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CHSP > SEC Filings for CHSP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CHESAPEAKE LODGING TRUST

Form 10-Q for CHESAPEAKE LODGING TRUST


8-Nov-2012

Quarterly Report


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

Forward-Looking Statements
This report contains 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, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words, such as "intend," "plan," "may," "should," "will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity," and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. All statements regarding our expected financial position, business and financing plans are forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
U.S. economic conditions generally and the real estate market and the lodging industry specifically;

management and performance of our hotels;

our plans for renovation of our hotels;

our financing plans and the terms on which capital is available to us;

supply and demand for hotel rooms in our current and proposed market areas;

our ability to acquire additional hotels and the risk that potential acquisitions may not be completed or perform in accordance with expectations;

legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts; and

our competition.

These risks and uncertainties, together with the information contained in our Form 10-K for the year ended December 31, 2011 under the caption "Risk Factors," should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law.

Overview
We were organized as a self-advised REIT with a focus on investments primarily
in upper-upscale hotels in major business and convention markets and, on a
selective basis, premium select-service hotels in urban settings or unique
locations in the U.S. We completed our IPO in January 2010 and have since
acquired or committed to acquire the following 16 hotels:

Hotel                                       Location         Rooms     Acquisition Date
Hyatt Regency Boston                    Boston, MA            502     March 18, 2010
Hilton Checkers Los Angeles             Los Angeles, CA       188     June 1, 2010
Courtyard Anaheim at Disneyland
Resort                                  Anaheim, CA           153     July 30, 2010
Boston Marriott Newton                  Newton, MA            430     July 30, 2010
Le Meridien San Francisco               San Francisco, CA     360     December 15, 2010
Homewood Suites Seattle Convention
Center                                  Seattle, WA           195     May 2, 2011
W Chicago - City Center                 Chicago, IL           403     May 10, 2011
Hotel Indigo San Diego Gaslamp
Quarter                                 San Diego, CA         210     June 17, 2011
Courtyard Washington Capitol
Hill/Navy Yard                          Washington, DC        204     June 30, 2011
Hotel Adagio                            San Francisco, CA     171     July 8, 2011
Denver Marriott City Center             Denver, CO            613     October 3, 2011
Holiday Inn New York City Midtown -
31st Street                             New York, NY          122     December 22, 2011
W Chicago - Lakeshore                   Chicago, IL           520     August 21, 2012
Hyatt Regency Mission Bay Spa and
Marina                                  San Diego, CA         429     September 7, 2012
The Hotel Minneapolis                   Minneapolis, MN       222     October 30, 2012
Hyatt Place New York Midtown South      New York, NY          185          Under contract
                                                            4,907


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Hotel Operating Metrics
We believe that the results of operations of our hotels are best explained by three key performance indicators: occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR"), which is room revenue divided by total number of available rooms. RevPAR does not include food and beverage revenues or other ancillary revenues, such as parking, telephone or other guest services provided by the hotel.
Occupancy is a major driver of room revenue, as well as other revenue categories, such as food and beverage and parking. ADR helps to drive room revenue as well; however, it does not have a direct effect on other revenue categories. Fluctuations in occupancy are accompanied by fluctuations in most categories of variable operating costs, such as utility costs and certain labor costs such as housekeeping, resulting in varying levels of hotel profitability. Increases in ADR typically result in higher hotel profitability since variable hotel expenses generally do not increase correspondingly. Thus, increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs, while increases in RevPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

