . . . . . . . . . . . . . . 2,550
----------
For the
Year Ended
December 31,
1997
------------
Income before minority interest . . . . . . 19,876
Minority interest . . . . . . . . . . . . . 3,436
----------
Net income applicable to
common shareholders . . . . . . . . . . . $ 16,440
==========
Net income applicable to common
shareholders per share -
basic and diluted . . . . . . . . . . . . $ 1.08
==========
Weighted average number of common
shares outstanding - basic and diluted. . 15,224,580
==========
16. PREDECESSOR INFORMATION
Pursuant to SEC regulations which require the presentation of
predecessor financial information for corresponding periods of the
preceding year, the following information represents condensed balance
sheet information as of December 31, 1997 and condensed statements of
operations and cash flows information of LRP Bloomington Limited
Partnership, which is considered to be the predecessor of the Company, for
the three and nine months ended September 30, 1997 and for the period from
January 1, 1998 through April 28, 1998.
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
BALANCE SHEET
(Unaudited, Dollar Amounts in Thousands)
December 31,
1997
------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 1,744
Guest and trade receivables, less allowance for
doubtful accounts of $34 . . . . . . . . . . . . . 976
Inventories . . . . . . . . . . . . . . . . . . . . 288
Prepaid expenses and other current assets . . . . . 439
--------
Total current assets . . . . . . . . . . . . . . 3,447
--------
Investment in hotel, at cost. . . . . . . . . . . . 35,539
Less: accumulated depreciation . . . . . . . . . . (6,074)
--------
Net investment in hotel property . . . . . . . . 29,465
--------
Deferred charges, net of accumulated amortization
of $142. . . . . . . . . . . . . . . . . . . . . . 199
Restricted cash reserves. . . . . . . . . . . . . . 490
--------
Total Assets. . . . . . . . . . . . . . . . . . $ 33,601
========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 497
Accrued expenses and other liabilities. . . . . . . 1,169
Current installments of long-term debt. . . . . . . 863
--------
Total current liabilities . . . . . . . . . . . 2,529
--------
Long-term debt, excluding current installments. . . 23,667
--------
Commitments and contingencies
Total Liabilities 26,196
--------
Partners' capital . . . . . . . . . . . . . . . . . 7,405
--------
Total Liabilities and Equity . . . . . . . . . . $ 33,601
========
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
STATEMENT OF OPERATIONS
(Unaudited, Dollar Amounts in Thousands)
For the period from
January 1, 1998
through
April 28, 1998
--------------------
REVENUES
Rooms . . . . . . . . . . . . . . . . . . . . $ 4,285
Food & beverage . . . . . . . . . . . . . . . 3,459
Telephone . . . . . . . . . . . . . . . . . . 124
Other . . . . . . . . . . . . . . . . . . . . 537
-------
Total Revenue. . . . . . . . . . . . . . 8,405
-------
EXPENSES
Departmental expenses:
Rooms . . . . . . . . . . . . . . . . . . . 1,096
Food & beverage . . . . . . . . . . . . . . 2,379
Telephone . . . . . . . . . . . . . . . . . 88
Other operating departments . . . . . . . . 307
General & administrative. . . . . . . . . . 571
Sales and marketing . . . . . . . . . . . . 435
Real estate and personal property taxes . . 405
Property operations and management. . . . . 400
Management fees . . . . . . . . . . . . . . 336
Energy. . . . . . . . . . . . . . . . . . . 292
Insurance . . . . . . . . . . . . . . . . . 71
Other fixed expenses. . . . . . . . . . . . 73
Interest expense. . . . . . . . . . . . . . 833
Depreciation and amortization . . . . . . . 1,196
Advisory fees . . . . . . . . . . . . . . . 53
-------
Total Expenses . . . . . . . . . . . . . 8,535
-------
Net Loss. . . . . . . . . . . . . . . . . . . $ (130)
=======
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
STATEMENTS OF OPERATIONS
(Unaudited, Dollar Amounts in Thousands)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1997 1997
-------------- -------------
Revenues:
Rooms . . . . . . . . . . . . . . $ 4,031 $ 10,357
Food and beverage . . . . . . . . 2,215 7,087
Telephone . . . . . . . . . . . . 131 356
Other . . . . . . . . . . . . . . 422 1,142
-------- --------
Total revenue . . . . . . 6,799 18,942
-------- --------
Expenses:
Departmental expenses:
Rooms . . . . . . . . . . . . . 961 2,563
Food and beverage . . . . . . . 1,620 5,030
Telephone . . . . . . . . . . . 75 216
Other operating
departments . . . . . . . . . 238 689
