UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-32379
MHI HOSPITALITY CORPORATION
(Exact name of registrant as specified in its charter)
| MARYLAND | 20-1531029 | |
| (State or Other Jurisdiction of corporation or Organization) |
(I.R.S. Employer Identification No.) |
814 Capitol Landing Road, Williamsburg, Virginia 23185
Telephone Number (757) 229-5648
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
As of May 12, 2005, there were 6,704,000 shares of the registrant’s common stock issued and outstanding.
INDEX
| Page | ||||
| PART I | ||||
| Item 1. | Financial Statements | 1 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 24 | ||
| Item 4. | Controls and Procedures | 25 | ||
| PART II | ||||
| Item 1. | Legal Proceedings | 26 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||
| Item 3. | Defaults Upon Senior Securities | 26 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 26 | ||
| Item 5. | Other Information | 26 | ||
| Item 6. | Exhibits | 27 | ||
MHI HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
| MHI Hospitality 2005 |
MHI Hospitality December 31, 2004 |
|||||||
| ASSETS | ||||||||
| Investment in hotel properties, net |
$ | 79,047,209 | $ | 78,418,173 | ||||
| Cash and cash equivalents |
10,585,342 | 8,314,353 | ||||||
| Restricted real estate tax escrows |
916,167 | 637,627 | ||||||
| Accounts receivable |
1,798,381 | 1,161,159 | ||||||
| Accounts receivable-affiliate |
1,760,832 | 400,216 | ||||||
| Prepaid expenses, inventory and other assets |
2,288,648 | 1,602,633 | ||||||
| Shell Island lease purchase, net |
3,397,059 | 3,500,000 | ||||||
| Deferred financing costs, net |
183,265 | 198,083 | ||||||
| TOTAL ASSETS |
$ | 99,976,903 | $ | 94,232,244 | ||||
| LIABILITIES & OWNERS’ EQUITY | ||||||||
| Mortgage loans |
$ | 25,542,994 | $ | 25,753,188 | ||||
| Note payable related party |
2,000,000 | 2,000,000 | ||||||
| Accounts payable and accrued expenses |
4,814,380 | 5,177,184 | ||||||
| Dividends payable |
1,139,680 | — | ||||||
| Advance deposits |
309,363 | 336,302 | ||||||
| Due to affiliate |
— | 100,000 | ||||||
| Total liabilities |
33,806,417 | 33,366,674 | ||||||
| Minority Interest in Operating Partnership |
22,045,464 | 21,118,257 | ||||||
| Commitments and contingencies (see Note 9) |
||||||||
| OWNERS’ EQUITY |
||||||||
| Preferred stock , par value $0.01, 1,000,000 shares authorized, 0 shares issued and outstanding |
— | — | ||||||
| Common stock , par value $0.01, 49,000,000 shares authorized, 6,704,000 shares and 6,004,000 issued and outstanding at March 31, 2005 and December 31,2004 |
67,040 | 60,040 | ||||||
| Additional paid in capital |
47,760,348 | 42,221,495 | ||||||
| Accumulated deficit |
(3,702,365 | ) | (2,534,222 | ) | ||||
| TOTAL OWNERS’ EQUITY |
44,125,023 | 39,747,313 | ||||||
| TOTAL LIABILITIES AND OWNERS’ EQUITY |
$ | 99,976,903 | $ | 94,232,244 | ||||
The accompanying notes are an integral part of these financial statements.
