UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 3, 2011

 

 

CHESAPEAKE LODGING TRUST

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		001-34572		27-0372343
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)
1997 Annapolis Exchange Parkway, Suite 410 Annapolis, MD				21401
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code: (410) 972-4140

Not Applicable

(Former name or former address, if changed since last report.)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

---

This Form 8-K/A amends and supplements the registrant’s Form 8-K, as filed on October 4, 2011, to include the historical financial statements and pro forma financial information required by Item 9.01(a) and (b).

Item 9.01. Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.

WTCC City Center Mezz V, LLC

Independent Auditors’ Report

Consolidated Balance Sheets as of September 9, 2011 (unaudited), and December 31, 2010 and 2009

Consolidated Statements of Operations for the periods ended September 9, 2011 (unaudited) and September 10, 2010 (unaudited) and for the years ended December 31, 2010 and 2009

Consolidated Statements of Members’ Capital for the periods ended September 9, 2011 (unaudited) and September 10, 2010 (unaudited) and for the years ended December 31, 2010 and 2009

Consolidated Statements of Cash Flows for the periods ended September 9, 2011 (unaudited) and September 10, 2010 (unaudited) and for the years ended December 31, 2010 and 2009

Notes to Consolidated Financial Statements

(b) Pro forma financial information.

Chesapeake Lodging Trust

Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2011

Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended September 30, 2011

Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2010

(d) Exhibits.

Incorporated by reference to the Exhibit Index filed herewith and incorporated herein by reference.

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: December 19, 2011				CHESAPEAKE LODGING TRUST
				By:		/s/ Graham J. Wootten
						Graham J. Wootten
						Senior Vice President and Chief Accounting Officer

---

Exhibit Index

 

Exhibit Number		Exhibit Description
23.1		Consent of KPMG LLP

---

Independent Auditors’ Report

The Members

WTCC City Center Mezz V, LLC:

We have audited the accompanying consolidated balance sheets of WTCC City Center Mezz V, LLC (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, members’ capital, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WTCC City Center Mezz V, LLC as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

December 15, 2011

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Consolidated Balance Sheets

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

		September 9, 2011				December 31, 2010				December 31, 2009
		(Unaudited)
Assets
Cash and cash equivalents		$	4,334,089				1,459,775				3,681,013
Cash held by hotel manager			1,924,591				1,592,438				1,090,245
Restricted cash			3,110,836				2,154,240				967,280
Accounts receivable, net			1,034,585				634,484				921,072
Other assets			326,644				396,512				418,852
Note receivable			695,915				833,648				1,032,337
Below market ground leases, net			4,059,536				4,110,655				4,178,813
Investment in hotel property:
Land			3,616,704				3,616,704				3,616,704
Building and improvements			90,956,138				90,911,344				90,073,785
Furniture, fixtures, and equipment			20,968,669				20,801,731				20,473,001
			115,541,511				115,329,779				114,163,490
Less accumulated depreciation			(24,006,360	)			(19,714,279	)			(13,331,202	)
Total investment in hotel property, net of accumulated depreciation			91,535,151				95,615,500				100,832,288
Total assets		$	107,021,347				106,797,252				113,121,900
Liabilities and Members’ Capital
Liabilities:
Accrued interest payable		$	84,100				89,171				87,647
Accounts payable and accrued expenses			1,985,681				836,449				1,002,016
Accrued real estate taxes			819,546				1,358,334				1,398,806
Advance deposits			64,450				43,364				124,831
Deferred income			670,963				805,813				995,323
Accrued lease liability			269,296				233,835				177,974
Mortgages payable			91,216,137				91,753,211				91,753,211
Total liabilities			95,110,173				95,120,177				95,539,808
Commitments and contingencies
Members’ capital			11,911,174				11,677,075				17,582,092
Total liabilities and members’ capital		$	107,021,347				106,797,252				113,121,900

See accompanying notes to consolidated financial statements.

 

2

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Operations

Periods ended September 9, 2011 (unaudited) and September 10, 2010 (unaudited),

and the years ended December 31, 2010 and 2009

 

