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MDH > SEC Filings for MDH > Form 10-K on 20-Mar-2013All Recent SEC Filings

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Form 10-K for MHI HOSPITALITY CORP


20-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a self-managed and self-administered 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 and thereafter consummated the acquisition of six initial hotel properties. Since our initial public offering, we have engaged in the following acquisitions and dispositions:

On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront).

On August 10, 2006, we sold the Holiday Inn Downtown Williamsburg.

On September 20, 2006, we acquired the Louisville Ramada Riverfront Inn, which went through an extensive renovation and re-opened in May 2008 as the Sheraton Riverside Louisville.

On August 8, 2007, through our joint venture with Carlyle, we acquired a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida.

On October 29, 2007, we acquired a hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, which went through an extensive renovation and re-opened in March 2009 as the Crowne Plaza Tampa Westshore.

On April 24, 2008, we acquired the Hampton Marina Hotel in Hampton, Virginia, which has been renovated and was converted to the Crowne Plaza Hampton Marina in October 2008.

Our hotel portfolio currently consists of ten full-service, primarily upper upscale and upscale hotels with 2,424 rooms, which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Nine of these hotels, totaling 2,113 rooms, are 100% owned by subsidiaries of our operating partnership (the "Operating Partnership"). We also own a 25.0% indirect non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. As of December 31, 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, MHI Hospitality, L.P. We are the sole general partner of our operating partnership and we own an approximate 77.6% interest in our operating partnership, with the remaining interest being held by limited partners who were contributors of our original hotel properties and related assets.

To qualify as a REIT, we cannot operate hotels. Therefore, our Operating Partnership leases our wholly-owned hotel properties to our TRS Lessee. 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, and credit card fees and the costs of the food and beverages 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 and 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 the room revenue divided by the total number of available rooms.

Results of Operations

Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011

The following table illustrates the key operating metrics for the years ended
December 31, 2012 and 2011 for our nine wholly-owned properties ("actual
properties").



                               Year Ended               Year Ended
                            December 31, 2012        December 31, 2011
             Occupancy %                  68.9 %                   66.2 %
             ADR           $            114.22      $            110.24
             RevPAR        $             78.65      $             72.94

Revenue. Total revenue for the year ended December 31, 2012 was approximately $87.3 million, an increase of approximately $6.1 million or 7.6% from total revenue for the year ended December 31, 2011 of approximately $81.2 million. Revenue increases were strongest at our DoubleTree by Hilton Brownstone - University and the Crowne Plaza Tampa Westshore properties.

Room revenues at our properties for the year ended December 31, 2012 increased approximately $4.6 million or 8.3% to approximately $60.8 million compared to room revenues for the year ended December 31, 2011 of approximately $56.2 million. The increase in room revenue was mostly attributable to increases in occupancy at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida and Tampa, Florida. Our recently renovated property in Raleigh, North Carolina as well as our property in Savannah, Georgia experienced significant increases in ADR as well. We expect occupancy and ADR to increase as demand continues to strengthen as the overall economy continues to improve.


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Food and beverage revenues at our properties for the year ended December 31, 2012 increased approximately $1.5 million or 7.2% to approximately $22.0 million compared to food and beverage revenues for the year ended December 31, 2011 of approximately $20.5 million. Most of the increase in food and beverage revenue was attributable to increased revenues at the DoubleTree by Hilton Brownstone - University, the Holiday Inn Laurel West and the Crowne Plaza Tampa Westshore.

Other operating revenues for the year ended December 31, 2012 increased approximately $0.1 million or 1.2% to approximately $4.6 million compared to other operating revenues for the year ended December 31, 2011 of approximately $4.5 million. Higher guaranteed no-show fees and garage revenue offset a decrease in the payments received in respect of the expired Shell Island sublease.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $2.5 million or 4.1% for the year ended December 31, 2012 to approximately $64.3 million compared to hotel operating expenses for the year ended December 31, 2011 of approximately $61.8 million. Increases in expenses that vary directly with increases in revenue, such as food and beverage expense, management fees and franchise fees, accounted for more than two-thirds of the increase in hotel operating expenses.

Rooms expense at our properties for the year ended December 31, 2012 increased approximately $0.8 million or 4.9% to approximately $16.6 million compared to rooms expense of approximately $15.8 million for the year ended December 31, 2011. The increase in rooms expense was directly related to the 8.3% increase in room revenue.

Food and beverage expenses at our properties for the year ended December 31, 2012 increased approximately $0.7 million or 4.9% to approximately $14.3 million compared to food and beverage expense of approximately $13.6 million for the year ended December 31, 2011. The increase in food and beverage expense was generally attributable to the 7.2% increase in food and beverage revenue.

Indirect expenses at our properties for the year ended December 31, 2012 increased approximately $1.1 million or 3.6% to approximately $32.9 million compared to indirect expenses of approximately $31.8 million for the year ended December 31, 2011. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. The overall increase in indirect expenses was offset by a decrease in energy costs, the non-recurrence of costs associated with Hurricane Irene at our property in Hampton, Virginia and the expiration of the sublease at Shell Island on December 31, 2011.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2012 remained constant at approximately $8.7 million compared to depreciation and amortization expense for the year ended December 31, 2011. We expect depreciation and amortization to remain at approximately this level for the current portfolio of hotels.

Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2012 increased approximately $0.1 million or 1.3% to approximately $4.1 million compared to corporate general and administrative expenses of approximately $4.0 million for the year ended December 31, 2011. The absence in the current year of charges related to our aborted stock offering in 2011 was offset by higher salaries and legal fees.

Interest Expense. Interest expense for the year ended December 31, 2012 increased approximately $1.6 million or 14.4% to approximately $12.4 million compared to approximately $10.8 million of interest expense for the year ended December 31, 2011. If not for the write-off of unamortized loan costs in conjunction with the


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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 and the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.7 million, we would have experienced a reduction in interest expense of approximately $0.4 million.

Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture was approximately $0.2 million for the year ended December 31, 2012 compared to equity in the loss of joint venture of approximately $0.1 million for the year ended December 31, 2011 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. The improvement was attributable to a 12.6% increase in net operating income as well as a curtailment of unrealized losses on hedging activities. For the year ended December 31, 2012, the Crowne Plaza Hollywood Beach Resort reported occupancy of 79.2%, ADR of $147.37 and RevPAR of $116.66. This compares with results reported by the hotel for the year ended December 31, 2011 of occupancy of 79.4%, ADR of $133.29 and RevPAR of $105.82.

Unrealized Loss on Warrant Derivative. The unrealized loss on the Warrant derivative for the year ended December 31, 2012 increased approximately $0.7 million or 54.8% to approximately $2.0 million compared to the unrealized loss of approximately $1.3 million for the year ended December 31, 2011. The current year loss was predominantly attributable to the increase in market price of the underlying common stock whereas the prior year loss was predominantly attributable to the modification to the Warrant agreement in December 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after December 31, 2011.

Income Tax Provision. The income tax provision for the year ended December 31, 2012 increased approximately $0.4 million or 43.7% to approximately $1.3 million compared to approximately $0.9 million for the year ended December 31, 2011. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the year ended December 31, 2012 compared to the year ended December 31, 2011.

Net Loss. Net loss attributable to the Company for the year ended December 31, 2012 decreased approximately $0.7 million to approximately $4.1 million compared to net loss attributable to the Company of approximately $4.8 million for the year ended December 31, 2011 as a result of the operating results discussed above.

Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

The following table illustrates the key operating metrics for the years ended
December 31, 2011 and 2010 for our nine wholly-owned properties ("actual
properties").



                               Year Ended               Year Ended
                            December 31, 2011        December 31, 2010
             Occupancy %                  66.2 %                   66.0 %
             ADR           $            110.24      $            104.42
             RevPAR        $             72.94      $             68.93

Revenue. Total revenue for the year ended December 31, 2011 was approximately $81.2 million, an increase of approximately $3.8 million or 4.9% from total revenue for the year ended December 31, 2010 of approximately $77.4 million. Increases in revenue at the Hilton Wilmington Riverside, the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore offset slight decreases in revenue at the Holiday Inn Laurel West and the DoubleTree by Hilton Brownstone - University.

Room revenues at our properties for the year ended December 31, 2011 increased approximately $3.1 million or 5.8% to approximately $56.2 million compared to room revenues for the year ended December 31, 2010 of approximately $53.1 million. The increase in room revenue was mostly attributable to increases in occupancy at our recently renovated properties in Jeffersonville, Indiana; Hampton, Virginia; and Tampa, Florida.


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Food and beverage revenues at our properties for the year ended December 31, 2011 increased approximately $0.6 million or 2.9% to approximately $20.5 million compared to food and beverage revenues for the year ended December 31, 2010 of approximately $19.9 million. Most of the increase in food and beverage revenue was attributable to increased revenues at the Crowne Plaza Tampa Westshore and the Hilton Wilmington Riverside.

Other operating revenues for the year ended December 31, 2011 increased approximately $0.1 million or 2.6% to approximately $4.5 million compared to other operating revenues for the year ended December 31, 2010 of approximately $4.4 million. Higher guaranteed no-show fees offset decreases in pay-per-view movie revenue.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $2.7 million or 4.6% for the year ended December 31, 2011 to approximately $61.8 million compared to hotel operating expenses for the year ended December 31, 2010 of approximately $59.1 million. Increases in expenses that vary directly with increases in revenue, such as food and beverage expense, management fees and franchise fees, accounted for approximately half the increase in hotel operating expenses.

Rooms expense at our properties for the year ended December 31, 2011 increased approximately $0.7 million or 5.0% to approximately $15.8 million compared to rooms expense of approximately $15.1 million for the year ended December 31, 2010. The increase in rooms expense was directly related to the 5.8% increase in room revenue.

Food and beverage expenses at our properties for the year ended December 31, 2011 increased approximately $0.4 million or 2.8% to approximately $13.6 million compared to food and beverage expense of approximately $13.2 million for the year ended December 31, 2010. The increase in food and beverage expense was generally attributable to the 2.9% increase in food and beverage revenue.

