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MDH > SEC Filings for MDH > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for MHI HOSPITALITY CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MHI HOSPITALITY CORP


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities primarily in the full-service upper-upscale and upscale segments of the hotel industry located in primary and secondary markets in the Mid-Atlantic and Southern United States. We commenced operations in December 2004 when we completed our initial public offering (the "IPO") and thereafter consummated the acquisition of the initial properties.

Our hotel portfolio currently consists of eight full-service, upper-upscale and upscale hotels and one midscale hotel, collectively with 2,113 rooms which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Substantially all of our assets are held by, and all of our operations are conducted through, our Operating Partnership. We also own a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. In total, our hotel portfolio contains 2,424 rooms. As of September 30, 2012, we owned the following hotel properties:

                                               Number
Property                                      of Rooms           Location        Date of Acquisition
Wholly-owned
Crowne Plaza Hampton Marina                         173     Hampton, VA          April 24, 2008
Crowne Plaza Jacksonville Riverfront                292     Jacksonville, FL     July 22, 2005
Crowne Plaza Tampa Westshore                        222     Tampa, FL            October 29, 2007
Doubletree by Hilton Brownstone-University          190     Raleigh, NC          December 21, 2004
Hilton Philadelphia Airport                         331     Philadelphia, PA     December 21, 2004
Hilton Savannah DeSoto                              246     Savannah, GA         December 21, 2004
Hilton Wilmington Riverside                         272     Wilmington, NC       December 21, 2004
Holiday Inn Laurel West                             207     Laurel, MD           December 21, 2004
Sheraton Louisville Riverside                       180     Jeffersonville, IN   September 20, 2006

                                                  2,113
Joint Venture Property
Crowne Plaza Hollywood Beach Resort                 311     Hollywood, FL        August 9, 2007

Total                                             2,424


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We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership, and we own an approximate 77.1% interest in our Operating Partnership, with the remaining interest being held by the contributors of our initial properties as limited partners.

To qualify as a REIT, we cannot operate hotels. Therefore, our Operating Partnership leases our wholly-owned hotel properties to MHI Hospitality TRS, LLC (our "TRS Lessee"), which then engages a hotel management company to operate the hotels under a management contract. Our TRS Lessee has engaged MHI Hotels Services to manage our hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

Key Operating Metrics

In the hotel industry, most categories of operating costs, with the exception of franchise, management, credit card fees and the costs of the food and beverage served, do not vary directly with revenues. This aspect of our operating costs creates operating leverage, whereby changes in sales volume disproportionately impact operating results. Room revenue is the most important category of revenue and drives other revenue categories such as food, beverage and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and

Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.

Results of Operations

The following table illustrates the actual key operating metrics for each of the
three months and nine months ended September 30, 2012 and 2011 for the
properties we wholly-owned during each respective reporting period.



                                Three months ended             Three months ended             Nine months ended              Nine months ended
                                September 30, 2012             September 30, 2011             September 30, 2012             September 30, 2011
Occupancy %                                    71.0 %                         68.6 %                         71.2 %                         68.2 %
ADR                            $             112.81           $             106.23           $             114.73           $             109.97
RevPAR                         $              80.15           $              72.88           $              81.67           $              75.02

Comparison of the Three Months Ended September 30, 2012 to the Three Months Ended September 30, 2011

Revenue. Total revenue for the three months ended September 30, 2012 increased approximately $1.8 million or 8.8% to approximately $21.8 million compared to total revenue of approximately $20.0 million for the three months ended September 30, 2011. All our properties experienced increases in revenue except our Jacksonville, Florida and Jeffersonville, Indiana properties.

Room revenue increased approximately $1.4 million or 10.1% to approximately $15.6 million for the three months ended September 30, 2012 compared to room revenue of approximately $14.2 million for the three months ended September 30, 2011. The increase in room revenue for the three months ended September 30, 2012 resulted from a 6.2% increase in ADR and a 3.6% increase in occupancy as compared to the same period in 2011. Room revenue increased at all our properties except our Jacksonville, Florida and Jeffersonville, Indiana properties. Our property in Raleigh, North Carolina experienced a significant increase as a result of the rebranding to a DoubleTree by Hilton in late 2011. In addition, our property in Tampa, Florida experienced significant increases related to the Republican National Convention held in August 2012.