		Periods ended								Years ended
		September 9, 2011				September 10, 2010				December 31, 2010				December 31, 2009
		(Unaudited)				(Unaudited)
Department revenues:
Rooms		$	16,053,959				15,125,927				22,266,114				20,206,103
Food and beverage			7,592,697				6,330,532				9,584,318				9,793,602
Telephone			278,694				289,489				402,361				375,095
Other			330,548				296,225				403,237				634,424
Total hotel operating revenues			24,255,898				22,042,173				32,656,030				31,009,224
Department expenses:
Rooms			3,366,725				3,241,282				4,652,220				4,482,022
Food and beverage			4,450,918				3,954,589				5,810,815				6,088,031
Telephone			218,574				204,930				291,350				287,122
Other			23,068				19,931				30,707				43,370
Total hotel operating expenses			8,059,285				7,420,732				10,785,092				10,900,545
Sales and marketing			2,111,683				1,850,916				2,715,023				2,509,662
General and administrative			2,124,556				2,007,343				2,840,082				2,906,028
Utilities			755,397				723,352				1,058,260				1,071,197
Management fees			2,153,485				1,932,500				2,934,870				2,687,633
Repairs and maintenance			959,308				932,940				1,349,218				1,397,362
Real estate taxes			739,747				837,279				1,208,659				1,340,307
Depreciation expense			4,292,081				4,240,070				6,383,077				6,028,376
Amortization expense			51,119				51,119				68,158				68,158
Other			561,503				426,303				579,379				814,438
Total operating expenses			13,748,879				13,001,822				19,136,726				18,823,161
Interest expense			1,087,577				1,143,421				1,539,229				1,880,194
Total expenses			22,895,741				21,565,975				31,461,047				31,603,900
Net income (loss)		$	1,360,157				476,198				1,194,983				(594,676	)

See accompanying notes to consolidated financial statements.

 

3

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Members’ Capital

Periods ended September 9, 2011 (unaudited) and September 10, 2010

(unaudited), and the years ended December 31, 2010 and 2009

 

		WTCC Hotel Investors V, LLC				Walton Acquisition Holdings V, LLC				Total
Members’ capital at December 31, 2008		$	19,080,884				95,884				19,176,768
Distributions			(995,000	)			(5,000	)			(1,000,000	)
Net loss			(591,703	)			(2,973	)			(594,676	)
Members’ capital at December 31, 2009			17,494,181				87,911				17,582,092
Distributions			(7,064,500	)			(35,500	)			(7,100,000	)
Net income			1,189,008				5,975				1,194,983
Members’ capital at December 31, 2010			11,618,689				58,386				11,677,075
Distributions (unaudited)			(1,120,428	)			(5,630	)			(1,126,058	)
Net income (unaudited)			1,353,356				6,801				1,360,157
Members’ capital at September 9, 2011 (unaudited)			11,851,617				59,557				11,911,174
Members’ capital at December 31, 2009			17,494,181				87,911				17,582,092
Distributions (unaudited)			(4,278,500	)			(21,500	)			(4,300,000	)
Net income (unaudited)			473,817				2,381				476,198
Members’ capital at September 10, 2010 (unaudited)		$	13,689,498				68,792				13,758,290

See accompanying notes to consolidated financial statements.

 

4

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Consolidated Statements of Cash Flows

Periods ended September 9, 2011 (unaudited) and September 10, 2010

(unaudited), and the years ended December 31, 2010 and 2009

 

		Periods ended								Years ended
		September 9, 2011				September 10, 2010				December 31, 2010				December 31, 2009
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	1,360,157				476,198				1,194,983				(594,676	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			4,292,081				4,240,070				6,383,077				6,028,376
Amortization of deferred financing costs			—				—				—				197,674
Amortization of below market ground leases			51,119				51,119				68,158				68,158
Accrued lease liability			35,462				41,985				55,860				55,860
Earned interest income			—				—				—				(37,014	)
Changes in assets and liabilities:
Restricted cash			7,723				(449,126	)			(2,147	)			381,438
Accounts receivable			(400,101	)			(496,924	)			286,588				881,805
Other assets			74,379				70,643				47,341				(107,559	)
Note receivable			137,733				135,398				198,689				—
Accrued interest payable			(5,071	)			(1,514	)			1,524				(53,932	)
Accounts payable and accrued expenses			1,149,232				509,357				168,667				(533,420	)
Accrued real estate taxes			(538,788	)			(417,588	)			(40,472	)			226,718
Advance deposits			21,086				(6,050	)			(81,467	)			91,016
Deferred income			(134,850	)			(130,543	)			(189,510	)			—
Net cash provided by operating activities			6,050,162				4,023,025				8,091,291				6,604,444
Cash flows from investing activities:
Additions to hotel property			(211,244	)			(1,009,600	)			(1,500,523	)			(3,230,757	)
Restricted cash			(964,319	)			(697,221	)			(1,184,813	)			(84,117	)
Net cash used in investing activities			(1,175,563	)			(1,706,821	)			(2,685,336	)			(3,314,874	)
Cash flows from financing activities:
Distributions to members			(1,126,058	)			(4,300,000	)			(7,100,000	)			(1,000,000	)
Repayment of mortgages payable			(537,074	)			—				—				—
Payment for interest rate cap			(5,000	)			(25,000	)			(25,000	)			(88,403	)
Net cash used in financing activities			(1,668,132	)			(4,325,000	)			(7,125,000	)			(1,088,403	)
Net increase (decrease) in cash and cash equivalents and cash held by hotel manager			3,206,467				(2,008,796	)			(1,719,045	)			2,201,167
Cash and cash equivalents and cash held by hotel manager, beginning of period			3,052,213				4,771,258				4,771,258				2,570,091
Cash and cash equivalents and cash held by hotel manager, end of period		$	6,258,680				2,762,462				3,052,213				4,771,258
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,097,648				1,169,935				1,537,705				1,736,452

See accompanying notes to consolidated financial statements.

