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, 1999
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 August 9, 1999
----- --------------
Common Shares of Beneficial 15,240,563
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 . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 25
Item 2. Changes in Securities and Use of Proceeds . . . . . . 25
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . 25
Item 5. Other Matters . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 26
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,
1999 1998
----------- ------------
(Unaudited)
ASSETS
------
Investment in hotel properties, net. . . . . $ 500,788 $ 467,552
Investment in affiliated lessee. . . . . . . (16) (21)
Cash and cash equivalents. . . . . . . . . . 1,021 1,570
Restricted cash reserves . . . . . . . . . . 10,005 9,789
Rent receivable from lessees:
Affiliated Lessee. . . . . . . . . . . . . 4,400 --
Other Lessees. . . . . . . . . . . . . . . 6,454 3,088
Notes receivable:
Affiliated Lessee. . . . . . . . . . . . . 3,900 1,500
Other Lessees. . . . . . . . . . . . . . . 3,618 3,451
Other. . . . . . . . . . . . . . . . . . . 406 --
Deferred financing costs, net. . . . . . . . 1,830 1,754
Prepaid expenses and other assets. . . . . . 1,357 7,655
---------- ----------
Total assets . . . . . . . . . . . $ 533,763 $ 496,338
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings under credit facility . . . . . . $ 204,300 $ 164,700
Bonds payable, net . . . . . . . . . . . . . 42,199 42,828
Due to JLL . . . . . . . . . . . . . . . . . 1,037 886
Due to Affiliated Lessee . . . . . . . . . . -- 614
Accounts payable and accrued expenses. . . . 7,525 4,320
Minority interest in Operating
Partnership. . . . . . . . . . . . . . . . 48,121 47,694
Minority interest in other partnerships. . . 10 10
Distributions payable. . . . . . . . . . . . -- 6,902
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred shares of beneficial interest,
$.01 par value, 20,000,000 shares
authorized, no shares issued and
outstanding. . . . . . . . . . . . . . . -- --
Common shares of beneficial interest,
$.01 par value, 100,000,000 shares
authorized 15,240,563 shares
issued and outstanding . . . . . . . . . 152 152
Additional paid-in capital . . . . . . . . 231,536 231,376
Retained earnings. . . . . . . . . . . . . -- --
Distributions in excess of
Retained Earnings. . . . . . . . . . . . (1,117) (3,144)
---------- ----------
Total shareholders' equity . . . . 230,571 228,384
---------- ----------
Total liabilities and
shareholders' equity . . . . . . $ 533,763 $ 496,338
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the six
months ended
June 30, 1999
-------------
Revenues:
Participating lease revenue:
Affiliated Lessee. . . . . . . . . . . . . . . . $ 12,124
Other Lessees. . . . . . . . . . . . . . . . . . 24,274
Interest income:
Affiliated Lessee. . . . . . . . . . . . . . . . 114
Other Lessees. . . . . . . . . . . . . . . . . . 101
Equity in income of Affiliated Lessee. . . . . . . 5
Other income . . . . . . . . . . . . . . . . . . . 238
----------
Total revenues . . . . . . . . . . . . . . 36,856
----------
Expenses:
Depreciation and other amortization. . . . . . . . 11,958
Real estate, personal property taxes
and insurance. . . . . . . . . . . . . . . . . . 3,953
Ground rent. . . . . . . . . . . . . . . . . . . . 1,512
General and administrative . . . . . . . . . . . . 707
Interest . . . . . . . . . . . . . . . . . . . . . 7,186
Amortization of deferred financing costs . . . . . 480
Advisory fee . . . . . . . . . . . . . . . . . . . 1,698
----------
Total expenses . . . . . . . . . . . . . . 27,494
----------
Income before minority interest. . . . . . . . . . . 9,362
Minority interest in Operating Partnership . . . . . 1,620
----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 7,742
==========
Net income per weighted average common share
outstanding
- basic . . . . . . . . . . . . . . . . . . . . . $ 0.51
- diluted . . . . . . . . . . . . . . . . . . . . $ 0.51
Weighted average number of common shares
outstanding
- basic . . . . . . . . . . . . . . . . . . . . . 15,235,337
- diluted . . . . . . . . . . . . . . . . . . . . 15,236,143
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
Period from
April 29, 1998
For the three (inception)
months ended through
June 30, 1999 June 30, 1998
-------------- --------------
Revenues:
Participating lease revenue:
Affiliated Lessee. . . . . . . . $ 7,525 $ 5,011
Other Lessees. . . . . . . . . . 12,767 6,596
Interest Income:
Affiliated Lessee. . . . . . . . 57 12
Other Lessees. . . . . . . . . . 51 34
Equity in income of Affiliated
Lessee . . . . . . . . . . . . . 119 13
Other income . . . . . . . . . . . 125 61
---------- ----------
Total Revenues . . . . . . . 20,644 11,727
---------- ----------
Expenses:
Depreciation and other
amortization . . . . . . . . . . 6,216 2,431