Executive Summary
Our hotel portfolio continued its strong performance during the third quarter. We also remained active in growing our hotel portfolio during the quarter and through the date of this report by acquiring three high-quality hotels located in major markets with high barriers-to-entry for an aggregate purchase price of $234.0 million. We funded these acquisitions by raising approximately $253.2 million from preferred and common share offerings during the quarter. In addition, we were able to take advantage of the attractive interest rate environment and extend debt maturities by closing on $95.0 million of secured financings and amending our revolving credit facility.
Our hotel portfolio significantly outperformed the overall U.S. lodging industry in RevPAR during the quarter. We believe our outperformance was a result of our intense asset management and because our hotels are located in major markets, and specifically, in several of the strongest performing markets in the U.S., including Boston, San Francisco, Los Angeles, and San Diego. Occupancy at our hotels is primarily driven by business transient customers, from which segment we continue to see strong demand for rooms. Because occupancy at our hotels were at high levels (85.4% during the third quarter), our hotel operators were able to exercise pricing power and aggressively increase ADR, and as a result, also significantly increase hotel profitability.
During the third quarter, we completed the renovation and repositioning of the Hotel Adagio. In October 2012, we completed the addition of 35 rooms to the top two vacant floors of the W Chicago - City Center. We also recently completed certain capital projects at the Hyatt Regency Boston and the Hotel Indigo San Diego Gaslamp Quarter. We are in the process of completing, or planning to complete in the future, certain capital projects at various other hotels, including a comprehensive renovation of the W Chicago - Lakeshore expected to commence in the fourth quarter 2013. We will continue to evaluate and invest in select return-on-investment projects.
We expect positive operating trends for our hotel portfolio to continue through the remainder of 2012 and in 2013 as a result of favorable hotel supply and demand fundamentals in our geographic markets combined with the completion of our return-on-investment projects. Operating trends may be affected, however, in the near term by general uncertainty surrounding U.S. fiscal policy and travel disruption as a result of Hurricane Sandy.

Results of Operations
Comparison of three months ended September 30, 2012 and 2011 Results of operations for the three months ended September 30, 2012 include the operating activity of 12 hotels for the full quarter and two hotels for part of the quarter, whereas the results of operations for the three months ended September 30, 2011 include the operating activity of nine hotels for the full quarter and one hotel for part of the quarter. As a result, comparisons of results of operations between the periods are not meaningful.
Revenues - Total revenue for the three months ended September 30, 2012 and 2011 was $75.9 million and $51.8 million, respectively. Total revenue for the three months ended September 30, 2012 included rooms revenue of $58.6 million, food and beverage revenue of $14.5 million, and other revenue of $2.7 million. Total revenue for the three months ended September 30, 2011 included rooms revenue of $40.6 million, food and beverage revenue of $9.3 million, and other revenue of $1.9 million.
For the three months ended September 30, 2012, RevPAR for our hotel portfolio was $167.31, driven by occupancy of 85.4% and ADR of $195.85.