 

5

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(1)	Organization

WTCC City Center Mezz V, LLC (the Company or City Center Mezz), a Delaware limited liability company, was formed on April 24, 2007 by WTCC Hotel Investors V, LLC and Walton Acquisition Holdings V, LLC. WTCC Hotel Investors V, LLC and Walton Acquisition Holdings V, LLC own 99.5% and 0.5% of the Company, respectively. City Center Mezz is the sole owner of WTCC City Center Investors V, LLC (City Center Investors), a wholly owned Delaware limited liability company. City Center Mezz and City Center Investors shall exist until December 31, 2057, as provided in the limited liability company agreements, unless earlier terminated. City Center Investors was formed to acquire, own, and operate the Denver Marriott City Center (the Hotel), a 613-room hotel in Denver, Colorado. An independent hotel operator operates the Hotel under an existing management agreement (note 9). The Hotel was acquired on May 24, 2007 (note 11).

The accompanying consolidated financial statements include the accounts of City Center Mezz and its consolidated subsidiary. The effects of all intercompany transactions and balances among these entities have been eliminated in consolidation.

 

(2)	Summary of Significant Accounting Policies

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Subsequent events have been evaluated through December 15, 2011.

The Company is operated on a calendar year basis. However, the Hotel’s fiscal year comprises 52 or 53 weeks, ending on the Friday closest to December 31. The related fiscal years for the Hotel ended on December 31, 2010 and January 1, 2010 and both contained 52 weeks for the years ended December 31, 2010 and 2009. Furthermore, the related interim periods for the Hotel ended on September 9, 2011 (which is the most recent Hotel period prior to the acquisition of the Hotel by Chesapeake Lodging Trust) and September 10, 2010 (note 11).

 

(a)

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments, including treasury money market funds, which invest principally in the U.S. Treasury notes and bills or repurchase agreements collateralized by those securities. Cash and cash equivalent balances with any one institution may be or may have been in excess of federally insured limits then in place. The Company has not experienced any losses in such accounts to date.

 

(b)

Cash Held by Hotel Manager

Cash held by hotel manager includes cash of the Company held at the Hotel level bank accounts maintained by the hotel manager on behalf of the Company.

 

(c)

Restricted Cash

Restricted cash is comprised of amounts reserved for capital improvements as required by the management agreement (note 9) and lender required deposits pursuant to the terms of the mortgages payable agreements (note 5).

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(d)

Building and Improvements

Significant betterments and improvements are capitalized and depreciated over the applicable useful lives as they are placed in service. Maintenance and repair expense are charged to operations as incurred.

 

(e)

Impairment of Long-Lived Assets

The real estate capital markets are cyclical in nature. As a result, determining the recoverability of real estate and investment values involves assumptions and estimates including comparable sales values, capitalization and discount rates, average daily rates and expense growth rates, and occupancy assumptions, which impact the fair value. The Company periodically reviews the carrying value of the Hotel for impairment if circumstances exist indicating the carrying value of the investment in the Hotel may not be recoverable. Impairment indicators include, but are not limited to, significant decreases in the Hotel’s net operating income, average daily rates, and occupancy percentages. If events or circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows of the Hotel to determine if the investment is recoverable. If impairment is indicated, an adjustment will be made to the carrying value of the asset to reduce the carrying value to its fair value. Such fair value measurements are derived using primarily Level 3 inputs. See Fair Value Measurements discussion below. The Company does not believe that there are any events or circumstances indicating impairment of its investment in the Hotel at September 9, 2011 (unaudited), December 31, 2010 and 2009.

 

(f)

Acquisition

The purchase of the Hotel was accounted for utilizing the acquisition method and, accordingly, the results of operations are included in the Company’s accompanying consolidated statements of operations from the date of acquisition. The Company has used estimates of future cash flows and other valuation techniques to allocate the purchase price of the acquired Hotel among land, buildings and improvements, and furniture, fixtures, and equipment and identified intangibles such as acquired below market ground leases.

The Company has included in the consolidated balance sheets at September 9, 2011, December 31, 2010 and 2009, net unamortized below market ground lease intangibles of $4,059,536 (unaudited), $4,110,655 and $4,178,813, respectively. The below market ground lease intangibles have accumulated amortization of $323,751 (unaudited), $272,632 and $204,474 as of September 9, 2011, December 31, 2010 and 2009, respectively.

