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| LHO > SEC Filings for LHO > Form 10-Q on 21-Oct-2009 | All Recent SEC Filings |
21-Oct-2009
Quarterly Report
The following should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 1 of this report.
Forward-Looking Statements
This report, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and includes this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe the Company's future plans,
strategies and expectations, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. Forward-looking statements in this report include, among others,
statements about the Company's business strategy, including its acquisition and
development strategies, industry trends, estimated revenues and expenses,
ability to realize deferred tax assets and expected liquidity needs and sources
(including capital expenditures and the ability to obtain financing or raise
capital). You should not rely on forward-looking statements since they involve
known and unknown risks, uncertainties and other factors that are, in some
cases, beyond the Company's control and which could materially affect actual
results, performances or achievements. Factors that may cause actual results to
differ materially from current expectations include, but are not limited to:
• the availability and terms of financing and capital and the general volatility of securities markets;
• the Company's dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly;
• risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs, potential unionization, actual or threatened terrorist attacks, any type of flu or disease-related pandemic, downturns in general and local economic conditions;
• risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act and similar laws;
• interest rate increases;
• the possible failure of the Company to qualify as a REIT and the risk of changes in laws affecting REITs;
• the possibility of uninsured losses;
• risks associated with redevelopment and repositioning projects, including delays and cost overruns; and
• the risk factors discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as updated elsewhere in this report.
Overview
The Company measures hotel performance by evaluating financial metrics such as room revenue per available room ("RevPAR"), funds from operations ("FFO"), earnings before interest, taxes, depreciation and amortization ("EBITDA") and Hotel EBITDA. The Company evaluates the hotels in its portfolio and potential acquisitions using these metrics to determine each portfolio hotel's contribution or acquisition hotel's potential contribution toward reaching the Company's goals of providing a reliable stream of income to its shareholders through increases in distributable cash flow and increasing long-term total returns to shareholders through appreciation in the value of its common shares. The Company invests in capital improvements throughout the portfolio to continue to increase the competitiveness of its hotels and improve their financial performance. The Company actively seeks to acquire new hotel properties that meet its investment criteria. Currently, due to the dislocation between buyers and sellers, the tight lending conditions, deteriorating operating fundamentals and lack of economic and industry clarity, it is difficult for the Company to identify hotels to acquire that fit its stringent investment criteria at prices that are generally acceptable to sellers.
During the third quarter of 2009, our hotels continued to operate in a challenging environment. However, the U.S. lodging industry experienced a decrease in the rate of decline in demand during the third quarter of 2009 compared to the prior two quarters. The improvement in the rate of decline was due somewhat to the U.S. lodging industry's ability to induce demand by offering discounted pricing through promotion, packages and third-party channels. As a result, industry-wide demand fell 5.0% compared to approximately 8.0% in the first and second quarters. The Company's third quarter RevPAR results reflected significant demand declines at our convention and resort properties, with modest increases at our urban hotels. Average daily rate ("ADR") fell significantly across all segments in the third quarter.
For the third quarter of 2009, the Company had net income applicable to common shareholders of $3.4 million, or $0.05 per diluted share. FFO was $30.7 million, or $0.49 per diluted share, and EBITDA was $48.4 million. RevPAR for the hotel portfolio was $132.82, which was a decline of 19.7% compared to the third quarter of 2008. Average daily rate fell 17.6% and occupancy was down 2.5%, compared to the same period of the prior year. Hotel portfolio revenues declined 16.8% and hotel portfolio expenses were reduced by 11.9% compared to the third quarter of 2008, resulting in a hotel portfolio EBITDA decrease of 26.1%. Hotel portfolio EBITDA margin was 30.8%, a decline of only 388 basis points as a result of the decrease in revenues being partially mitigated by continued cost reductions implemented by our team and operators.
Please refer to "Non-GAAP Financial Measures" for a detailed discussion of the Company's use of FFO, EBITDA, and Hotel EBITDA and a reconciliation of FFO, EBITDA, and Hotel EBITDA to net income, a GAAP measurement.