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Hotel operating expenses - Hotel operating expenses, excluding depreciation and amortization, for the three months ended September 30, 2012 and 2011 were $48.0 million and $33.3 million, respectively. Direct hotel operating expenses for the three months ended September 30, 2012 included rooms expense of $12.6 million, food and beverage expense of $10.4 million, and other direct expenses of $1.4 million. Direct hotel operating expenses for the three months ended September 30, 2011 included rooms expense of $9.1 million, food and beverage expense of $7.3 million, and other direct expenses of $0.8 million. Indirect hotel operating expenses, which includes management and franchise fees, lease expense, real estate taxes, insurance, utilities, repairs and maintenance, advertising and sales, and general and administrative expenses, for the three months ended September 30, 2012 and 2011 were $23.6 million and $16.1 million, respectively.
Depreciation and amortization - Depreciation and amortization expense for the three months ended September 30, 2012 and 2011 was $7.2 million and $5.3 million, respectively. The increase in depreciation and amortization expense was directly attributable to the increase in investment in hotels since September 30, 2011.
Air rights contract amortization - Air rights contract amortization expense associated with the Hyatt Regency Boston for the three months ended September 30, 2012 and 2011 was $0.1 million.
Corporate general and administrative - Total corporate general and administrative expenses for the three months ended September 30, 2012 and 2011 were $5.5 million and $3.1 million, respectively. Included in corporate general and administrative expenses for the three months ended September 30, 2012 and 2011 was $0.8 million of non-cash share-based compensation expense and $2.5 million and $0.4 million, respectively, of hotel acquisition costs. The increase in corporate general and administrative expense is primarily a result of an increase in hotel acquisition costs as a result of two hotel acquisitions occurring during the three months ended September 30, 2012, as compared to one hotel acquisition occurring during the three months ended September 30, 2011. Interest income - Interest income on cash and cash equivalents and from loan receivables for the three months ended September 30, 2012 and 2011 was $74 thousand and $16 thousand, respectively.
Interest expense - Interest expense for the three months ended September 30, 2012 and 2011 was $5.4 million and $4.1 million, respectively. The increase in interest expense is directly related to the increase in long-term debt outstanding.
Loss on early extinguishment of debt - Loss on early extinguishment of debt for the three months ended September 30, 2011 was $0.2 million. The loss on early extinguishment of debt was related to the write-off of unamortized deferred financing costs associated with the prepayment of a previous $60.0 million term loan secured by the Le Meridien San Francisco during the period. Income tax benefit (expense) - Income tax expense for the three months ended September 30, 2012 was $0.7 million. Income tax benefit for the three months ended September 30, 2011 was $23 thousand. Income tax benefit (expense) is related to taxable losses (income) generated by our TRS during the periods. Comparison of nine months ended September 30, 2012 and 2011 Results of operations for the nine months ended September 30, 2012 include the operating activity of 11 hotels for the full period and three hotels for part of the period, whereas the results of operations for the nine months ended September 30, 2011 include the operating activity of five hotels for the full period and five hotels for part of the period. As a result, comparisons of results of operations between the periods are not meaningful.
Revenues - Total revenue for the nine months ended September 30, 2012 and 2011 was $193.2 million and $116.1 million, respectively. Total revenue for the nine months ended September 30, 2012 included rooms revenue of $148.4 million, food and beverage revenue of $38.3 million, and other revenue of $6.5 million. Total revenue for the nine months ended September 30, 2011 included rooms revenue of $87.8 million, food and beverage revenue of $24.4 million, and other revenue of $3.9 million.
For the nine months ended September 30, 2012, RevPAR for our hotel portfolio was $151.49, driven by occupancy of 80.1% and ADR of $189.11.
Hotel operating expenses - Hotel operating expenses, excluding depreciation and amortization, for the nine months ended September 30, 2012 and 2011 were $127.5 million and $77.8 million, respectively. Direct hotel operating expenses for the nine months ended September 30, 2012 included rooms expense of $33.3 million, food and beverage expense of $27.8 million, and other direct expenses of $3.2 million. Direct hotel operating expenses for the nine months ended September 30, 2011 included rooms expense of $20.5 million, food and beverage expense of $18.5 million, and other direct expenses of $1.9 million. Indirect hotel operating expenses, which includes management and franchise fees, lease expense, real estate taxes, insurance, utilities, repairs and maintenance, advertising and sales, and general and administrative expenses, for the nine months ended September 30, 2012 and 2011 were $63.2 million and $36.9 million, respectively.