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

Estimated amortization of the respective below market ground lease intangible asset as of December 31, 2010 for each of the five succeeding years is as follows:

 

2011		$	68,158
2012			68,158
2013			68,158
2014			68,158
2015			68,158
Thereafter			3,769,865
		$	4,110,655

 

(g)

Deferred Expenses

Deferred expenses are comprised of deferred financing costs, which are amortized on a straight-line basis over the lives of the related debt (which approximates the effective interest method), excluding extension periods. Deferred financing costs of $897,321 were fully amortized as of September 9, 2011, December 31, 2010 and 2009.

 

(h)

Derivatives and Hedging Instruments

The Company recognizes all derivatives as either an asset or liability in the consolidated balance sheets and measures the derivatives at fair value. The fair value of derivative instruments is based on a discounted cash flow analysis. This analysis reflects the contractual terms of the derivative instruments, including the period to maturity, and uses of observable market-based inputs, including interest rate curves and implied volatilities. The accounting for changes in the fair value of derivative instruments is dependent upon whether the applicable instrument has been formally designated and qualifies as a hedging instrument. The instrument must be designated, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. The Company has an interest rate cap, which has not been designated as a hedging instrument. As of September 9, 2011, December 31, 2010 and 2009, the Company’s derivatives are measured at fair value and were derived using primarily Level 2 inputs. See Fair Value Measurements discussion below.

 

(i)

Fair Value of Financial Instruments

The Company estimates fair value based on the discounting of future cash flows using current market information. The carrying amount of the Company’s financial instruments, principally, restricted cash, accounts receivable, note receivable, accounts payable and accrued expenses, derivative instruments, and other working capital items approximates their fair value at September 9, 2011 (unaudited), December 31, 2010 and 2009. As of September 9, 2011, December 31, 2010 and 2009, the approximate aggregate fair value of mortgages payable (based principally on Level 3 inputs) was $91,216,000 (unaudited), $89,408,000 and $87,620,000, respectively, as compared to the carrying value of $91,216,137 (unaudited), $91,753,211, and $91,753,211, respectively. Such amounts were determined based upon the contractual principal and interest payments through the scheduled maturity date (excluding future extension options) discounted at an estimate of current market interest rate spreads.

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(j)

Fair Value Measurements

In some instances, certain of the Company’s assets and liabilities are required to be measured at fair value according to a fair value hierarchy pursuant to relevant accounting literature. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:

 

•

Level 1 – quoted prices in active markets for identical assets or liabilities.

 

•

Level 2 – quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable.

 

•

Level 3 – model-derived valuations with unobservable inputs that are supported by little or no market activity.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of certain assets and liabilities and their classification within the fair value hierarchy.

Entities are permitted to choose to measure financial instruments and certain other items at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This election can only be made upon initial acquisition of the financial instrument. Management has not elected the fair value option for any such financial assets and liabilities that are not already reflected at fair value.

 

(k)

Revenue Recognition

The Company recognizes hotel operating revenue on an accrual basis consistent with the Hotel’s operations. Interest income is accrued as earned.

Profit on real estate sales transactions shall not be recognized by the full accrual method until (a) a sale is consummated, (b) the buyer’s initial investment and continuing investments are adequate to demonstrate a commitment to pay for the Hotel, (c) the Company’s receivable is not subject to future subordination, and (d) the Company has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the Hotel.

 

(l)

Ground Leases

Ground rent expense relating to land leases, which are considered operating leases are recognized on a straight-line basis over the related lease terms.

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(m)

Income Taxes

No provision for federal and state income taxes has been made in the accompanying consolidated financial statements, as the liability for such taxes is primarily that of the members rather than the Company. In certain instances the Company may be subject to certain state and local taxes, which are not material to the consolidated financial statements.

The Company had no unrecognized tax benefits as of September 9, 2011 (unaudited) and December 31, 2010 and 2009. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of September 9, 2011 (unaudited) and December 31, 2010 and 2009. The Company has no interest or penalties relating to income taxes recognized in the consolidated statements of financial position as of September 9, 2011 (unaudited) and December 31, 2010 and 2009.

 

(n)

Depreciation

Depreciation of the Hotel is computed using the straight-line method over 5 (personal property) to 39 (real property) years as assets are placed in service.

 

(o)

Risks and Uncertainties

In the normal course of business, the Company encounters economic risk, including interest rate risk, credit risk, and market risk.

 

(p)

Use of Estimates

The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

(3)	Investment in Hotel Property

On May 24, 2007, the Company acquired the Hotel for a total purchase price of $106,000,000 before closing costs and prorations. The acquisition was financed through a combination of third-party mortgages payable totaling $91,753,211 (note 5) and capital contributions of $18,214,634 (note 11).