Critical Accounting Estimates
Substantially all of the Company's revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its quarterly reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and revenue and expense estimates for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company's consolidated statements of operations based on an aggregate estimate, are fairly stated.
The Company's management has discussed the policy of using estimated hotel operating revenues and expenses with the audit committee of its Board of Trustees. The audit committee has reviewed the Company's disclosure relating to the estimates in this Management's Discussion and Analysis of Financial Conditions and Results of Operations section.
Industry travel declined in the third quarter of 2009 compared to the same period in 2008. The industry continued to experience supply growth of approximately 3.0% while demand fell. Industry-wide average rate fell for business and leisure customers, as leisure demand was induced by discounting and promotions marketed at the hotels and through the third-party internet channels. Occupancy at our properties fell 2.5% from the same prior year period, while ADR declined 17.6%. As a result, RevPAR fell 19.7% in the quarter compared to the third quarter of 2008. Hotel portfolio EBITDA margin was 30.8%, a decline of 388 basis points as a result of the lower revenues being partially mitigated by continued cost reductions implemented by our team and operators.
Hotel Operating Revenues
Hotel operating revenues from the hotels leased to LHL (31 hotels as of September 30, 2009), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking, and other ancillary revenues) decreased $30.7 million from $192.1 million in 2008 to $161.4 million in 2009. This decrease is primarily due to the effects of the economic downturn which resulted in a 19.7% decrease in RevPAR, attributable to a 2.5% decrease in occupancy and a 17.6% decrease in ADR across the portfolio.
The following are significant decreases in total room, food and beverage and other revenue primarily as a result of the detrimental effects of the recession:
• $4.3 million decrease from Westin Michigan Avenue;
• $4.1 million decrease from San Diego Paradise Point Resort and Spa;
• $3.8 million decrease from Seaview Resort;
• $2.4 million decrease from Indianapolis Marriott Downtown;
• $2.0 million decrease from Hotel Sax Chicago; and
• $2.0 million decrease from Lansdowne Resort.
Hotel operating revenues declined $17.0 million across twenty-two additional hotels in the portfolio due to the effects of the recession.
The above decreases are partially offset by a $2.2 million increase in room, food and beverage and other revenue from Le Montrose Suite Hotel due to the transition to a new lease with LHL as of January 1, 2009, which increase is not comparable year-over-year.
The above decreases are further offset by an aggregate increase of $2.7 million in room, food and beverage and other revenue at the Liaison Capitol Hill and Donovan House as a result of improved hotel and restaurant facilities.
Participating Lease Revenue
Participating lease revenue from hotels leased to third party lessees (no such hotels as of September 30, 2009) decreased $1.4 million from $1.4 million in 2008 to zero in 2009. The decrease is due to the transition of Le Montrose Suite Hotel to a new lease with LHL as of January 1, 2009.
Other Income
Other income decreased $0.8 million from $2.1 million in 2008 to $1.3 million in 2009. This decrease is primarily due to a lease termination fee from a retail tenant at Hotel Sax Chicago recognized in the 2008 period.
Hotel Operating Expenses
Hotel operating expenses decreased $14.4 million from $116.3 million in 2008 to $101.9 million in 2009. This overall decrease is primarily a result of decreases portfolio-wide from reductions in management and hourly staffing levels and other cost-saving initiatives in anticipation of the significant decrease in occupancy across the portfolio.
• $2.1 million decrease from Seaview Resort;
• $2.0 million decrease from Westin Michigan Avenue; and
• $1.8 million decrease from San Diego Paradise Point Resort and Spa.
Hotel operating expenses declined $11.4 million across twenty-five additional hotels in the portfolio as a result of reduced occupancies and cost-savings initiatives.
The above decreases are partially offset by a $1.1 million increase in room, food and beverage, other operating department and indirect expense from Le Montrose Suite Hotel due to the transition to a new lease with LHL as of January 1, 2009, which increase is not comparable year-over-year.