General and administration. . . 421 1,212
Sales and marketing . . . . . . 384 966
Real estate and personal
property taxes. . . . . . . . 300 940
Property operations
and management. . . . . . . . 268 833
Management fees . . . . . . . . 272 758
Energy. . . . . . . . . . . . . 212 591
Insurance . . . . . . . . . . . 53 272
Other fixed expenses. . . . . . 47 170
Interest expense. . . . . . . . 754 1,980
Depreciation and
amortization. . . . . . . . . 813 2,344
Advisory fees . . . . . . . . . 43 123
-------- --------
Total expenses. . . . . . 6,461 18,687
-------- --------
Net earnings. . . . . . . . . . . . $ 338 $ 255
======== ========
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
STATEMENT OF CASH FLOWS
(Unaudited, Dollar Amounts in Thousands)
For the period from
January 1, 1998
through
April 28, 1998
--------------------
Cash flows from operating activities:
Net earnings (loss) . . . . . . . . . . . . $ (130)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization. . . . . . . 1,196
Changes in assets and liabilities:
Guest and trade receivables, net . . . . (284)
Inventories. . . . . . . . . . . . . . . 8
Prepaid expenses and other current assets (367)
Accounts payable . . . . . . . . . . . . (133)
Accrued expenses and other liabilities . 515
-------
Net cash provided by operating
activities. . . . . . . . . . . . . 805
-------
Cash flows from investing activities:
Proceeds from restricted cash reserves. . . 148
Capital improvement expenditures. . . . . . (611)
-------
Net cash used in investing activities. (463)
-------
Cash flows from financing activities:
Principal payments on long-term debt. . . . (145)
-------
Net cash used in financing activities. (145)
-------
Increase in cash and cash equivalents . . . . 197
Cash and cash equivalents, beginning of
period. . . . . . . . . . . . . . . . . . 1,744
-------
Cash and cash equivalents, end of period. . $ 1,941
=======
Cash paid for interest. . . . . . . . . . . . $ 833
=======
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
STATEMENT OF CASH FLOWS
(Unaudited, Dollar Amounts in Thousands)
For the Nine
Months Ended
September 30,
1997
--------------
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . $ 255
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 2,344
Changes in assets and liabilities:
Guest and trade receivables, net. . . . . . . (190)
Inventories . . . . . . . . . . . . . . . . . 67
Prepaid expenses and other current assets . . 1
Accounts payable. . . . . . . . . . . . . . . 103
Accrued expenses and other liabilities. . . . 654
--------
Net cash provided by operating activities 3,234
--------
Cash flows from investing activities:
Proceeds from restricted cash reserves. . . . . . 710
Capital improvement expenditures. . . . . . . . . (1,304)
--------
Net cash used in investing activities . . (594)
--------
Cash flows from financing activities:
Distributions . . . . . . . . . . . . . . . . . . (993)
Principal payments on long-term debt. . . . . . . (563)
--------
Net cash used in financing activities . . (1,556)
--------
Increase in cash and cash equivalents . . . . . . . 1,084
Cash and cash equivalents, beginning of period. . . 346
--------
Cash and cash equivalents, end of period. . . . . . $ 1,430
========
Cash paid for interest. . . . . . . . . . . . . . . $ 1,980
========
17. SUBSEQUENT EVENTS
On October 20, 1998, the Company declared its regular third and fourth
quarter distributions of $0.375 per share on its common shares of
beneficial interest. The distributions are payable on November 13, 1998
and January 15, 1998 to the shareholders of record at the close of business
on October 30, 1998 and December 31, 1998, respectively.
The Company amended its 1998 Credit Facility to provide more financing
flexibility. Under the terms of the Amended and Restated Senior Unsecured
Credit Agreement, as amended (the 1998 Amended Credit Facility), the
Company also increased its commitment for an additional $35 million,
bringing the total commitment under the facility to $235 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL BACKGROUND
LaSalle Hotel Properties (the Company) had no operations prior to
April 29, 1998. On April 29, 1998, the Company completed an initial public
offering of 14,200,000 common shares of beneficial interest (the Initial
Offering). The offering price of all shares sold was $18 per common share,
resulting in gross proceeds of $255,600 and net proceeds (less the
underwriters' discount and offering expenses) of approximately $234,181.