1
MHI HOSPITALITY CORPORATION AND PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(unaudited)
| MHI Hospitality March 31, 2005 |
The Predecessor March 31, 2004 |
|||||||
| Revenue |
||||||||
| Rooms department |
$ | 7,655,583 | $ | 3,503,027 | ||||
| Food and beverage department |
3,322,736 | 1,715,554 | ||||||
| Other operating departments |
504,528 | 199,562 | ||||||
| Total revenue |
11,482,847 | 5,418,143 | ||||||
| EXPENSES |
||||||||
| Hotel operating expenses |
||||||||
| Rooms department |
2,273,310 | 916,458 | ||||||
| Food and beverage department |
2,472,871 | 1,275,814 | ||||||
| Other operating departments |
156,853 | 98,840 | ||||||
| Indirect |
4,496,407 | 2,229,416 | ||||||
| Total hotel operating expenses |
9,399,441 | 4,520,528 | ||||||
| Depreciation and amortization |
952,104 | 414,053 | ||||||
| Renovation expenses |
241,503 | 15,410 | ||||||
| Corporate general and administrative |
507,875 | — | ||||||
| Total operating expenses |
11,100,923 | 4,949,991 | ||||||
| OPERATING INCOME |
381,924 | 468,152 | ||||||
| Other income (expense) |
||||||||
| Interest expense |
(495,639 | ) | (570,669 | ) | ||||
| Interest income |
48,311 | 212 | ||||||
| Other income - net |
— | (7,187 | ) | |||||
| Income (loss) before minority interest in operating partnership and income taxes |
(65,404 | ) | (109,492 | ) | ||||
| Minority Interest in predecessor company |
— | (104,990 | ) | |||||
| Minority interest in operating partnership |
36,941 | — | ||||||
| Income tax benefit |
— | — | ||||||
| Net income (loss) |
$ | (28,463 | ) | $ | (214,482 | ) | ||
| Loss per share |
(0.00 | ) | — | |||||
| Weighted average number of shares outstanding |
6,618,444 | — | ||||||
The accompanying notes are an integral part of these financial statements.
2
MHI HOSPITALITY CORPORATION AND PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
| MHI Hospitality March 31, 2005 |
The Predecessor March 31, 2004 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net Income (Loss) |
$ | (28,463 | ) | $ | (214,482 | ) | ||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
952,104 | 414,053 | ||||||
| Equity in net (income) loss of partnership investments |
— | 4,814 | ||||||
| Minority interest in operating partnership/predecessor |
(36,941 | ) | 104,990 | |||||
| Changes in assets and liabilities: |
||||||||
| Restricted cash |
(278,540 | ) | 448,071 | |||||
| Accounts receivable |
(637,222 | ) | (203,732 | ) | ||||
| Inventory and prepaid expenses |
(686,015 | ) | (54,397 | ) | ||||
| Other assets |
117,759 | 3,316 | ||||||
| Accounts payable and accrued expenses |
(362,803 | ) | 334,532 | |||||
| Advance deposits |
(26,939 | ) | 145,669 | |||||
| Net cash provided by (used in ) operating activities |
(987,060 | ) | 982,834 | |||||
| Cash flows from investing activities: |
||||||||
| Improvements and additions to hotel properties |
(1,581,140 | ) | (190,790 | ) | ||||
| Net cash used in investing activities |
(1,581,140 | ) | (190,790 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from sale of common stock |
7,000,000 | — | ||||||
| Payment of issuance costs related to sale of common stock |
(490,000 | ) | — | |||||
| Payments to related party |
(1,460,616 | ) | — | |||||
| Payment of loans and capital lease obligations |
(210,195 | ) | (91,660 | ) | ||||
| Net cash provided by (used in) financing activities |
4,839,189 | (91,660 | ) | |||||
| Net increase in cash and cash equivalents |
2,270,989 | 700,384 | ||||||
| Cash and cash equivalents at the beginning of the period |
8,314,353 | 67,365 | ||||||
| Cash and cash equivalents at the end of the period |
$ | 10,585,342 | $ | 767,749 | ||||
| Supplemental disclosures: |
||||||||
| Cash paid during the period for interest |
$ | 522,698 | $ | 570,669 | ||||
The accompanying notes are an integral part of these financial statements.