In addition, room, food and beverage, other operating department and indirect expense at The Liaison Capitol Hill and Donovan House increased $1.8 million as a result of improved hotel facilities following an extensive hotel and restaurant renovation. The hotel improvements increased occupancy and in turn increased service costs.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.1 million from $27.4 million in 2008 to $27.3 million in 2009. The decrease is primarily due to a portion of furniture, fixtures and equipment across the hotel portfolio becoming fully depreciated.
Real Estate Taxes, Personal Property Taxes and Insurance
Real estate taxes, personal property taxes, and insurance expenses increased $0.9 million from $7.1 million in 2008 to $8.0 million in 2009. The increase is primarily due to an increase of $1.5 million in real estate taxes from Hotel Sax Chicago and Westin Michigan Avenue due to tax savings from decreases in assessment and rate recognized in the 2008 period, partially offset by a net decrease in real estate and personal property taxes of $0.6 million as a result of decreases in assessments and rates at certain of the hotel properties in the 2009 period. Insurance expense remained flat for the two periods.
Ground Rent
Ground rent decreased $0.3 million from $2.2 million in 2008 to $1.9 million in 2009. Certain hotels are subject to ground rent under operating leases which call for either fixed or variable payments based on the hotel's performance. This decrease is due to performance at the applicable hotels being slightly better in the 2008 period than in the 2009 period.
General and Administrative
General and administrative expense decreased $2.8 million from $5.1 million in 2008 to $2.3 million in 2009 primarily as a result of the reversal of non-cash equity compensation related to restricted stock forfeitures in the 2009 period.
Lease Termination Expense
Lease termination expense decreased $4.3 million from $4.3 million in 2008 to zero in 2009. The 2008 expense related to the settlement of litigation. There was no such settlement in 2009.
Other Expenses
Other expenses decreased $0.4 million from $0.7 million in 2008 to $0.3 million in 2009 primarily due to a decrease in common area maintenance costs incurred at the 330 N. Wabash Avenue property and energy and security cost savings from retail tenants at Hotel Sax Chicago.
Interest Income
Interest income had no change from 2008 to 2009, with an immaterial amount earned in both periods. Low cash balances were maintained in both periods.
Interest expense decreased by $3.2 million from $12.4 million in 2008 to $9.2 million in 2009 due to a decrease in the Company's weighted average debt, partly offset by an increase in the weighted average interest and a decrease in capitalized interest. The Company's weighted average debt outstanding decreased from $970.5 million in 2008 to $680.2 million in 2009, which includes paydowns on outstanding debt with proceeds from:
• an April 2009 common share offering;
• a June 2009 common share offering; and
• operating cash flow.
The above paydowns are offset by borrowings under the Company's credit facility to finance other capital improvements during 2008 and 2009.
The Company's weighted average interest rate, including the impact of capitalized interest, increased from 4.8% in 2008 to 5.1% in 2009. The Company's weighted average interest rate, excluding the impact of capitalized interest, was 5.1% for 2008 and 2009. Capitalized interest decreased $0.7 million, from $0.7 million in 2008 to an immaterial amount in 2009, primarily due to the temporary suspension of the redevelopment of the 330 N. Wabash Avenue property as a luxury hotel.
Income Tax Expense
Income tax expense increased $1.0 million from $0.8 million in 2008 to $1.8 million in 2009. For the three months ended September 30, 2009, current federal, state and local income tax expense totaled $0.1 million. LHL's net income before income tax expense increased $2.0 million from $2.4 million in 2008 to $4.4 million in 2009 primarily due to the reversal of allocated costs related to the resignation of an executive in the 2009 period and the property converted to a new lease with LHL in 2009, partly offset by lower hotel income across the portfolio due to the effects of the recession. Accordingly, for the three months ended September 30, 2009, LHL recorded a deferred federal, state and local income tax expense of $1.7 million (using an estimated tax rate of 40.3%).