The Company contributed all of the net proceeds of the Initial Offering to
LaSalle Hotel Operating Partnership, L.P., a limited partnership, (the
Operating Partnership) in exchange for an approximate 82.6% general
partnership interest in the Operating Partnership. The Operating
Partnership used the net proceeds from the Company, the issuance of
additional common shares of the Company and the issuance of limited
partnership interests, representing approximately 17.4% of the Operating
Partnership, to acquire ten upscale and luxury full service hotels (the
Initial Hotels).
As of September 30, 1998, the Company owned interests in 12 hotels
with an aggregate of 4,120 suites/rooms (the Hotels) located in nine
states. The Company owns 100% equity interests in 11 of the hotels and a
95.1% interest in a partnership which 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). Eight of the Hotels are leased to
unaffiliated lessees (affiliates of whom also operate these hotels) and
four of the Hotels are leased to LaSalle Hotel Lessee, Inc. (the Affiliated
Lessee).
The following discusses: (i) the Company's actual results of
operations for the period from April 29, 1998 (inception) through
September 30, 1998, and (ii) the Company's pro forma results of operations
for the nine months ended September 30, 1998 and 1997. This discussion
should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this form 10-Q. The Company has not
included a discussion of LRP Bloomington Limited Partnership (the
Predecessor) as its financial information would not be deemed comparable to
the Company. However, the Predecessor's financial information has been
included in the notes to the financial statements.
The pro forma financial information of the Company is presented as if
(i) the Initial Offering and the related formation transactions and (ii)
the acquisitions of the hotels discussed in Note 4 to the financial
statements had been consummated as of January 1, 1997. The pro forma
financial information is not necessarily indicative of what actual results
of operations of the Company would have been assuming the Initial Offering
and the related formation transactions and the acquisitions had been
consummated and all the Hotels had been leased as of January 1, 1997, nor
does it purport to represent the results of operations for future periods.
RESULTS OF OPERATIONS
ACTUAL RESULTS FOR THE PERIOD APRIL 29, 1998 (INCEPTION) THROUGH
SEPTEMBER 30, 1998
The Company earned approximately $31.2 million in participating lease
revenue from the Affiliated Lessee and the other lessees. The Company's
expenses before minority interest, consisting principally of depreciation,
property taxes, insurance, advisory fees, general and administrative
expenses and interest expense were approximately $19.3 million. Minority
interest in the Operating Partnership was approximately $2.1 million
representing the weighted average minority interest percentage for the
period April 29, 1998 (inception of operations) through September 30, 1998.
Net income applicable to common shareholders was approximately $10.1
million or 32.0% of total revenues for the period.
PRO FORMA RESULTS OF OPERATIONS FOR THE COMPANY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,
1997
For the nine months ended September 30, 1998, the Company's pro forma
total revenues would have been $57.0 million, representing a $5.9 million,
or 11.6%, increase over pro forma total revenues for the nine months ended
September 30, 1997 of $51.1 million. The increase for 1998 over 1997
consisting almost entirely of Participating Lease revenues, is primarily
attributable to an 5.6% increase in RevPAR for the 12 Hotels owned by the
Company at September 30, 1998.
Pro forma expenses before minority interest, consisting principally of
depreciation, property taxes, insurance, advisory fees, general and
administrative expenses and interest expense would have been $38.3 million
for 1998, representing a $1.0 million, or 2.6% increase over 1997 expenses
of $37.3 million. This increase is principally attributable to property
taxes, insurance, ground rent and advisory fees. Property taxes and
insurance would have increased from $5.3 million in 1997 to $5.7 million in
1998, or 8.0%, primarily because of inflation and the reassessment of
certain Initial Hotels acquired in 1997.
Pro forma depreciation, general and administrative expenses and
interest expense would have remained relatively unchanged.
Pro forma minority interest would have been $3.2 million and $2.4
million for the nine months ended September 30, 1998 and 1997,
respectively.
As a result of the above, pro forma net income of the Company would
have been $15.5 million and $11.4 million for the nine months ended
September 30, 1998 and 1997, respectively. As a percentage of total
revenues, net income would have been 27.2% and 22.0% for the nine months
ended September 30, 1998 and 1997, respectively.