 

(4)	Ground Leases

The Hotel is subject to three long-term ground leases (collectively, the Ground Leases), which have remaining terms between 58 and 62 years. Total ground rent expense was $85,127 (unaudited) and $91,650 (unaudited) for the periods ended September 9, 2011 and September 10, 2010, respectively, and was approximately $113,216 and $113,216 for the years ended December 31, 2010 and 2009, respectively, and is included in other expenses in the accompanying consolidated statements of operations. As the leases provide for determinable increases in minimum lease payments over the term of the lease, ground rent expense accrues on a straight-line basis. Related adjustments increased ground rent expense by approximately $35,462 (unaudited) and $41,985 (unaudited) for the periods ended September 9, 2011 and September 10, 2010 and $55,860 and $55,860 for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010 the approximate future minimum lease payments are as follows:

 

2011		$	66,000
2012			66,000
2013			66,000
2014			66,000
2015			66,000
Thereafter			6,814,000
		$	7,144,000

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(5)	Mortgages Payable

Mortgages payable consisted of the following at September 9, 2011 (unaudited), December 31, 2010 and 2009:

 

		Balance												Interest rate														Payment terms		Current maturity date
		September  9 2011				December 31								Stated		September  9 2011				December 31
						2010				2009										2010				2009
		(Unaudited)														(Unaudited)
Senior loan		$	46,526,058				46,800,000				46,800,000			LIBOR + 0.44%			0.65	%			0.70	%			0.67	%		Interest only		June 9, 2012
Mezzanine loan			44,690,079				44,953,211				44,953,211			LIBOR + 2.26%			2.46				2.52				2.49			Interest only		June 9, 2012
Total mortgages payable		$	91,216,137				91,753,211				91,753,211

The senior loan is secured by the Hotel and the mezzanine loan is secured by the Company’s interest in City Center Investors.

In March 2011, the Company elected to exercise the third and final extension option to extend the maturity date to June 9, 2012. As of December 31, 2010, the Company is not aware of any Events of Default (as defined).

Pursuant to lender requirements, funds are deposited monthly into an escrow account for interest. Lender required escrow deposits aggregated $117,927 (unaudited) at September 9, 2011 and $125,650 and $123,502 at December 31, 2010 and 2009, respectively, and are included in restricted cash in the accompanying consolidated balance sheets.

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

Interest rate derivatives consisted of the following:

 

Derivatives instrument

Notional amount

Strike

Effective date

Maturity date

Interest rate cap

$

91,753,211

6.25

%

May 29, 2007

June 9, 2009

Interest rate cap – 1st extension

91,753,211

7.33

June 9, 2009

June 9, 2010

Interest rate cap – 2nd extension

91,753,211

6.80

June 9, 2010

June 9, 2011

Interest rate cap – 3rd extension

91,753,211

8.26

June 9, 2011

June 9, 2012

 

Derivative instruments		Balance sheet location		September 9, 2011 Fair value (unaudited)				December 31, 2010 Fair value				December 31, 2009 Fair value
Interest rate caps		Other assets		$	—				—				—
Derivative instruments		Statement of operations location		2011 loss (unaudited)				2010 loss				2009 loss
Interest rate caps		Interest expense		$	(5,000	)			(25,000	)			(88,403	)

 

(6)	Note Receivable

On May 12, 2009, the Company entered into a side letter (the Side Letter) to the management agreement (note 9) in which Marriott agreed to pay the Company $1,032,337. The Company will be paid 20% of this amount each year over five years through a reduction in the incentive management fee, only to the extent that future incentive management fees are earned. The Company has recorded a note receivable due to the Company from Marriott that is recorded in the accompanying consolidated balance sheets. Interest income on the note receivable is recognized as earned and is included in other income in the accompanying consolidated statements of operations.

As of September 9, 2011, December 31, 2010 and 2009, the Company has a receivable from Marriott in the amount of $695,915 (unaudited), $833,648 and $1,032,337, respectively, which bears interest at 3.25% per annum and has a maturity date of December 5, 2014. Additionally, the Company has a corresponding deferred liability of $670,963 (unaudited), $805,813 and $995,323, as of September 9, 2011, December 31, 2010 and 2009, respectively. During the periods ended September 9, 2011 and September 10, 2010, the Company recognized interest income of $19,540 (unaudited) and $28,492 (unaudited), respectively, on the note receivable and a reduction in the incentive management fee of $134,850 (unaudited) and $130,543 (unaudited), respectively. During the years ended December 31, 2010 and 2009, the Company recognized interest income of $27,835 and $37,014, respectively, on the note receivable and a reduction in the incentive management fee of $189,510 and $14,324, respectively.