Real estate, personal property
taxes and insurance. . . . . . . 1,956 1,196
Ground rent. . . . . . . . . . . . 861 262
General and administrative . . . . 352 126
Interest . . . . . . . . . . . . . 3,681 1,289
Amortization of deferred
financing costs. . . . . . . . . 239 106
Advisory fee . . . . . . . . . . . 1,037 507
---------- ----------
Total Expenses . . . . . . . 14,342 5,917
---------- ----------
Income before minority interest. . . 6,302 5,810
Minority interest in Operating
Partnership. . . . . . . . . . . . 1,068 1,005
---------- ----------
Net income . . . . . . . . . . . . . $ 5,234 $ 4,805
========== ==========
Net income per weighted average
common share outstanding
- basic. . . . . . . . . . . . . . $ 0.34 $ 0.32
- diluted. . . . . . . . . . . . . $ 0.34 $ 0.32
Weighted average number of
common shares outstanding
- basic. . . . . . . . . . . . . . 15,240,563 15,165,673
- diluted. . . . . . . . . . . . . 15,260,923 15,165,673
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
Period from
April 29, 1998
For the six (inception)
months ended through
June 30, 1999 June 30, 1998
-------------- --------------
Cash flows from operating
activities:
Net income . . . . . . . . . . . . $ 7,742 $ 4,805
Adjustments to reconcile net
income to net cash flow
provided by operating
activities:
Depreciation and other
amortization . . . . . . . . . 11,958 2,431
Amortization of deferred
financing costs. . . . . . . . 480 106
Bond premium amortization. . . . (629) (24)
Minority interest in
Operating Partnership. . . . . 1,620 1,005
Equity in income of
Affiliated Lessee. . . . . . . (5) (13)
Changes in assets and
liabilities:
Rent receivable from lessees . . (7,684) (6,612)
Prepaid expenses and
other assets . . . . . . . . . 3,453 (2,742)
Due to JLL . . . . . . . . . . . 306 2,420
Accounts payable and
accrued expenses . . . . . . . 415 304
---------- ----------
Net cash flow provided
by operating
activities . . . . . . . 17,656 1,680
---------- ----------
Cash flows from investing activities:
Acquisition of Hotel Properties. . (28,233) (384,353)
Improvements and additions to
hotel properties . . . . . . . . (14,609) (379)
Funding of notes receivable. . . . (400) (4,951)
Funding of restricted cash
reserves . . . . . . . . . . . . (9,183) (8,488)
Proceeds from restricted
cash reserves. . . . . . . . . . 8,967 379
Proceeds from minority interest
in other partnerships. . . . . . -- 10
---------- ----------
Net cash flow used in
investing activities . . (43,458) (397,782)
---------- ----------
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands, except per share data)
(Unaudited)
For the
Period from
April 29, 1998
For the six (inception)
months ended through
June 30, 1999 June 30, 1998
-------------- --------------
Cash flows from financing
activities:
Borrowings under credit facility . 47,500 162,900
Repayments under credit facility . (7,900) --
Payment of deferred financing
costs. . . . . . . . . . . . . . (481) (1,702)
Proceeds from issuance of
common shares. . . . . . . . . . -- 257,601
Offering costs paid. . . . . . . . (56) (20,782)
Distributions. . . . . . . . . . . (13,810) --
---------- ----------
Net cash flow provided by
financing activities . . 25,253 398,017
---------- ----------
Net change in cash and
cash equivalents . . . . . . . . . (549) 1,915
Cash and cash equivalents
at beginning of period . . . . . . 1,570 --
---------- ----------
Cash and cash equivalents
at end of period . . . . . . . . . $ 1,021 $ 1,915
========== ==========
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, 1999
(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 Jones Lang LaSalle Incorporated and certain of its
affiliates (collectively "JLL"). 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 (the "Initial Offering") of 14,200,000
common shares of beneficial interest (the "Common Shares"). 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 $ 234,139. 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 (the "Units"),
representing approximately 17.4% of the Operating Partnership, to acquire
ten upscale and luxury full service hotels (the "Initial Hotels").
As of June 30, 1999, the Company owned interests in 13 hotels with
approximately 4,300 suites/rooms (the "Hotels") located in ten states. The
Company owns 100% equity interests in 12 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"). Nine 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 1998 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, 1998 audited financial
statements included in the Company's 1998 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, 1999 and the results of its operations and its
cash flows for the six months ended June 30, 1999 and for the period from
April 29, 1998 (inception) through June 30, 1998.
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
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.