Food and beverage revenues increased approximately $0.4 million or 8.9% to approximately $5.1 million for the three months ended September 30, 2012 compared to food and beverage revenues of approximately $4.7 million for the three months ended September 30, 2011. A significant amount of the increase was attributable to operations at the Mojito restaurant at our Tampa, Florida property which opened in early 2012. Increases in banqueting revenue at our properties in Wilmington, North Carolina and Philadelphia, Pennsylvania offset decreases in food and beverage revenue at our properties in Laurel, Maryland and Jacksonville, Florida.

Revenue from other operating departments decreased approximately $0.1 million or 7.1% to approximately $1.1 million for the three months ended September 30, 2012 compared to revenue from other operating departments of approximately $1.2 million for the three months ended September 30, 2011.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses and management fees, were approximately $16.4 million, an increase of approximately $0.7 million or 5.1% for the three months ended September 30, 2012 compared to total hotel operating expenses of approximately $15.7 million for the three months ended September 30, 2011. The increase in hotel operating expense was mostly attributable to an increase in operating revenue.


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Rooms expense for the three months ended September 30, 2012 increased approximately $0.3 million or 7.5% to approximately $4.4 million compared to rooms expense of approximately $4.1 million for the three months ended September 30, 2011. The increase was largely related to the increase in occupancy and revenue.

Food and beverage expenses for the three months ended September 30, 2012 increased approximately $0.2 million or 5.8% to approximately $3.5 million compared to food and beverage expenses of approximately $3.3 million for the three months ended September 30, 2011. Most of the increase in food and beverage expense was directly related to the increase in food and beverage revenues. An improvement in food and beverage margins from 29.9% to 31.8% offset the cost of higher volume.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2012 increased approximately $0.3 million or 4.1% to approximately $8.5 million compared to indirect expenses of approximately $8.2 million for the three months ended September 30, 2011. Management fees and franchise fees increased directly in proportion to the increase in revenue. Energy and utility expenses were lower due to lower energy prices. Repairs and maintenance, insurance, real and personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2012 remained constant at approximately $2.2 million compared to depreciation and amortization expense for the three months ended September 30, 2011.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2012 decreased approximately $0.3 million or 27.5% to approximately $1.0 million compared to corporate general and administrative expense of approximately $1.3 million for the three months ended September 30, 2011. The change related mostly to aborted offering costs of approximately $0.6 million in the prior period partially offset by higher legal costs in the current period.

Interest Expense. Interest expense for the three months ended September 30, 2012 decreased approximately $0.3 million or 11.1% to approximately $2.4 million compared to interest expense of approximately $2.7 million for the three months ended September 30, 2011. Most of the decrease related to a lower effective interest rate on our outstanding debt due in substantial part to the retirement of approximately 45% of the outstanding Preferred Stock during the second quarter 2012.

Equity Income in Joint Venture. Equity income in joint venture for the three months ended September 30, 2012 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the three months ended September 30, 2012, our 25.0% share of the net loss of the hotel decreased approximately $0.1 million or 42.7% to approximately $0.2 million compared to a net loss of approximately $0.3 million for the three months ended September 30, 2011. For the three months ended September 30, 2012, the hotel reported occupancy of 72.4%, ADR of $110.29 and RevPAR of $79.89. This compares with results reported by the hotel for the three months ended September 30, 2011 of occupancy of 69.4%, ADR of $109.20 and RevPAR of $75.76.

Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $1.7 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the three months ended September 30, 2012 compared to an unrealized gain of approximately $0.7 million for the three months ended September 30, 2011. The unrealized gains and losses are mostly attributable to the change in the market price of our common stock.

Income Taxes. The income tax provision or benefit is primarily derived from the operations of our TRS Lessee. The Company realized income tax expense of approximately $28 thousand for the three months ended September 30, 2012 compared to an income tax benefit of approximately $72 thousand for the three months ended September 30, 2011.