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(7)	Limited Liability Company Agreement

The Company shall operate through December 31, 2057, unless earlier terminated as provided in the Limited Liability Company Agreement (the Agreement). Except as provided in the Agreement, no Member shall be personally liable for any debt, obligations, or liability of the Company solely by reason of being a member of a limited liability company.

Pursuant to the terms of the Agreement, profits, losses, and distributions are allocated in accordance with the ownership percentages, as defined.

 

(8)	Commitments and Contingencies

The Company is or may be subject to a variety of claims or legal actions arising in the ordinary course of business. The outcomes of such claims are not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

The Company generally carries such insurance coverage which might include commercial liability, fire, flood, earthquake, environmental, extended coverage, and rental loss insurance with policy specifications. The Company believes that the limits and deductibles within these policies are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and industry practice, including the use of master policies and coverages covering multiple properties. There are, however, certain types of extraordinary losses (such as bio-terrorism) that may be either uninsurable or not economically insurable.

---

WTCC CITY CENTER MEZZ V, LLC

(A Delaware Limited Liability Company)

Notes to Consolidated Financial Statements

September 9, 2011 (unaudited), December 31, 2010 and 2009

 

(9)	Management Agreement

On May 24, 2007, the Company entered into a Management Agreement with Marriott. The Management Agreement expires December 30, 2016. Upon the expiration of the Management Agreement, at Marriotts option there is one 10-year extension option and then four additional renewal terms of 5 years each. The Management Agreement requires a base management fee equal to 3% of gross revenues (as defined) and an incentive management fee equal to 20% of operating profit (as defined). Pursuant to the terms of the Management Agreement, Marriott provides the Hotel with various services and supplies, including marketing, reservations, construction management, and insurance. Base and incentive management fees for the periods ended September 9, 2011 and September 10, 2010 and the years ended December 31, 2010 and 2009 are approximately:

 

		Periods ended								Years ended
		September 9, 2011				September 10, 2010				December 31, 2010				December 31, 2009
		(Unaudited)				(Unaudited)
Base management fees		$	727,000				660,000				981,000				929,000
Incentive management fee			1,273,000				1,120,000				1,754,000				1,559,000
Total fees		$	2,000,000				1,780,000				2,735,000				2,488,000

The Manager is responsible for maintaining the Hotel’s furniture, fixtures, and equipment and making purchases as considered necessary. Pursuant to the Management Agreement, the Company is responsible for funding an escrow account (the FF&E Reserve) with 5% of the Hotel’s gross revenue, as defined in the Management Agreement, for capital expenditures, and the replacement or refurbishment of furniture, fixtures, and equipment of the Hotel. Upon purchase of furniture, fixtures, and equipment, the Manager requests reimbursement from the FF&E Reserve. At September 9, 2011, December 31, 2010 and 2009, the FF&E Reserve balance was $2,992,908 (unaudited), $2,028,590 and $843,777, respectively, and is included in restricted cash in the accompanying consolidated balance sheets.

 

(10)	Oversight Agreement

In May 2007, the City Center Investors engaged SCS Hotels, Inc. (SCS Hotels) to provide oversight services for Hotel. The agreement requires a fee of $50,000 per quarter. Pursuant to the terms of the agreement, SCS Hotels advises the Company in various areas, including monitoring of hotel operations, budgets, capital expenditures, and marketing. Oversight fees were approximately $153,000 (unaudited) and $153,000 (unaudited) for the periods ended September 9, 2011 and September 10, 2010, and $200,000 and $200,000 for the years ended December 31, 2010 and 2009, respectively, are included in management fees in the accompanying consolidated statements of operations.

 

(11)	Subsequent Event

On October 3, 2011, the Hotel was sold for $119,000,000 to Chesapeake Lodging Trust.

---

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF CHESAPEAKE LODGING TRUST

Chesapeake Lodging Trust (the “Trust”) was organized in the state of Maryland on June 12, 2009. On January 27, 2010, the Trust completed its initial public offering (“IPO”). In conjunction with the IPO, the Trust sold additional common shares through private placements and through the exercise of the underwriters’ overallotment option. The total net proceeds (after deducting underwriting fees and offering costs) generated from the IPO, private placements, and exercise of the underwriters’ overallotment option was approximately $169.4 million.

On March 18, 2010, the Trust acquired its first hotel property, the 498-room Hyatt Regency Boston in Boston, Massachusetts for a purchase price of $112.0 million, plus customary pro-rated amounts and closing costs. The effective date of the Hyatt Regency Boston acquisition was March 1, 2010.

On June 1, 2010, the Trust acquired the 188-room Hilton Checkers Los Angeles in Los Angeles, California for a purchase price of $46.0 million, plus customary pro-rated amounts and closing costs.