FUNDS FROM OPERATIONS (FFO)
The Company believes that FFO is 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, it
provides 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 March
1995 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 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 does 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 is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. FFO 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. The following is a
reconciliation between net income and FFO for the three months ended
September 30, 1998 and for the period from April 29, 1998 (inception)
through September 30, 1998 and pro forma net income and pro forma FFO for
the nine months ended September 30, 1998 and 1997, respectively (in
thousands):
For the period
from April 29,
For the three 1998 (inception)
months ended through
September 30, September 30,
1998 1998
------------- -----------------
Net income applicable
to common shareholders. . . . $ 5,303 10,108
Depreciation. . . . . . . . . . 5,470 7,901
Minority interest . . . . . . . 1,116 2,121
----------- ----------
FFO . . . . . . . . . . . . . . $ 11,889 20,130
=========== ==========
FFO per common share
and unit. . . . . . . . . . . $ 0.65 1.10
=========== ==========
Weighted average common
shares and units
outstanding . . . . . . . . . 18,406,303 18,382,360
=========== ==========
Nine Months Ended
September 30,
--------------------------------
1998 1997
----------- ----------
Pro forma net income
applicable to
common shareholders . . . . $ 15,537 11,455
Pro forma depreciation. . . . 15,123 15,123
Pro forma minority
interest. . . . . . . . . . 3,247 2,394
---------- ----------
Pro forma FFO . . . . . . . . $ 33,907 28,972
========== ==========
Pro forma FFO per
common share
and unit. . . . . . . . . . $ 1.84 1.57
========== ==========
Pro forma weighted
average common shares
and units outstanding . . . 18,406,303 18,406,303
========== ==========
Pro forma FFO for the nine months ended September 30, 1998 would have
increased $4.9 million, or 17.0%, to $33.9 million compared to $29.0
million in the nine months ended September 30, 1997. The increase in pro
forma FFO in 1998 is primarily attributable to the increase in
participating lease revenues.
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, regardless of
ownership, for the nine month periods ended September 30, 1998 and 1997.
This information is useful in understanding the underlying changes in the
pro forma participating lease revenue for the Company during the pro forma
periods presented.
Nine Months Ended
September 30,
-------------------
1998 1997 Variance
------- ------- --------
THE TOTAL HOTEL PORTFOLIO
- -------------------------
Occupancy . . . . . . . . 73.6% 75.1% (1.9%)
ADR . . . . . . . . . . . $129.09 $119.96 7.6%
RevPAR. . . . . . . . . . $ 95.07 $ 90.05 5.6%
The Total Hotel Portfolio experienced an increase in RevPAR of $5.02,
or 5.6%, for the nine months ended September 30, 1998 compared to the same
period in 1997. This increase was led by significant RevPAR percentage
increases at Le Meridien New Orleans, the LaGuardia Airport Marriott and
the San Diego Paradise Point Resort. This increased RevPAR is a result of
increases in rates for upscale and luxury full service hotel rooms. The
increases in RevPAR for these properties were partially offset by the
decrease in RevPAR at the Radisson Tampa. The Radisson Tampa, along with
the Le Meridien Dallas, which experienced a decline in occupancy, were
under renovation in the third quarter of 1998. In addition, the Radisson
South in Bloomington, Minnesota, experienced a decline in occupancy, due to
the Northwest Airlines strike, which also occurred in the third quarter of
1998. Also in the third quarter of 1998, the Holiday Inn Key West and the
Le Meridien New Orleans experienced a decline in occupancy due to
evacuation at these two hotels associated with Hurricane Georges. The
company is in the process of preparing a claim in order to recover lost
revenue through business interruption insurance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its 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 April 1998, the Company entered into a $200 million senior
unsecured revolving credit facility (the 1998 Credit Facility) to be used
for acquisitions, capital improvements, working capital and general
corporate purposes. Borrowings under the 1998 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 the
Company. At September 30, 1998 the interest rate was approximately 7.2%
for LIBOR borrowings. The Company did not have any Adjusted Base Rate
borrowings outstanding at September 30, 1998. Additionally, the Company is
required to pay an unused commitment fee which is variable, determined from
a ratings or leverage based pricing matrix, currently set at 25 basis
points. The Company incurred an unused commitment fee of approximately $57
for the period from April 29, 1998 (inception) through September 30, 1998.
The 1998 Credit Facility matures on April 30, 2001 and contains certain
financial covenants relating to debt service coverage, market value net
worth and total funded indebtedness.