Net Loss Attributable to the Company. The net loss attributable to the Company for the three months ended September 30, 2012 increased approximately $0.5 million or 44.6% to approximately $1.6 million as compared to a net loss of approximately $1.1 million for the three months ended September 30, 2011 as a result of the operating results discussed above.

Comparison of the Nine months Ended September 30, 2012 to the Nine months Ended September 30, 2011

Revenue. Total revenue for the nine months ended September 30, 2012 increased approximately $5.2 million or 8.5% to approximately $66.9 million compared to total revenue of approximately $61.7 million for the nine months ended September 30, 2011. All our properties experienced increases in revenue except our Hampton, Virginia property.

Room revenue increased approximately $4.1 million or 9.4% to approximately $47.3 million for the nine months ended September 30, 2012 compared to room revenue of approximately $43.2 million for the nine months ended September 30, 2011. The increase in room revenue for the nine months ended September 30, 2012 resulted from a 4.3% increase in occupancy and a 4.3% increase in ADR as compared to the same period in 2011. Room revenue increased at all our properties except our Hampton, Virginia property.

Food and beverage revenues increased approximately $1.2 million or 8.4% to approximately $16.2 million for the nine months ended September 30, 2012 compared to food and beverage revenues of approximately $15.0 million for the nine months ended


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September 30, 2011. A significant amount of the increase was attributable to operations at the Mojito restaurant at our Tampa, Florida property which opened in early 2012. We also experienced a significant increase in banqueting revenue at our property in Raleigh, North Carolina.

Revenue from other operating departments for the nine months ended September 30, 2012 decreased approximately $0.1 million or 2.5% to approximately $3.4 million for the nine months ended September 30, 2012 compared to revenue from other operating departments of approximately $3.5 million for the nine months ended September 30, 2011.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses and management fees, were approximately $49.1 million, an increase of approximately $2.6 million or 5.6% for the nine months ended September 30, 2012 compared to total hotel operating expenses of approximately $46.5 million for the nine months ended September 30, 2011. The increase in hotel operating expense was mostly attributable to an increase in operating revenue.

Rooms expense for the nine months ended September 30, 2012 increased approximately $0.8 million or 6.3% to approximately $12.8 million compared to rooms expense of approximately $12.0 million for the nine months ended September 30, 2011. The increase was largely related to the increase in occupancy and revenue.

Food and beverage expenses for the nine months ended September 30, 2012 increased approximately $0.7 million or 7.0% to approximately $10.8 million compared to food and beverage expenses of approximately $10.1 million for the nine months ended September 30, 2011. Most of the increase in food and beverage expense was directly related to the increase in food and beverage revenues. An improvement in food and beverage margins from 32.6% to 33.5% offset the cost of higher volume.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2012 increased approximately $1.2 million or 4.9% to approximately $25.1 million compared to indirect expenses of approximately $23.9 million for the nine months ended September 30, 2011. Management fees and franchise fees increased directly in proportion to the increase in revenue. Sales and marketing costs increased as vacant positions were filled and additional staff was hired in anticipation of improvement in group business. Energy and utility expenses moderated due to the mild winter in the early part of the year and due as well to lower energy costs despite the increase in occupancy. Repairs and maintenance, insurance, real and personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2012 remained constant at approximately $6.5 million compared to depreciation and amortization expense for the nine months ended September 30, 2011.

Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2012 decreased approximately $0.1 million or 2.6% to approximately $3.1 million compared to corporate general and administrative expense of approximately $3.2 million for the nine months ended September 30, 2011. Included in the variance were aborted offering costs of approximately $0.6 million in the prior period that were partially offset by higher legal costs and higher overall costs in the current period.

Interest Expense. Interest expense for the nine months ended September 30, 2012 increased approximately $1.9 million or 24.4% to approximately $10.0 million compared to interest expense of approximately $8.1 million for the nine months ended September 30, 2011. The increase was mostly attributable to the write-off of unamortized loan costs in conjunction with the extinguishment of the credit facility in March 2012 of approximately $0.5 million, the premium paid to redeem approximately 11,514 shares of Preferred Stock in June 2012 of approximately $0.8 million, the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.7 million as well as comparably higher interest in the first quarter of this year associated with the Preferred Stock issued in April 2011.