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Depreciation and amortization - Depreciation and amortization expense for the nine months ended September 30, 2012 and 2011 was $20.4 million and $12.1 million, respectively. The increase in depreciation and amortization expense was directly attributable to the increase in investment in hotels since September 30, 2011.
Air rights contract amortization - Air rights contract amortization expense associated with the Hyatt Regency Boston for the nine months ended September 30, 2012 and 2011 was $0.4 million.
Corporate general and administrative - Total corporate general and administrative expenses for the nine months ended September 30, 2012 and 2011 were $11.5 million and $11.8 million, respectively. Included in corporate general and administrative expenses for the nine months ended September 30, 2012 and 2011 was $2.3 million of non-cash share-based compensation expense and $2.9 million and $4.3 million, respectively, of hotel acquisition costs. The decrease in hotel acquisition costs is primarily a result of two hotel acquisitions occurring during the nine months ended September 30, 2012, as compared to five hotel acquisitions occurring during the nine months ended September 30, 2011. Interest income - Interest income on cash and cash equivalents and loan receivables for the nine months ended September 30, 2012 and 2011 was $0.1 million.
Interest expense - Interest expense for the nine months ended September 30, 2012 and 2011 was $15.6 million and $8.0 million, respectively. The increase in interest expense is directly related to the increase in long-term debt outstanding.
Loss on early extinguishment of debt - Loss on early extinguishment of debt for the nine months ended September 30, 2011 was $0.2 million. The loss on early extinguishment of debt was related to the write-off of unamortized deferred financing costs associated with the prepayment of a previous $60.0 million term loan secured by the Le Meridien San Francisco during the period. Income tax benefit (expense) - Income tax expense for the nine months ended September 30, 2012 was $0.6 million. Income tax benefit for the nine months ended September 30, 2011 was $0.2 million. Income tax benefit (expense) is related to taxable losses (income) generated by our TRS during the periods. Pro forma hotel performance
We assess the operating performance of our hotels irrespective of the hotel owner during the periods compared. Included in the following table are comparisons, on a pro forma basis, of occupancy, ADR, RevPAR, Adjusted Hotel EBITDA, and Adjusted Hotel EBITDA Margin for the three and nine months ended September 30, 2012 and 2011. Adjusted Hotel EBITDA and Adjusted Hotel EBITDA Margin are non-GAAP financial measures. For further information on the calculation of Adjusted Hotel EBITDA and Adjusted Hotel EBITDA Margin, why we believe they are useful, and the limitations on their use, see "Non-GAAP Financial Measures" below.
The pro forma operating metrics reflect the operating results of 10 of our 14 hotels owned as of September 30, 2012. The pro forma operating metrics do not include operating results for the Holiday Inn New York City Midtown - 31st Street, as the hotel opened for business on January 19, 2012, the Hotel Adagio, as the hotel was under renovation during the period, and the W Chicago - Lakeshore and the Hyatt Regency Mission Bay Spa and Marina, as both hotels were acquired during the period.

                                    Three Months Ended                   Nine Months Ended
                                       September 30,                       September 30,
                                2012         2011      Change       2012         2011      Change
Occupancy                        85.4 %       84.3 %   110 bps       80.6 %       78.5 %   210 bps
ADR                          $ 193.04     $ 179.47      7.6%     $ 187.79     $ 175.16      7.2%
RevPAR                       $ 164.85     $ 151.38      8.9%     $ 151.28     $ 137.54      10.0%
Adjusted Hotel EBITDA(1)     $ 23,192     $ 20,378      13.8%    $ 59,296     $ 50,479      17.5%
Adjusted Hotel EBITDA Margin     37.2 %       35.2 %   200 bps       34.3 %       31.7 %   260 bps

(1) In thousands.

The increase in pro forma RevPAR for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily driven by pro forma RevPAR increases at the Hyatt Regency Boston, the Boston Marriott Newton, the Le Meridien San Francisco, and the Hotel Indigo San Diego Gaslamp Quarter. The increases in pro forma RevPAR at the aforementioned hotels were primarily a result of our hotel managers aggressively increasing ADR during the three months ended September 30, 2012 as occupancy had reached stabilized levels. Offsetting the pro forma RevPAR increases at the above hotels were the Courtyard Anaheim at Disneyland Resort, the W Chicago - City Center, and the Denver Marriott City Center, all of which experienced an increase in pro forma RevPAR for the three months ended September 30, 2012 as