3. EARNINGS PER SHARE
The outstanding 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. The computation of basic and diluted EPS is
presented below:
For the
period from
April 29, 1999
Six Months Three months (inception)
Ended Ended through
June 30, June 30, June 30,
1999 1999 1998
---------- ------------ -------------
NUMERATOR:
Net income . . . . . $ 7,742 $ 5,234 $ 4,805
========== ========== ==========
DENOMINATOR:
Weighted average
shares - Basic. . . 15,235,337 15,240,563 15,165,673
Effect of Dilutive
Securities:
Common Stock
Options. . . . . 806 20,360 --
---------- ---------- ----------
Weighted average
shares - Diluted. . 15,236,143 15,260,923 15,165,673
========== ========== ==========
BASIC EPS:
Net Income applicable
to Common Share-
holders. . . . . . . $ 0.51 $ 0.34 $ 0.32
========== ========== ==========
DILUTED EPS:
Net Income applicable
to Common Share-
holders. . . . . . . $ 0.51 $ 0.34 $ 0.32
========== ========== ==========
4. ACQUISITION OF HOTEL PROPERTIES
On June 2, 1999, the Company acquired a 100% interest in the 182 room
Hotel Viking in Newport, Rhode Island (the "Hotel") through an indirect
subsidiary, LHO Viking 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 Hotel was acquired from Bellevue
Properties Inc. (Bellevue), for an aggregate purchase price of $28 million
funded with proceeds from a borrowing under the Company's 1998 Amended
Credit Facility. The Hotel is leased and operated by Viking Hotel
Corporation, an affiliate of Bellevue.
The Hotel is a full-service upscale resort located on Bellevue Avenue
in Newport, a resort area that is rapidly becoming a year round hotel
market. The Hotel offers 29,000 square feet of meeting space, two
restaurants, a lounge and a rooftop bar. The sale also included the fully
restored Kay Chapel and Trinity Parish House, both adjacent to the Hotel,
as well as a 12 room inn located directly across the street.
5. LONG-TERM DEBT
CREDIT FACILITY
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. Borrowings under the 1998 Amended 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. For the three and six months ended June 30, 1999, the weighted
average interest rate was approximately 6.5% and 6.6%, respectively. The
Company did not have any Adjusted Base Rate borrowings outstanding at
June 30, 1999. 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 $33 and $77 for the three and six
months ended June 30, 1999, respectively. As of June 30, 1999, the Company
had outstanding borrowings against the 1998 Amended Credit Facility of
$204,300.
BONDS PAYABLE
At June 30, 1999, the Company had outstanding bonds payable of
$42,199, of which $40,000 million represents the principal balance of the
bonds and the remaining $2,199 million represents unamortized premium. The
bonds bear interest at a fixed rate of 10% per annum. Interest expense,
net of the premium amortization, for the three and six months ended
June 30, 1999 totaled $686 and $1,372, respectively.
Pursuant to the bond agreement, certain cash reserves are required to
be held in trust for payments of interest, credit enhancement fees and
ground rent. As of June 30, 1999, these reserves totaled $6,392 and are
included in Restricted Cash Reserves.
6. SHAREHOLDERS' EQUITY
On January 15, 1999, the Company paid its regular fourth quarter
distribution of $0.375 per share/unit on its Common Shares and Units.
On March 4, 1999, pursuant to the advisory agreement, the Company
issued 10,988 Common Shares to the Advisor for the incentive portion of the
1998 advisory fee, in lieu of the $155, which would have otherwise been due
to the Advisor.
On May 13, 1999, the Company's registration statement on Form S-3
under the Securities Act of 1933, as amended, (the "Securities Act")
registering $200,000 of Common Shares, Common Share Warrants, Preferred
Shares of Beneficial Interest (the "Preferred Shares") and Depositary
Shares representing Preferred Shares was declared effective.
On May 14, 1999, the Company paid its regular first quarter
distribution of $0.375 per share/unit on its Common Shares and Units.
7. SHARE OPTION AND INCENTIVE PLAN
On January 19, 1999, the Company granted 305,700 non-qualified stock
options at a strike price of $13.19. On May 19, 1999, the Company also
granted 1,000 options to each of its five independent trustees at a strike
price of $13.88. All options granted during 1999 vest over three years and
have expiration dates ranging from seven to ten years from date of grant.
On February 22, 1999, the Company issued 4,995 Common Shares to its
Board of Trustees for 1998 compensation. The Common Shares were issued in
lieu of cash, at the trustee's election. These Common Shares were issued
from the 1998 Share Option and Incentive Plan (the "1998 SIP").
On May 19, 1999, the common shareholders approved an amendment to the
1998 SIP, increasing the number of Common Shares authorized for issuance
under the 1998 SIP from 757,000 to 1,500,000. On June 30, 1999, 1,103,305
Common Shares were available for future grant.