Indirect expenses at our properties for the year ended December 31, 2011 increased approximately $1.8 million or 5.9% to approximately $31.8 million compared to indirect expenses of approximately $30.0 million for the year ended December 31, 2010. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees, franchise fees and energy costs.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2011 increased approximately $0.2 million or 2.3% to approximately $8.7 million compared to depreciation and amortization expense of approximately $8.5 million for the year ended December 31, 2010.

Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2011 increased approximately $0.6 million or 18.8% to approximately $4.0 million compared to corporate general and administrative expenses of approximately $3.4 million for the year ended December 31, 2010 due mostly to the charge in the third quarter for fees related to our aborted stock offering.

Interest Expense. Interest expense for the year ended December 31, 2011 increased approximately $0.8 million or 7.9% to approximately $10.8 million compared to approximately $10.0 million of interest expense for the year ended December 31, 2010. The increase was the combined result of a lower effective interest rate on our line of credit in the period prior to the June 2010 amendment to the credit agreement as well as higher interest costs in the current period associated with the April 2011 issuance of Preferred Stock.

Equity Income (Loss) in Joint Venture. Equity loss in the joint venture was approximately $60.1 thousand for the year ended December 31, 2011 compared to equity income in the joint venture of approximately $17.0


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thousand for the year ended December 31, 2010 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. A 228.4% increase in net operating income was offset by higher interest expense and unrealized losses on hedging activities. For the year ended December 31, 2011, the Crowne Plaza Hollywood Beach Resort reported occupancy of 79.4%, ADR of $133.29 and RevPAR of $105.82. This compares with results reported by the hotel for the year ended December 31, 2010 of occupancy of 80.0%, ADR of $120.73 and RevPAR of $96.53.

Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $1.3 million on the value of the Warrant derivative issued in April 2011 to the purchasers of redeemable preferred stock. The loss predominantly was attributable to the modification to the Warrant agreement in December 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after December 31, 2011.

Income Tax Provision. The income tax provision for the year ended December 31, 2011 increased approximately $0.7 million or 321.6% to approximately $0.9 million compared to approximately $0.2 million for the year ended December 31, 2010. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the year ended December 31, 2011 compared to the year ended December 31, 2010.

Net Loss. Net loss attributable to the Company for the year ended December 31, 2011 increased approximately $2.4 million to approximately $4.8 million compared to net loss attributable to the Company of approximately $2.4 million for the year ended December 31, 2010 as a result of the operating results discussed above.

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unit holders and stockholders as well as repayments of indebtedness, is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2012 was approximately $9.0 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund the Company's operating requirements, 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 90.0% of our REIT taxable income, excluding net capital gains.

Investing Activities. Approximately $2.9 million was spent during the year ended December 31, 2011 on renovations and capital improvements.

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").

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.

During the year ended December 31, 2012, we paid approximately $2.5 million of scheduled principal payments toward the mortgages on our properties.


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During the year ended December 31, 2012, we also paid approximately $1.1 million in deferred financing costs in relation to the mortgages discussed above.

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 December 31, 2012, we had cash and cash equivalents of approximately $10.3 million, of which approximately $3.1 million was in restricted reserve accounts as well as real estate tax and insurance 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 of furniture, fixtures and equipment, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and dividends on the Preferred Stock.

On March 5, 2012, we obtained a $30.0 million mortgage with TD Bank, N.A. on the Hilton Philadelphia Airport. The mortgage bears interest at a rate of 30-day LIBOR plus additional interest of 3.0% per annum and provides for payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage's maturity date is August 30, 2014, with an extension option until March 1, 2017, contingent upon the extension or replacement of the Hilton Worldwide license agreement. Proceeds of the mortgage were used to extinguish our indebtedness under the then-existing credit facility, prepay a portion of our indebtedness under the Bridge Financing and for working capital. With this transaction, our syndicated credit facility was extinguished and our Crowne Plaza Tampa Westshore hotel was released therefrom.

In June 2012, we obtained a $14.0 million mortgage with C1 Bank on the Crowne Plaza Tampa Westshore in Tampa, Florida. The proceeds of the loan were used to repay the outstanding indebtedness on the Bridge Financing as well as redeem approximately 45.0% of the outstanding shares of Preferred Stock.

In June 2012, we extended the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 2013. At that time, we intend to refinance the outstanding mortgage indebtedness with a 5-year term. If we are unable to obtain such financing on favorable terms, we may be required to reduce the mortgage balance by an amount up to $1.0 million or may seek to secure an additional one-year extension of the existing mortgage indebtedness with the current lender.

In July 2012, we obtained a $14.3 million mortgage on the Crowne Plaza Jacksonville Riverfront. The maturity date is July 10, 2015, but may be extended for an additional year pursuant to certain terms and conditions. The mortgage contains an "earn-out" feature which allows us to draw up to an additional $3.0 million provided the property satisfies certain debt service coverage and loan-to-value requirements. Should we be able to draw the additional proceeds, we are required, under the terms of the Preferred Stock instrument, to use such proceeds to repurchase outstanding shares of Preferred Stock.

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