The Company amended its 1998 Credit Facility to provide more financing
flexibility. Under the terms of the Amended and Restated Senior Unsecured
Credit Agreement, as amended (the 1998 Amended Credit Facility), the
Company also increased its commitment for an additional $35 million,
bringing the total commitment under the facility to $235 million.
On June 24, 1998 the Company, through the Subsidiary LLC, acquired the
Boston Property subject to $40,000 principal amount 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). In conjunction with the Massport Bonds, the
Company recorded a premium of $3,480, of which $3,142 remains unamortized
at September 30, 1998. The Massport Bonds are collateralized by the
leasehold improvements and bear interest at 10% per annum through the date
of maturity, March 1, 2026. Interest payments are due semiannually on
March 1 and September 1. Interest expense, net of the premium
amortization, for the period June 24, 1998 through September 30, 1998
totaled $740. The Massport Bonds shall 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 is due in full. The Company has
the option to prepay the Massport Bonds in full beginning March 1, 2001
subject to a prepayment penalty which varies depending on the date of
prepayment.
On September 30, 1998, the Company had $3,321 of cash and cash
equivalents and had utilized $162.9 million outstanding under its 1998
Credit Facility.
Net cash provided by operating activities was approximately $13.5
million for the period from April 29, 1998 (inception) through
September 30, 1998 primarily due to the collections of Participating Lease
revenues prior to September 30, 1998, which was offset by payments for real
estate taxes, personal property taxes, insurance, ground rent and the
Advisory Fee.
Net cash used in investing activities was approximately $402.7 million
for the period from April 29, 1998 (inception) through September 30, 1998
primarily due to the acquisition of the Initial Hotels, the San Diego
Property and the Boston Property.
Net cash provided by financing activities was approximately $392.6
million for the period from April 29, 1998 (inception) through
September 30, 1998 primarily attributable to the net proceeds received from
the IPO and the borrowings under the 1998 Credit Facility.
During the period from April 29, 1998 (inception) through
September 30, 1998, the Company granted 81,000 stock options from the 1998
SIP. These stock options vest over various periods ranging from zero to
three years. The stock options have strike prices ranging from $14.81 to
$18.00 per share and have expiration dates ranging from seven to ten years
from date of grant.
In connection with the purchase of the San Diego Property, the sole
limited partner in the Subsidiary Partnership (which is an affiliate of the
hotel operator) acquired 112,458 common shares of beneficial interest from
the Company for a purchase price of $2 million. The purchase and sale of
the common shares was a condition to the selection of the affiliate of the
limited partner as operator of the San Diego Property, and the common
shares have been pledged to the Operating Partnership to secure the limited
partner's obligations under the Participating Lease.
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 $11.5 million at September 30, 1998, of which $3.4
million is available in restricted cash reserves for future capital
expenditures. Purchase orders and letters of commitment totaling
approximately $8.8 million have been issued for renovations at the Hotels.
The Board of Trustees has modified the Company's debt policy to a
basis which better reflects the underlying value of the Company's
properties. It is the Company's policy 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) for 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, and (b) for 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. The Company's previous policy was based upon market
capitalization, which can fluctuate from time to time and which is not
necessarily an accurate measure of the value of the Company's properties.
The new basis for the Company's debt policy is expected to provide a more
consistent measure of the value of the Company's properties.
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 Amended
Credit Facility, 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 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.
INFLATION
The Company's revenues will come from the Participating Leases, which
will result in changes in the Company's revenues based on changes in the
underlying Hotels' revenues. Therefore, the Company will be relying
entirely on the performance of the Hotels and the lessees' abilities to
increase revenues to keep pace with inflation. Operators of hotels can
change room rates quickly, but competitive pressures may limit the Lessees'
and their Operators abilities to raise rates faster than inflation or even
at the same rate. The average annual growth rate in ADR for the Initial
Hotels for the three years ended December 31, 1997 was approximately 4.9%,
which was higher than the rate of inflation as measured by the Consumer
Price Index for such period. However, according to industry statistics,
industry-wide annual increases in ADR failed to keep pace with inflation
from 1987 to 1992.
The Company's variable expenses are subject to inflation. These
variable expenses (real estate and personal property taxes, property and
casualty insurance and ground rent) 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. Holiday Inn Beachside Resort,
Radisson Hotel Tampa at Sabal Park and Le Meridien New Orleans experience
their highest occupancies in the first quarter. This seasonality pattern
can be expected to cause fluctuations in the Company's quarterly lease
revenue under the Participating Leases.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" is the result of computer programs and systems
having been designed and developed to use two digits, rather than four, to
define the applicable year. As a result, these computer programs and
systems may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, pay invoices or engage in similar normal
business activities. The Company has defined five key phases in addressing
the Year 2000 Issue: awareness, assessment, renovation, validation and
implementation.