On July 30, 2010, the Trust entered into a credit agreement to obtain a $115.0 million, two-year secured revolving credit facility with a syndicate of banks. Borrowings under the revolving credit facility bear interest equal to LIBOR plus 3.75%, subject to a LIBOR floor of 2.00%. On January 21, 2011 the Trust amended its credit agreement to increase the maximum amounts the Trust may borrow under the revolving credit facility from $115.0 million to $150.0 million.

Also on July 30, 2010, the Trust acquired the 153-room Courtyard Anaheim at Disneyland Resort in Anaheim, California for a purchase price of $25.0 million, plus customary pro-rated amounts and closing costs, and the 430-room Boston Marriott Newton in Newton, Massachusetts for a purchase price of $77.25 million, plus customary pro-rated amounts and closing costs.

On October 13, 2010, the Trust completed a follow-on offering, which generated total net proceeds (after deducting underwriting fees and offering costs) of $140.4 million.

On December 15, 2010, the Trust acquired the 360-room Le Meridien San Francisco in San Francisco, California for a purchase price of $143.0 million, plus customary pro-rated amounts and closing costs. In connection with the acquisition, the Trust entered into a loan agreement to obtain a $60.0 million one-year term loan secured by the hotel.

On March 4, 2011, the Trust completed another follow-on offering, which generated total net proceeds (after deducting underwriting fees and offering costs) of $229.8 million.

On May 10, 2011, the Trust acquired the 368-room W Chicago – City Center in Chicago, Illinois for a purchase price of $128.8 million, plus customary pro-rated amounts and closing costs.

On October 3, 2011, the Trust acquired the 613-room Denver Marriott City Center in Denver, Colorado for a purchase price of $119.0 million, plus customary pro-rated amounts and closing costs.

The unaudited pro forma balance sheet as of September 30, 2011 is based on the Trust’s unaudited consolidated balance sheet and reflects the acquisition of the Denver Marriott City Center as if the acquisition had occurred on September 30, 2011. The unaudited pro forma statement of operations for the nine months ended September 30, 2011 and the year ended December 31, 2010 reflect the completion of the IPO, private placements, and follow-on offerings, and the acquisitions of the Hyatt Regency Boston, Hilton Checkers Los Angeles, Courtyard Anaheim at Disneyland Resort, Boston Marriott Newton, Le Meridien San Francisco, W Chicago – City Center and Denver Marriott City Center (all deemed to be significant acquisitions under Rule 3-05 of Regulation S-X), and the completion of related debt financings as if all transactions had been completed on January 1, 2010.

---

The unaudited pro forma financial information does not purport to represent what the Trust’s results of operations or financial condition would actually have been if the completion of these transactions had in fact occurred at the beginning of the periods presented, or to project the Trust’s results of operations or financial condition for any future period. In addition, the unaudited pro forma financial information is based upon available information and upon assumptions and estimates, some of which are set forth in the notes to the unaudited pro forma financial statements, which the Trust believes are reasonable under the circumstances. The unaudited pro forma financial information and accompanying notes should be read in conjunction with the Trust’s audited financial statements included in its 2010 Annual Report on Form 10-K.

---

CHESAPEAKE LODGING TRUST

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2011

(in thousands, except share data)

 

		Historical Chesapeake Lodging Trust				Acquisition of Denver Marriott City Center (1)				Pro Forma Chesapeake Lodging Trust
ASSETS
Property and equipment, net		$	703,011			$	119,000			$	822,011
Intangible asset, net			35,304				—				35,304
Cash and cash equivalents			140,182				(113,390	)			26,792
Restricted cash			10,465				3,201				13,666
Accounts receivable, net			8,248				2,227				10,475
Prepaid expenses and other assets			13,709				(6,699	)			7,010
Deferred financing costs			3,860				—				3,860
Total assets		$	914,779			$	4,339			$	919,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Long-term debt		$	363,274			$	—			$	363,274
Accounts payable and accrued expenses			22,560				4,587				27,147
Dividends payable			6,420				—				6,420
Total liabilities			392,254				4,587				396,841
Commitments and contingencies
Preferred shares, $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding			—				—				—
Common shares, $.01 par value; 400,000,000 shares authorized; 32,165,370 shares issued and outstanding			322				—				322
Additional paid-in capital			543,053				—				543,053
Cumulative dividends in excess of net income			(19,433	)			(248	)			(19,681	)
Accumulated other comprehensive loss			(1,417	)			—				(1,417	)
Total shareholders’ equity			522,525				(248	)			522,277
Total liabilities and shareholders’ equity		$	914,779			$	4,339			$	919,118

 

Footnote:

(1)	Reflects the acquisition of the Denver Marriott City Center as if it had occurred on September 30, 2011 for $122,420. The acquisition was funded with available cash. The pro forma adjustment reflects the following:

Cash paid of $113,142, net of hotel cash acquired of $2,278 and receipt of deposit of $7,000;

Cash paid of $248 for hotel acquisition costs;

Purchase of land, building, and furniture, fixtures and equipment of $119,000;

Purchase of restricted cash of $3,201; and

Purchase of net working capital of $219.