8. AFFILIATED LESSEE
A significant portion of the Company's participating lease revenue is
derived from the Participating Leases with the Affiliated Lessee. The
Affiliated Lessee is 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. Certain condensed financial information,
related to the Affiliated Lessee's income statement, is as follows:
For the
Period from
April 29, 1998
For the six For the three (inception)
months ended months ended through
June 30, 1999 June 30, 1999 June 30, 1998
------------- ------------- --------------
Total revenues . . . . $ 45,971 $ 27,847 $ 17,003
Participating lease
expense. . . . . . . 12,124 7,525 5,011
Net income . . . . . . 58 1,327 141
On March 26, 1999, the Company executed lease amendments for its
leases with the Affiliated Lessee. The amendments were effective as of
January 1, 1999, and amended the participating rent thresholds of the
leases. Also, in conjunction with the lease amendments, the Affiliated
Lessee executed a promissory note in the amount of $2,400, for working
capital previously advanced to the Affiliated Lessee. The promissory note
bears interest at a rate of 6.0% per annum. The promissory note matures on
the earlier of April 30, 2009 or the date upon which any Affiliated Lessee
lease terminates. The effective date of the promissory note was also
January 1, 1999.
9. 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. The total amount obligated by the Company under the Reserve
Funds is approximately $8,146 at June 30, 1999, of which $3,613 is
available in restricted cash reserves for future capital expenditures.
Purchase orders and letters of commitment totaling approximately $11,850
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.
10. RELATED PARTY TRANSACTIONS
At June 30, 1999, the Company had a payable to JLL of $1,037 for the
second quarter advisory fee.
11. SUPPLEMENTAL CASH FLOW DISCLOSURE
For the
Period from
April 29, 1998
For the six (inception)
months ended through
June 30, 1999 June 30, 1998
-------------- --------------
Supplemental disclosure of
cash flow information:
Interest paid, net of
capitalized interest. . . . . . . $ 6,099 $ 1,160
Interest capitalized . . . . . . . 142 --
Accrued offering costs . . . . . . -- 550
In conjunction with the hotel
acquisitions, the Company assumed
the following assets and liabilities:
Purchase of real estate. . . . . . $ 28,052 $474,823
Adjustment required to reflect
predecessor's basis. . . . . . . -- 33,012
Note receivable. . . . . . . . . . 167 --
Other assets purchased . . . . . . 14 --
Liabilities, net of other assets . -- (3,316)
Bonds payable. . . . . . . . . . . -- (43,480)
Issuance of shares/units . . . . . -- (76,686)
-------- --------
Acquisition of hotel properties. $ 28,233 $384,353
======== ========
12. SUBSEQUENT EVENTS
On July 19, 1999, the Company announced an increase in its quarterly
divided for the quarter ended June 30, 1999 to $0.38 per share/unit on its
Common Shares and Units from $0.375 per share/unit. On July 19, 1999, the
Company also declared its second quarter distribution of $0.38 per
share/unit on its Common Shares and Units. The distribution is payable on
August 13, 1999 to shareholders and unitholders of record at the close of
business on July 30, 1999.
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 the 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 for the payment
of one half year's insurance and real estate taxes. The 1999 Mortgage loan
also requires the Financing Partnership to maintain a certain debt service
coverage ratio.
13. 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 subsequent acquisitions of the San Diego Paradise Point Resort, the
Harborside Hyatt Conference Center and Hotel and the Hotel Viking
(collectively, the "Subsequent Acquisitions") had been consummated and
leased as of January 1, 1998. 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 Subsequent Acquisitions had been consummated and all
the Hotels had been leased as of January 1, 1998, nor does it purport to
represent the results of operations for future periods.
For the For the
Pro forma Pro forma
six months six months
ended ended
June 30, 1999 June 30, 1998
------------- -------------
Total revenues . . . . . . . . . . $ 38,059 $ 38,235
---------- ----------
Depreciation . . . . . . . . . . . 12,340 10,481
Real estate and personal property
taxes and insurance. . . . . . . 4,019 3,814
Ground rent. . . . . . . . . . . . 1,512 1,531
General and administrative . . . . 707 345
Interest . . . . . . . . . . . . . 7,907 8,477
Amortization of deferred
financing costs. . . . . . . . . 480 303
Advisory fee . . . . . . . . . . . 1,755 1,953
---------- ----------
Income before minority interest. . 9,339 11,331
Minority interest in
Operating Partnership. . . . . . 1,625 1,972
---------- ----------
Net income . . . . . . . . . . . . $ 7,714 $ 9,359
========== ==========
Net income per weighted average
common share outstanding
- basic. . . . . . . . . . . . . $ 0.51 $ 0.62
- diluted. . . . . . . . . . . . $ 0.51 $ 0.62
Weighted average number of
common shares outstanding
- basic. . . . . . . . . . . . . 15,235,337 15,224,580
- diluted. . . . . . . . . . . . 15,236,143 15,224,580
14. 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 statements
of operations and cash flows information of LRP Bloomington Limited
Partnership, which is considered to be the predecessor of the Company, for
the period from January 1, 1998 through April 28, 1998.