Under the guidance of a Year 2000 program team, whose strategy is
supported by senior management, the Company has substantially completed its
awareness phase and will continue this phase through December 31, 1999 to
maintain a heightened sense of awareness to the Year 2000 Issue. The
Company has grouped its systems and technology into three categories for
purposes of Year 2000 compliance: (i) commercial software purchased from
third-party vendors; (ii) information resource applications and technology
(Operator IT Applications) - systems supported by the hotel operators; and
(iii) building systems -- non IT equipment at hotels that use embedded
computer chips, such as elevators, automated room key systems and HVAC
equipment. In conducting the assessment phase, the Company is reviewing
the Year 2000 compliance of these systems in addition to creating an
inventory of all other applications, systems software and hardware
including the related impact of the Year 2000 Issue. Completion of the
assessment phase is anticipated to be in late 1998.
Based upon the results of the assessment phase, the Company will
determine the appropriate levels of renovation and validation that will be
required. The renovation process of converting, replacing or eliminating
selected platforms, applications, databases and utilities, as well as the
validation process of testing and verifying, is anticipated to be completed
by the end of the first quarter of 1999. The implementation phase, which
involves returning the tested systems to operational status, ongoing
maintenance procedures to insure continued readiness and development of
contingency plans for critical business systems, is anticipated to be
completed by mid-year 1999.
The Company's business is heavily dependent upon the efforts of the
Company's hotel operators. The Company's Year 2000 activities related to
the systems used by its operators have been limited to inquiry and
evaluation of its operators' preparedness plans. A small number of the
Company's operators have responded to Company inquiries regarding their
preparedness for issues related to the Year 2000. The Company will follow-
up with operators to give a reasonable assurance of their preparedness,
particularly with respect to critical systems. The operators' current
levels of preparedness appear varied and include partially completed
inventory and assessment of potential risks, testing, implementation of
plans for remediation and reprogramming. Additionally, there can be no
guarantee that the systems of other companies on which the operators rely
for certain data will be Year 2000 compliant on a timely basis and that any
such lack of compliance will not have a material adverse effect on the
Company.
The Company's hotels rely on a variety of third party suppliers to
provide critical operating services. These suppliers may utilize systems
and embedded technologies to control the operation of building systems such
as utilities, lighting, security, elevators, heating, ventilating and air
conditioning systems. The Company will be obtaining assurances from
suppliers as to their Year 2000 compliance and preparing contingency plans,
including the identification of alternative suppliers. The Company does
not control these third party suppliers, and for some suppliers, such as
utility companies, there may be no feasible alternative suppliers
available. The failure of these suppliers' systems could have a material
adverse effect on the operations of the affected hotel, and failures could
have a material adverse effect on the Company.
The actual costs to be incurred by the Company will depend on a number
of factors which cannot currently be accurately predicted, including the
extent and difficulty of the remediation and other work to be done, the
availability and cost of consultants, the extent of testing required to
demonstrate Year 2000 compliance, and the reliance on contingency planning
to mitigate any non-compliant situations. Upon completion of the
assessment phase (anticipated to be in late 1998), the Company expects to
have a reasonably accurate estimate of Year 2000 costs. Factors that could
impact the Company's ability to make the necessary modifications or
replacements include, but are not limited to, the availability and cost of
trained personnel and the ability of such personnel to locate and correct
all relevant computer codes. If such modifications are not completed on a
timely basis or are more costly to implement than anticipated, the
Company's business, financial condition or results of operations could be
materially adversely effected.
The ability of third parties with whom the Company transacts business
to adequately address their Year 2000 issues is outside the Company's
control. At this time, the Company is in the process of reviewing the Year
2000 compliance of its major suppliers. There can be no assurance that
their failure to adequately address Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition,
results of operations, or liquidity.
Although the Company is not aware of any threatened claims related to
the Year 2000, the Company may become subject to litigation arising from
such claims and, depending on the outcome, such litigation could have a
material adverse effect on the Company. It is not clear whether the
Company's insurance coverage would be adequate to offset these and other
business risks related to the Year 2000.