3
MHI HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF OWNERS’ EQUITY
(unaudited)
| Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Total |
||||||||||||||
| Shares |
Par Value |
||||||||||||||||
| Balances at December 31, 2004 |
6,004,000 | $ | 60,040 | $ | 42,221,495 | $ | (2,534,222 | ) | $ | 39,747,313 | |||||||
| Sale of common shares in connection with overallotment of initial public offering |
700,000 | 7,000 | 6,993,000 | — | 7,000,000 | ||||||||||||
| Underwriters fees related to overallotment |
(490,000 | ) | — | (490,000 | ) | ||||||||||||
| Adjustment to Minority Interest in operating partnership |
(964,147 | ) | (964,147 | ) | |||||||||||||
| Net Income (Loss) |
(28,463 | ) | (28,463 | ) | |||||||||||||
| Dividends declared |
(1,139,680 | ) | (1,139,680 | ) | |||||||||||||
| Balances at March 31, 2005 |
6,704,000 | $ | 67,040 | $ | 47,760,348 | $ | (3,702,365 | ) | $ | 44,125,023 | |||||||
The accompanying notes are an integral part of these financial statements.
4
MHI HOSPITALITY CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
1. Organization and Description of Business
MHI Hospitality Corporation (the “Company”) is a self-advised real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service Upper Upscale and Midscale hotels located in primary and secondary markets in the mid-Atlantic and Southeastern regions of the United States. The Company operates under well-known national hotel brands such as Hilton and Holiday Inn. The Company commenced operations on December 21, 2004 when it completed its initial public offering (“IPO”) and thereafter consummated the acquisition of six hotel properties (“initial properties”). The Company utilized part of its net proceeds to repay approximately $25.0 million of mortgage indebtedness secured by the initial properties and paid an additional $16.9 million in cash related to the acquisition of the properties. Accordingly, the Company had approximately $12.9 million available in cash immediately following its formation.
The IPO consisted of the sale of 6,000,000 shares of common stock at a price of $10 per share, resulting in gross proceeds of $60 million and net proceeds (after deducting underwriting discounts and offering expenses) of approximately $55.8 million. On December 21, 2004 the Company issued 4,000 shares of common stock to its independent directors. On January 19, 2005, the Company sold an additional 700,000 shares of common stock at a price of $9.30 per share, net of the underwriting discount, as a result of the exercise of the underwriters’ over-allotment option, resulting in additional net proceeds of approximately $6.5 million. The total net proceeds from the IPO and the exercise of the underwriters’ over-allotment option were approximately $62.4 million.
The Company contributed all of the net proceeds from the IPO and the exercise of the underwriters’ over-allotment option to MHI Hospitality, L.P., a Delaware limited partnership (the “Operating Partnership”), in exchange for an approximate 63.7% general and limited partnership interest in the Operating Partnership as of January 19, 2005. The Operating Partnership used, approximately $42.1 million of the net proceeds from the Company, along with 3,817,036 units of limited partner interest, to acquire all of the equity interests in the entities that own or lease the initial properties.
Substantially all of the Company’s assets are held by, and all of its operations are conducted through, the Operating Partnership. For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which is owned 63.7% by the Company as of January 19, 2005, leases its hotels to subsidiaries of MHI Hospitality TRS Holding Corporation, MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly owned subsidiary of the Operating Partnership. MHI TRS then engages hotel management companies to operate the hotels under management contracts. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.
5
MHI HOSPITALITY CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS – (Continued)
2. Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of MHI Hospitality Corporation beginning with its commencement of operations on December 21, 2004. Prior to December 21, 2004, this report includes the financial statements of MHI Hotels Services Group (“MHI HSG”), which is not a legal entity, but rather a combination of three hotels that were owned by various limited liability companies and a limited liability partnership that were controlled by affiliates of MHI Hotels Services, LLC (“MHI Hotels Services”) all of which were acquired by the Company concurrent with the completion of the IPO on December 21, 2004. MHI HSG is considered the predecessor to the Company for accounting purposes. Securities and Exchange Commission regulations require the inclusion of the predecessor for the periods prior to the Company’s commencement of operations. The predecessor statements of operations and cash flows for the three months ended March 31, 2004 include the operations of MHI HSG on a historical cost basis.
Principles of Consolidation – The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash – Restricted cash includes real estate tax escrows and reserves for replacements of furniture, fixtures and equipment pursuant to