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 and beverage. . . . . . . . . . . . . . . 3,459
Telephone. . . . . . . . . . . . . . . . . . . 124
Other. . . . . . . . . . . . . . . . . . . . . 537
--------
Total revenue. . . . . . . . . . . . . 8,405
--------
Expenses:
Departmental expenses:
Rooms. . . . . . . . . . . . . . . . . . . . 1,096
Food and beverage. . . . . . . . . . . . . . 2,379
Telephone. . . . . . . . . . . . . . . . . . 88
Other operating departments. . . . . . . . . 307
General and administration . . . . . . . . . 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)
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 loss . . . . . . . . . . . . . . . . . . . $ (130)
Adjustments to reconcile net
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
========
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. 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
consolidated financial statements.
The pro forma financial information of the Company in this analysis is
presented as if (i) the Initial Offering and the related formation
transactions and (ii) the Subsequent Acquisitions had been consummated as
of January 1, 1998. 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 Subsequent Acquisitions had been consummated and all the Hotels had
been leased as of January 1, 1998, nor does it purport to represent the
results of operations for future periods.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO PRO FORMA SIX MONTHS
ENDED JUNE 30, 1998
The Company earned approximately $36.4 million in participating lease
revenue during the six months ended June 30, 1999. For the pro forma six
months ended June 30, 1998, participating lease revenues would have been
$38.0 million. A significant portion of the $1.6 million or 4.3% decrease
is due to participating lease revenues for the six months ended June 30,
1999 including the Hotel Viking only since its acquisition on June 2, 1999,
while participating lease revenues for the pro forma six months ended
June 30, 1998 include the Hotel Viking for the entire six month period.
Participating lease revenues also decreased at the Marriott Seaview and
San Diego Paradise Point resorts in 1999 due to decreased occupancy levels
resulting from the significant renovations which took place during the six
months ended June 30, 1999. These decreases are partly offset by
increases in participating lease revenues from the LeMeridien Dallas and
LeMeridien New Orleans, which had increased hotel revenues for the six
months ended June 30, 1999. The LeMeridien hotels benefitted from the
renovations which took place at each of the respective hotels during 1998.
Depreciation expense increased to $12.0 million or 14.1% for the six
months ended June 30, 1999, compared to depreciation expense for the pro
forma six months ended June 30, 1998, which would have been $10.5 million.
This increase is attributable to the additional depreciation expense
incurred on capital improvements which occurred and were placed into
service during 1998 and through the first six months of 1999.
Real estate and personal property taxes, insurance and ground rent
increased $.1 million to $5.5 million for the six months ended June 30,
1999 from $5.4 million for the pro forma six months ended June 30, 1998.
Excluding the Hotel Viking, which is included in the six months ended June
30, 1999 only since its acquisition on June 2, 1999 and in the six months
ended June 30, 1998 for the entire six month period, real estate and
personal property taxes, insurance and ground rent would have increased $.2
million from $5.3 million. This increase is primarily attributable to
increased real estate taxes at the hotels.
General and administrative expense increased to $.7 million for the
six months ended June 30, 1999, from the pro forma six months ended
June 30, 1998 general and administrative expense, which would have been $.4
million. This increase is attributable to additional administrative costs
incurred for the six months ended June 30, 1999.
Interest expense decreased $1.3 million to $7.2 million for the six
months ended June 30, 1999 compared to the same pro forma period in 1998.
Interest expense for the pro forma six months ended June 30, 1998, assumes
that the $27 million borrowing under the 1998 Amended Credit Facility for
the purchase of the Hotel Viking was outstanding for the entire six month
period in 1998. For the actual six months ended June 30, 1999, the
borrowing did not occur until the acquisition date of the Hotel Viking,
which was June 2, 1999. The decrease is also attributable to lower average
interest rates in the first six months of 1999, compared to the comparable
period in 1998.
Amortization of deferred financing costs increased $0.5 million for
the six months ended June 30, 1999, compared to the comparable pro forma
period in 1998, in which amortization costs would have been $0.3 million.
This $0.2 million increase is attributable to the amortization in 1999 of
costs incurred in late 1998 for the amendment to the credit facility.
These costs would not have been incurred in the pro forma six month period
ended June 30, 1998.
Advisory fees for the six months ended June 30, 1999 were $1.7 million
compared to $2.0 million for the pro forma six months ended June 30, 1998.
This $.3 million decrease is a result of a lower net operating income for
the six months ended June 30, 1999 versus the comparable pro forma period
in 1998.