As part of its contingency planning, the Company is analyzing the most
reasonably likely worst-case scenario that could result from Year 2000 non-
compliance. For example, failure by third parties to achieve Year 2000
compliance could cause short-term disruptions in travel patterns,
potentially caused by actual or perceived problems with travel systems
(such as the air traffic control system), and potential temporary
disruptions in the supply of utility, telecommunications and financial
services, which may be local or regional in scope. These events could lead
travelers to accelerate travel to late 1999, postpone travel to later in
2000 or cancel travel plans, which could in turn affect lodging patterns
and occupancy. In addition, failure by either the Company or third parties
to achieve Year 2000 compliance could cause short-term operational
inconveniences and inefficiencies for the Company. For example, problems
with reservation systems could impact the occupancy of hotels. To the
extent reasonably achievable, the Company will seek to prevent and/or
mitigate the effects of such possible failures through its compliance and
contingency planning efforts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither the Company nor the Operating Partnership is currently
involved in any litigation the ultimate resolution of which, 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
NOT APPLICABLE.
ITEM 5. OTHER MATTERS.
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 in the Company's Registration
Statement (No. 333-45647), under "Risk Factors" and elsewhere in this
Report under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere, and in other reports filed by the
Company with the Securities and Exchange Commission and include, among
other things, the following: (i) dependence upon rental payments from
lessees of the Company's Hotels for all of the Company's income, (ii)
dependence upon the ability of the lessees and operators to manage the
Company's Hotels, (iii) the possibility that the Company may be required to
fund distributions to shareholders from working capital or borrowings or
reduce such distributions, (iv) the lack of appraisals for the Hotels
contributed to the Company in connection with the formation of the Company
and the possibility that the price paid for the interests in those Hotels
may have exceeded their market value, (v) the potential for conflicts of
interest between the Company and (a) the Advisor and its affiliates and (b)
certain Trustees and officers of the Company who are also officers,
directors and stockholders of the Advisor and its affiliates, (vi)
competition for guests, increases in operating costs due to inflation and
other factors, dependence on business, commercial and leisure travelers,
seasonality of business, potential loss of franchise or brand licenses, the
possible need for expenditures in excess of those budgeted for capital
improvements and replacement of furniture, fixtures and equipment and other
risks that may affect the hotel industry generally or the Company's Hotels
specifically, (vii) the Company's lack of an operating history and
employees and its dependence on the Advisor for its management and
administration, (viii) the use of debt financing, (ix) the potential
unavailability of adequate financing to fund acquisitions and development
activities, (x) the dependence of the Company's performance and value on
real estate industry conditions and the condition of the economy in
general, (xi) taxation of the Company as a corporation if it fails to
qualify as a REIT and the taxation of the Operating Partnership as a
corporation if it were deemed not to be a partnership for income tax
purposes, (xii) provisions of the Company's organizational documents,
including restrictions on ownership of more than 9.8% of the outstanding
Common Shares, which may make a change in control of the Company more
difficult to achieve and (xiii) the effect of market interest rates on the
price of the Company's Common Shares. 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. A list of exhibits is set forth in the Exhibit
Index which immediately precedes the exhibits and which is incorporated by
reference herein.
(b) Reports of Form 8-K.
A report on Form 8-K dated June 1, 1998, filed
June 15, 1998, as amended by the report on Form 8-K/A filed August 14,
1998, relating to the Company's acquisition of the San Diego Paradise Point
Resort. The report includes the required financial statements of the
property.
A report on Form 8-K dated June 24, 1998 was filed on
July 9, 1998, relating to the Company's acquisition of the Harborside Hyatt
Conference Center & Hotel in Boston.
A report on Form 8-K/A dated June 24, 1998 was filed
on September 8, 1998. The report includes the financial statements of the
Harborside Hyatt Conference Center & Hotel, Accounts Maintained by Hyatt
Corporation.
A report on Form 8-K/A No. 2 dated June 24, 1998 was
filed on September 11, 1998. The report includes the financial statements
of the previous owner of Harborside Hyatt Conference Center & Hotel.
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: November 13, 1998 BY:/S/ HANS WEGER
------------------------------
Hans Weger
Executive Vice President,
Treasurer and Chief
Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 1998 Share Option and Incentive Plan
10.2 Amended and Restated Senior Unsecured Credit
Agreement
10.3 First Amendment to the Amended and Restated
Unsecured Credit Agreement
27 Financial Data Schedule