As of September 30, 2009, the Company had a deferred tax asset of $12.7 million primarily due to past years' tax net operating losses. These loss carryforwards will expire in 2023 through 2028 if not utilized by then. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is required.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest in consolidated entity represents the outside equity interest in the 330 N. Wabash Avenue property which is included in the consolidated financial statements of the Company since the Company holds a controlling interest.
Noncontrolling Interests
Noncontrolling interest of common units in the Operating Partnership represents the allocation of income or loss of the Operating Partnership to the common units held by a third party. Income or loss is allocated to common units noncontrolling interest based on the weighted average percentage ownership throughout the period. At September 30, 2009, a limited partner held 0.1% of the common units of the Operating Partnership.
Noncontrolling interest of preferred units in the Operating Partnership represents the allocation of income of the Operating Partnership to the preferred units held by third parties. The decrease in noncontrolling interest of preferred units in the Operating Partnership from $1.3 million in 2008 to zero in 2009 is a result of the redemption of 1,098,348 Series F Preferred Units during the third and fourth quarter of 2008 and the redemption of the 2,348,888 Series C Preferred Units on February 1, 2009.
Distributions to Preferred Shareholders
Distributions to preferred shareholders increased $1.1 million, from $5.6 million in 2008 to $6.7 million in 2009. This increase was due to the redemption of the Series C Preferred Units and issuance of Series C Cumulative Redeemable Preferred Shares of Beneficial Interest on February 1, 2009, which were subsequently exchanged for Series G Cumulative Redeemable Preferred Shares of Beneficial Interest on April 16, 2009.
Industry-wide leisure and business travel declined significantly compared to the same prior year period. Industry-wide average rate fell during the first quarter of 2009 and dropped more substantially during each of the second and third quarters, respectively. The Company's hotels experienced an occupancy decline of 5.5%, while ADR fell 14.0% during the first nine months of 2009, which resulted in a RevPAR decrease of 18.8% compared to the prior year. Hotel portfolio EBITDA margin was 28.2%, a decline of only 346 basis points as a result of the decrease in revenues being partially mitigated by continued cost reductions implemented by our team and operators.
Hotel Operating Revenues
Hotel operating revenues from the hotels leased to LHL (31 hotels as of September 30, 2009), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking, and other ancillary revenues) decreased $57.5 million from $508.1 million in 2008 to $450.6 million in 2009. This decrease is primarily due to the effects of the economic downturn which resulted in an 18.8% decrease in RevPAR, attributable to a 5.5% decrease in occupancy and a 14.0% decrease in ADR across the portfolio.
The following are significant decreases in total room, food and beverage and other revenue primarily as a result of the detrimental effects of the recession:
• $13.4 million decrease from Westin Michigan Avenue;
• $7.0 million decrease from Westin Copley Place;
• $6.9 million decrease from Sheraton Bloomington Hotel Minneapolis South;
• $6.6 million decrease from Seaview Resort;
• $6.3 million decrease from Lansdowne Resort;
• $5.2 million decrease from Indianapolis Marriott Downtown;
• $4.6 million decrease from Hotel Sax Chicago;
• $3.4 million decrease from Hilton San Diego Gaslamp Quarter;
• $3.4 million decrease from Hotel Viking;
• $3.1 million decrease from Harborside Hyatt Conference Center and Hotel; and
• $3.0 million decrease from Hotel Solomar.
Hotel operating revenues declined $21.2 million across sixteen additional hotels in the portfolio, due to the effects of the recession.
The above decreases are partially offset by increases from amounts that are not comparable year-over-year as follows:
• $9.0 million increase in room, food and beverage and other revenue from San Diego Paradise Point Resort and Spa due to the transition to a new lease with LHL as of June 1, 2008;
• $6.2 million increase in room, food and beverage and other revenue from Le Montrose Suite Hotel due to the transition to a new lease with LHL as of January 1, 2009; and
• $4.7 million increase in room, food and beverage and other revenue from Donovan House re-opening on March 28, 2008 after completion of a comprehensive renovation and repositioning project.