Minority interest was $1.6 million for the six months ended June 30,
1999 compared to $2.0 million for the pro forma six months ended June 30,
1998. This decrease is attributable to lower income before minority
interest of $2.0 million for the six months ended June 30, 1999 versus the
comparable pro forma period in 1998.
As a result of the above, net income decreased approximately $1.6
million to $7.7 for the six months ended June 30, 1999 compared to net
income of $9.4 million for the pro forma six months ended June 30, 1998.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THE PERIOD FROM
APRIL 29, 1998 (INCEPTION) THROUGH JUNE 30, 1998.
For the quarter ended June 30, 1999, the Company earned participating
lease revenues of $20.3 million, while participating lease revenues for the
period from April 29, 1998 (inception) through June 30, 1998 were $11.6
million. The $8.7 million increase is attributable to a full three month
quarter in 1999 compared to a partial quarter in 1998. In addition, the
quarter ended June 30, 1999 includes participating lease revenues for the
Hotel Viking, which was acquired on June 2, 1999.
The Company's expenses before minority interest, consisting
principally of depreciation and amortization, property taxes, insurance,
ground rent, general and administrative expenses, interest and advisory
fees was $14.3 million for the quarter ended June 30, 1999, compared to
$5.9 million for the period from April 29, 1998 (inception) through
June 30, 1998. The $8.4 million increase is attributable to a full three
month quarter in 1999 compared to a partial quarter in 1998. The partial
quarter in 1998 included property tax and insurance expense for the San
Diego Paradise Point Resort and the Harborside Hyatt Conference Center and
Hotel only for the period from their acquisition dates, which were June 1,
1998 and June 24, 1998, respectively. In addition, property tax and
insurance expense for the quarter ended June 30, 1999 includes the Hotel
Viking.
Minority interest was $1.1 million and $1.0 million for the quarter
ended June 30, 1998 and for the period from April 29, 1998 (inception)
through June 30, 1998, respectively. This increase is attributable to an
increase in income before minority interest.
As a result of the above, net income for the quarter ended June 30,
1999 was $5.2 million compared to $4.8 million for the period from
April 29, 1998 (inception) through June 30, 1998.
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 six and three months
ended June 30, 1999 (in thousands, except share data):
For the six For the three
months ended months ended
June 30, 1999 June 30, 1999
------------- -------------
Net income applicable to
common shareholders. . . . . . . $ 7,742 $ 5,234
Depreciation . . . . . . . . . . . 11,954 6,213
Minority interest. . . . . . . . . 1,620 1,068
---------- ----------
FFO. . . . . . . . . . . . . . . . $ 21,316 $ 12,515
========== ==========
FFO per common share and unit
- basic. . . . . . . . . . . . . $ 1.16 $ 0.68
- diluted. . . . . . . . . . . . $ 1.16 $ 0.68
Weighted average common shares
and units outstanding
- basic. . . . . . . . . . . . . 18,417,060 18,422,286
- diluted. . . . . . . . . . . . 18,417,866 18,442,646
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 comparable Hotels, the non-comparable
Hotels and the total Hotel portfolio, regardless of ownership, for the
three and six month periods ended June 30, 1999 and 1998.
For the three months ended For the six months ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 Variance 1999 1998 Variance
---- ---- -------- ---- ---- --------
COMPARABLE
HOTELS (1)
Occupancy 77.7% 76.9% 1.0% 76.5% 75.6% 1.2%
ADR $134.17 $128.55 4.4% $135.18 $130.53 3.6%
REVPAR $104.28 $98.88 5.5% $103.40 $98.64 4.8%
NON-COMPARABLE
HOTELS (1)
Occupancy 69.2% 73.8% (6.2%) 61.8% 69.3% (10.8%)
ADR $142.88 $137.18 4.2% $132.25 $126.00 5.0%
REVPAR $98.92 $101.23 (2.3%) $81.71 $87.32 (6.4%)
TOTAL
PORTFOLIO
Occupancy 75.1% 75.9% (1.1%) 71.8% 73.6% (2.4%)
ADR $136.64 $131.18 4.2% $134.39 $129.18 4.0%
REVPAR $102.63 $99.62 3.0% $96.55 $95.06 1.6%
(1) Non-Comparable hotels include the following:
Three months and six months ended June 30, include San Diego
Paradise Point Resort, Marriott Seaview, and Radisson Convention Hotel.
Comparable hotels include all Hotels excluding those in Non-
Comparable hotels.
For the quarter ended June 30, 1999, RevPAR on a comparable basis rose
5.5% to $104.28, compared to RevPAR of $98.88 for the quarter ended
June 30, 1998. Occupancy on a comparable basis increased 1% to 77.7%,
while ADR, also on a comparable basis, increased 4.4% to $134.17, as
compared to occupancy of 76.9% and ADR of $128.55 in the second quarter
1998. For the total portfolio, RevPAR and ADR increased 3.0% and 4.2% to
$102.63 and $136.64, respectively. Occupancy for the total portfolio was
down 1.1%.