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compared to the three months ended September 30, 2011 to a lesser extent than that of the comparable portfolio during the period.
The increase in pro forma RevPAR for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily driven by pro forma RevPAR increases at the Hyatt Regency Boston, the Boston Marriott Newton, the Le Meridien San Francisco, the Homewood Suites Seattle Convention Center, and the Hotel Indigo San Diego Gaslamp Quarter. Offsetting the pro forma RevPAR increases at the aforementioned hotels were the Courtyard Washington Capitol Hill/Navy Yard, the Courtyard Anaheim at Disneyland Resort, the W Chicago - City Center, and the Denver Marriott City Center, all of which experienced an increase in pro forma RevPAR for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 to a lesser extent than that of the comparable portfolio during the period.
The increase in pro forma Adjusted Hotel EBITDA and Adjusted Hotel EBITDA Margin for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily driven by pro forma Adjusted Hotel EBITDA increases at the Hyatt Regency Boston, the Boston Marriott Newton, the Le Meridien San Francisco, and the Hotel Indigo San Diego Gaslamp Quarter. The increase in pro forma Adjusted Hotel EBITDA and Adjusted Hotel EBITDA Margin for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily driven by pro forma Adjusted Hotel EBITDA increases at the Hyatt Regency Boston, the Le Meridien San Francisco, and the Hotel Indigo San Diego Gaslamp Quarter.

Non-GAAP Financial Measures
Non-GAAP financial measures are measures of our historical financial performance that are different from measures calculated and presented in accordance with GAAP. We report the following seven non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) Funds from operations (FFO), (2) Adjusted FFO (AFFO), (3) Corporate EBITDA,
(4) Adjusted Corporate EBITDA, (5) Hotel EBITDA, (6) Adjusted Hotel EBITDA, and
(7) Adjusted Hotel EBITDA Margin. FFO -We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income (calculated in accordance with GAAP), excluding depreciation and amortization, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets 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, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. By excluding the effect of depreciation and amortization and gains (losses) from sales of real estate, both of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance. AFFO-We further adjust FFO for certain additional recurring and non-recurring items that are not in NAREIT's definition of FFO. Specifically, we adjust for hotel acquisition costs and non-cash amortization of intangible assets and unfavorable contract liabilities. We believe that AFFO provides investors with another financial measure of our operating performance that provides for greater comparability of our core operating results between periods. The following table reconciles net income available to common shareholders excluding amounts attributable to unvested time-based awards to FFO and AFFO available to common shareholders for the three and nine months ended September 30, 2012 and 2011 (in thousands, except per share amounts):


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                                                       Three Months Ended September 30,                       Nine Months Ended September 30,
                                                             2012                       2011                        2012                      2011
Net income available to common shareholders
excluding amounts attributable to unvested
time-based awards                             $           7,008                     $     5,666      $          15,197                    $     5,914
Add: Depreciation and amortization                        7,215                           5,319                 20,422                         12,070
FFO available to common shareholders                     14,223                          10,985                 35,619                         17,984
Add: Hotel acquisition costs                              2,474                             353                  2,917                          4,270
Non-cash amortization(1)                                     60                             138                    181                            409
AFFO available to common shareholders         $          16,757                     $    11,476      $          38,717                    $    22,663
FFO available per common share-basic and
diluted                                       $            0.43                     $      0.35      $            1.10                    $      0.63
AFFO available per common share-basic and
diluted                                       $            0.51                     $      0.36      $            1.20                    $      0.79

(1) Includes non-cash amortization of ground lease asset, deferred franchise costs, unfavorable contract liability, and air rights contract.

Corporate EBITDA-Corporate EBITDA is defined as earnings before interest, income taxes, and depreciation and amortization. We believe that Corporate EBITDA provides investors a useful financial measure to evaluate our operating performance, excluding the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization). Adjusted Corporate EBITDA-We further adjust Corporate EBITDA for certain additional recurring and non-recurring items. Specifically, we adjust for hotel property acquisition costs and non-cash amortization of intangible assets. We believe that Adjusted Corporate EBITDA provides investors with another financial measure of our operating performance that is more comparable between periods. The following table reconciles net income to Corporate EBITDA and Adjusted Corporate EBITDA for the three and nine months ended September 30, 2012 and 2011 (in thousands):

                                         Three Months Ended September 30,           Nine Months Ended September 30,
                                             2012                 2011                 2012                 2011
Net income                            $         9,033       $         5,727      $       17,290       $        6,095
. . .
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