In addition, room, food and beverage and other revenue at The Liaison Capitol Hill increased $6.7 million due to improved hotel facilities as a result of an extensive hotel and restaurant renovation.
Participating Lease Revenue
Participating lease revenue from hotels leased to third party lessees (no such hotels as of September 30, 2009) decreased $12.0 million from $12.0 million in 2008 to zero in 2009. The decrease is due to the transitions of San Diego Paradise Point Resort and Spa and Le Montrose Suite Hotel to new leases with LHL as of June 1, 2008 and January 1, 2009, respectively.
Other income increased $8.3 million from $6.2 million in 2008 to $14.5 million in 2009. This increase is primarily due to the following:
• $9.5 million recognized in the 2009 period from cure payments from Marriott International at Seaview Resort; and
• $1.0 million recognized in the 2009 period from the fee received related to the exchange of Series C Preferred Shares for Series G Preferred Shares.
These increases are partially offset by the following decreases:
• $0.9 million recognized in the 2008 period from a lease termination fee from a retail tenant at Hotel Sax Chicago;
• $0.7 million recognized in the 2008 period from a settlement of outstanding liabilities with respect to the acquisition of Westin Michigan Avenue property in March 2006; and
• $0.4 million recognized in the 2008 period from a settlement of outstanding liabilities due to the transition of San Diego Paradise Point Resort and Spa to a new lease with LHL as of June 1, 2008.
The remaining decrease of $0.2 million is primarily due to decreases in income from retail leases across the portfolio.
Hotel Operating Expenses
Hotel operating expenses decreased $26.0 million from $320.4 million in 2008 to $294.4 million in 2009. This overall decrease is primarily a result of decreases portfolio-wide resulting from reductions in management and hourly staffing levels and other cost-saving initiatives in anticipation of the significant decrease in occupancy across the portfolio.
The following are significant decreases in total room, food and beverage, other operating department and indirect expense primarily as a result of reduced occupancies at the hotels and cost-saving initiatives that have been implemented:
• $5.1 million decrease from Westin Michigan Avenue;
• $3.9 million decrease from Westin Copley Place;
• $3.8 million decrease from Seaview Resort;
• $3.6 million decrease from Sheraton Bloomington Hotel Minneapolis South;
• $3.1 million decrease from Indianapolis Marriott Downtown;
• $3.1 million decrease from Lansdowne Resort;
• $2.7 million decrease from Hotel Sax Chicago; and
• $2.1 million decrease from The Hilton San Diego Resort and Spa.
Hotel operating expenses declined $13.0 million across nineteen additional hotels in the portfolio as a result of reduced occupancies and cost-saving initiatives. The above decreases are partially offset by increases from amounts that are not comparable year-over-year as follows:
• $6.9 million increase in room, food and beverage, other operating department and indirect expense from San Diego Paradise Point Resort and Spa due to the transition to a new lease with LHL as of June 1, 2008;
• $3.1 million increase in room, food and beverage, other operating department and indirect expense from Le Montrose Suite Hotel due to the transition to a new lease with LHL as of January 1, 2009; and
• $1.2 million increase in room, food and beverage, other operating department and indirect expense from Donovan House re-opening on March 28, 2008 after completion of a comprehensive renovation and repositioning project.
Depreciation and Amortization
Depreciation and amortization expense increased $3.4 million from $78.9 million in 2008 to $82.3 million in 2009. This increase includes an amount that is not comparable year-over-year of $1.5 million from Donovan House which re-opened on March 28, 2008 after completion of a comprehensive renovation and repositioning project. The remaining increase of $1.9 million is primarily due to depreciation on building and land improvements and purchases of furniture, fixtures and equipment made across the hotel portfolio during 2009 and 2008.
Real Estate Taxes, Personal Property Taxes and Insurance
Real estate taxes, personal property taxes, and insurance expenses decreased $2.1 million from $25.8 million in 2008 to $23.7 million in 2009. The 2009 period includes an amount that is not comparable year-over-year of $0.4 million . . .
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