The Company continues to benefit from its focus on the urban, resort,
and convention markets and on its extensive hotel renovation and
improvement programs. The Company saw significant RevPAR gains during the
quarter from properties which were renovated during 1998.
During the second quarter 1999, major renovations and upgrades were
completed at the Marriott Seaview Resort, located outside of Atlantic City,
New Jersey and the Radisson Convention Hotel in Bloomington, Minnesota.
The first phase of a three year renovation and repositioning of the San
Diego Paradise Point Resort was also completed in the second quarter 1999,
with the next phase of improvements expected to commence this fall.
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. Borrowings under the 1998 Amended 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. For the three and six months ended June 30, 1999, the weighted
average interest rate was approximately 6.5% and 6.6% respectively. The
Company did not have any Adjusted Base Rate borrowings outstanding at
June 30, 1999. 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 $33 and $77 for the
three and six months ended June 30, 1999, respectively. The 1998 Amended
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.
In June 1998, the Company acquired the Harborside Hyatt Conference
Center and Hotel 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 $2,199 remains unamortized
at June 30, 1999. 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 three and six months ended June 30, 1999 totaled $686 and $1,372,
respectively. 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 June 30, 1999, the Company had $1,021 of cash and cash equivalents
and had utilized $204.3 million outstanding under its 1998 Amended Credit
Facility.
Net cash provided by operating activities was approximately $17.7
million for the six months ended June 30, 1999 primarily due to the
collections of Participating Lease revenues, which was offset by payments
for real estate taxes, personal property taxes, insurance, ground rent and
the fourth quarter 1998 and first quarter 1999 base advisory fees.
Net cash used in investing activities was approximately $43.5 million
for the six months ended June 30, 1999 due primarily to the acquisition of
the Hotel Viking, as well as outflows for improvements and additions at the
existing Hotels.
Net cash provided by financing activities was approximately $25.3
million for the six months ended June 30, 1999 attributable to borrowings
under the 1998 Amended Credit Facility to finance the acquisition of the
Hotel Viking and the extensive hotel renovations. These inflows were
offset by repayments under the 1998 Amended Credit Facility, as well as the
payment of the fourth quarter 1998 and first quarter 1999 distributions.
During the six months ended June 30, 1999, the Company granted 310,700
stock options from the 1998 SIP at strike prices ranging from $13.1875 to
$13.8750. These stock options vest over a period of three years and have
expiration dates ranging from seven to ten years from date of grant.
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 $8.2 million at June 30, 1999, of which $3.6 million
is available in restricted cash reserves for future capital expenditures.
Purchase orders and letters of commitment totaling approximately $11.9
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) 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 Board of Trustees can change this policy at any time
without the approval of the shareholders.
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 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 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 come primarily 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 relies entirely on
the performance of the Hotels and the lessees' abilities to increase
revenues to keep pace with inflation. 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 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. Nine 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. Key West Beachside Resort,
Radisson Hotel Tampa 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.
Under the guidance of a Year 2000 program team, whose strategy is
supported by senior management, the Company has 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 readiness: (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 its system
assessment, the Company's Hotel Operators reviewed the Year 2000 readiness
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. The Company, working with its Hotel Operators, then
prioritized each of the hotel systems in terms of the degree of impact on
the operations of the hotel.
Based upon the results of the assessment, the Company's Hotel
Operators determined the appropriate levels of renovation that would be
required and the process for validating the effect of the renovations. The
order in which this process is occurring is based on a system priority
rating. 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 September 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 also anticipated to be completed by
September 1999.
The Company's business is heavily dependent upon the efforts of the
Company's Hotel Operators. The Company has assisted its Hotel Operators in
developing guidelines for determining the status of Year 2000 readiness for
the Hotels, planning for the remediation and testing of Year 2000 affected
systems, and the preparation for potential unanticipated issues through the
creation of contingency plans. The Company's Hotel Operators are
addressing Year 2000 issues in a predetermined sequence based on a
priority schedule which places life safety and mission critical issues as
immediate concerns and so-called "amenity" or non-operationally critical
systems as less immediate. The Company continues to rely on its Hotel
Operators to identify and enact appropriate measures to assure that any
adverse impact of the arrival of the Year 2000 will be minimized. The
Company's involvement in terms of issue prioritization, scheduled review
and on-going feedback will ensure that adequate focus by the Hotel
Operators is maintained. The Company's senior management is, in addition
to reviewing Year 2000 status reports submitted by the Hotel Operators,
visiting all of the hotels to meet with hotel management regarding their
specific Year 2000 issues, reviewing first hand the situation, and
reiterating the importance of their efforts towards Year 2000 readiness.