Equity Income in Joint Venture. Equity income in joint venture for the nine months ended September 30, 2012 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the nine months ended September 30, 2012, our 25.0% share of the net income of the hotel generated approximately $0.0 million compared to our 25.0% share of the net loss from the hotel of approximately $0.2 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, the hotel reported occupancy of 80.1%, ADR of $142.78 and RevPAR of $114.41. This compares with results reported by the hotel for the nine months ended September 30, 2011 of occupancy of 79.9%, ADR of $130.47 and RevPAR of $104.19.

Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $4.3 million for the nine months ended September 30, 2012 compared to an unrealized gain of approximately $0.3 million for the nine months ended September 30, 2011. The unrealized gains and losses are mostly attributable to the change in the market price of our common stock.

Income Taxes. The income tax provision or benefit is primarily derived from the operations of our TRS Lessee. The Company's income tax expense increased approximately $0.3 million or 42.6% to approximately $1.1 million for the nine months ended September 30, 2012 as compared to income tax expense of approximately $0.8 million for the nine months ended September 30, 2011.


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Net Loss Attributable to the Company. The net loss attributable to the Company for the nine months ended September 30, 2012 increased approximately $3.3 million to approximately $5.6 million as compared to a net loss of approximately $2.3 million for the nine months ended September 30, 2011 as a result of the operating results discussed above.

Funds From Operations

Funds from Operations ("FFO") is used by industry analysts and investors as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income.

Management believes that the use of FFO, combined with the required GAAP presentations, has improved the understanding of the operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted net income for reviewing comparative operating and financial performance. Management believes FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company's real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

The following table reconciles net loss to FFO for each of the three months and nine months ended September 30, 2012 and 2011 (unaudited):

                                  Three months ended            Three months ended            Nine months ended             Nine months ended
                                  September 30, 2012            September 30, 2011            September 30, 2012            September 30, 2011
Net loss                         $         (2,095,198 )        $         (1,494,901 )        $         (7,221,854 )        $         (3,074,873 )
Add depreciation and
amortization                                2,150,007                     2,187,541                     6,525,561                     6,460,928
Add equity in depreciation
of joint venture                              135,671                       156,123                       456,413                       430,150
(Gain)/loss on disposal of
assets                                             -                          9,894                            -                         (2,361 )

FFO                              $            190,480          $            858,657          $           (239,880 )        $          3,813,844

Weighted average shares
outstanding                                 9,999,786                     9,701,786                     9,994,246                     9,627,006
Weighted average units
outstanding                                 2,974,861                     3,239,439                     2,980,153                     3,305,574

Weighted average shares
and units                                  12,974,647                    12,941,225                    12,974,399                    12,932,580

FFO per share and unit           $               0.01          $               0.07          $              (0.02 )        $               0.29

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the nine months ended September 30, 2012 was approximately $8.3 million. We expect that the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to our stockholders of at least 90% of our REIT taxable income, excluding net capital gains.

Investing Activities. Approximately $2.5 million was spent during the nine months ended September 30, 2012 on capital improvements and the replacement of furniture, fixtures and equipment.

Financing Activities. On March 5, 2012, we obtained a mortgage on the Hilton Philadelphia Airport for $30.0 million and used the proceeds to extinguish the credit facility and repay a portion of the outstanding indebtedness on the $10.0 million loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC (the "Note Agreement" or "Bridge Financing").


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On June 18, 2012, we obtained a mortgage on the Crowne Plaza Tampa Westshore for $14.0 million and used the proceeds to repay the outstanding indebtedness on the Bridge Financing and to redeem approximately 11,514 shares of Preferred Stock.

On July 10, 2012, we obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida and used the proceeds to repay the outstanding indebtedness on the property and to pay transaction costs.

Capital Expenditures

We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will approximate historical norms for our properties and the industry. Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue.

We expect capital expenditures for the replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina and the Sheraton Louisville Riverside as well as 4.0% of room revenues for the Hilton Philadelphia Airport on a monthly basis.

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents of approximately $11.2 million, of which approximately $2.8 million was in restricted reserve accounts and real estate tax escrows. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement . . .

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