The Company is reasonably optimistic that its portfolio will have made
prudent efforts towards the goal of Year 2000 readiness, and will be
adequately prepared for most foreseen problems before the end of 1999. At
this time, the majority of the Company's Hotel Operators have taken prudent
measures to prevent any foreseeable Year 2000 impact on systems classified
as either life safety related or mission critical for the on-going
operation of the hotels, with the remaining open issues expected to be
addressed in the near future. As such, the Company believes that it has
significantly reduced its exposure to life safety related liability and has
protected a significant portion of its revenue and earnings streams. In
addition, the majority of the Company's Hotel Operators have also taken
prudent measures to prevent any foreseeable impact on systems related to
the efficient production of revenues and control of expenses. With the
exception of the relatively few outstanding issues referred to above, the
only remaining currently identified systems to be addressed are those
systems which have limited impact on revenue generation or expense control.
It is expected that all systems will be ready to the fullest extent
possible as of the end of the third quarter 1999. There can be no
guarantee that the Company's Hotel Operators have identified every system
in any of the above described categories, nor can there be any assurance
that the steps taken to prepare for the Year 2000 will have addressed all
potential impact of Year 2000, especially those issues yet to be
identified.
Contingency plans for the majority of the Hotels' systems are
complete. The Company and its Hotel Operators expect to have the few
outstanding contingency plans in place by the end of the third quarter.
Additionally, there can be no guarantee that the systems of other
companies, including some of the Hotel Operator's parent companies, on
which the operators rely for certain data and services will be Year 2000
ready on a timely basis and that any such lack of readiness 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, including but not limited to utility
providers. 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 has been and will continue to obtain assurances from suppliers
as to their Year 2000 compliance and will continue to prepare 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, many of which cannot currently be accurately predicted,
including the extent and difficulty of the remediation and other work to be
done, the appearance of unforeseen issues, the availability and cost of
consultants, the extent of testing required to demonstrate Year 2000
readiness, and the reliance on contingency planning to mitigate any non-
compliant situations. At this point in time, the Company is relying on the
estimates of its Hotel Operators who have projected the total costs related
to Year 2000 issues for the Company's hotels to be approximately $0.3
million. To date, approximately $0.2 million has been incurred in
connection with costs related to Year 2000 issues.
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.
Finally, the Company also cannot predict the potential impact on its
business of the failure of other third parties to achieve Year 2000
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 system (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.
These potential issues are out of the control of the Company and may have
material impact on the financial performance of the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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, 2000, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates.
The Company's policy is to manage interest rates through the use of a
combination of fixed and variable rate debt. 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 Amended Credit Facility, which
provides for a maximum borrowing amount of up to $235 million. Borrowings
under the 1998 Amended Credit Facility bear interest at variable market
rates. At June 30, 1999, the Company's outstanding borrowings under the
1998 Amended Credit Facility were $204.3 million. The weighted average
interest rate under the facility for the three and six months ended
June 30, 1999 was 6.5% and 6.6%, respectively.
At June 30, 1999, the Company also had outstanding bonds payable of
$42.2 million, of which $40.0 million represents the principal balance of
the bonds and the remaining $2.2 million represents unamortized premium.
The bonds bear interest at a fixed rate. For fixed rate debt, changes in
interest rates generally affect the fair value of the debt, but not the
earnings or cash flows of the Company. Changes in the fair market value of
fixed rate debt generally will not have a significant impact on the
Company, unless the Company is required to refinance such debt. At
June 30, 1999, the carrying value of the bonds approximated their fair
value.
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
On May 19, 1999, the Company held its Annual Meeting of Shareholders.
At the meeting, two Class I trustees of the Company were elected to
serve until the 2002 Annual Meeting of Shareholder's. The votes cast for
each trustee were as follows:
For election of Jon E. Bortz
Votes for: 13,856,590
Votes withheld: 74,018
For election of Donald A. Washburn
Votes for: 13,856,140
Votes withheld: 74,468
The appointment of KPMG LLP as independent auditors of the Company for
the fiscal year ending December 31, 1999 was ratified at the meeting with
13,523,302 shares voting in favor, 49,552 shares voting against and 357,754
shares abstaining.
In addition, the 1998 Share Option and Incentive Plan, as amended, was
approved at the meeting with 12,759,279 shares voting in favor, 761,161
share voting against and 410,168 shares abstaining.
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 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,
1998, 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, 1999, under "Certain Relationships and
Related Transactions" and elsewhere in the Company's proxy statement with
respect to the annual meeting of shareholders held on May 19, 1999, 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. 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.
No reports on Form 8-K were filed during the second
quarter of 1999.
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 11, 1999 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 First Amendment to the 1998 Share Option and
Incentive Plan
27 Financial Data Schedule