---

CHESAPEAKE LODGING TRUST

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(in thousands, except share and per share data)

 

		Historical Chesapeake Lodging Trust				Acquisition of W Chicago - City Center (1)				Acquisition of Denver Marriott City Center (2)				Pro Forma Adjustments				Pro Forma Chesapeake Lodging Trust
REVENUE
Rooms		$	87,763			$	6,543			$	16,054			$	—			$	110,360
Food and beverage			24,392				2,243				7,593				—				34,228
Other			3,906				247				609				—				4,762
Total revenue			116,061				9,033				24,256				—				149,350
EXPENSES
Hotel operating expenses:
Rooms			20,548				2,032				3,367				—				25,947
Food and beverage			18,458				2,071				4,451				—				24,980
Other direct			1,886				236				241				—				2,363
Indirect			36,912				2,957				9,406				—				49,275
Total hotel operating expenses			77,804				7,296				17,465				—				102,565
Depreciation and amortization			12,070				2,176				4,343				(2,719	)(3)			15,870
Intangible asset amortization			390				—				—				—				390
Corporate general and administrative:
Share-based compensation			2,286				—				—				—				2,286
Hotel acquisition costs			4,270				—				—				—				4,270
Other			5,228				—				—				—				5,228
Total operating expenses			102,048				9,472				21,808				(2,719	)			130,609
Operating income (loss)			14,013				(439	)			2,448				2,719				18,741
Interest income			140				—				—				—				140
Interest expense			(8,005	)			—				(1,088	)			(2,165	)(4)			(11,258	)
Loss on early extinguishment of debt			(208	)			—				—				—				(208	)
Income (loss) before income taxes			5,940				(439	)			1,360				554				7,415
Income tax benefit (expense)			155				—				—				(171	)(5)			(16	)
Net income (loss)		$	6,095			$	(439	)		$	1,360			$	383			$	7,399
Net income available per share – basic and diluted:		$	0.21															$	0.23
Weighted-average number of common shares outstanding – basic and diluted:			28,611,438																31,788,727	(6)

Footnotes:

(1)	Reflects the results of operations of the W Chicago – City Center for the period prior to our acquisition on May 10, 2011.

(2)	Reflects the results of operations of the Denver Marriott City Center for the period ended September 9, 2011.

(3)

Reflects adjustment to depreciation expense based on the Trust’s cost basis in the acquired hotels and its accounting policy for depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for building and seven years for furniture, fixtures and equipment.

(4)

Reflects removal of historical interest expense related to debt not assumed in conjunction with the acquisition of Denver Marriott City Center and includes adjustment for interest expense related to incremental financings in conjunction with the acquisitions of the W Chicago – City Center and the Denver Marriott City Center.

(5)	Reflects adjustment to record pro forma income taxes related to the Trust’s taxable REIT subsidiary as if the acquisitions had occurred on January 1, 2010.

(6)	Reflects number of common shares issued and outstanding as if the follow-on offering completed on March 4, 2011 had occurred on January 1, 2010.

---

CHESAPEAKE LODGING TRUST

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

(in thousands, except share and per share data)

 

		Historical Chesapeake Lodging Trust				Previous Hotel Acquisitions Adjustment (1)				Acquisition of W Chicago - City Center (2)				Acquisition of Denver Marriott City Center (3)				Pro Forma Adjustments				Pro Forma Chesapeake Lodging Trust
REVENUE
Rooms		$	38,530			$	39,057			$	21,616			$	22,266			$	—			$	121,469
Food and beverage			13,758				13,195				7,370				9,584				—				43,907
Other			1,906				1,738				971				806				—				5,421
Total revenue			54,194				53,990				29,957				32,656				—				170,797
EXPENSES
Hotel operating expenses:
Rooms			9,104				10,791				5,773				4,652				—				30,320
Food and beverage			9,414				11,010				5,946				5,811				—				32,181
Other direct			1,053				877				656				322				—				2,908
Indirect			17,770				19,242				8,501				12,686				—				58,199
Total hotel operating expenses			37,341				41,920				20,876				23,471				—				123,608
Depreciation and amortization			4,793				8,116				4,893				6,451				(5,684	)(4)			18,569
Intangible asset amortization			411				32				—				—				73	(5)			516
Corporate general and administrative:
Share-based compensation			1,689				—				—				—				87	(6)			1,776
Hotel acquisition costs			3,597				—				—				—				1,389	(7)			4,986
Other			5,396				—				—				—				292	(8)			5,688
Total operating expenses			53,227				50,068				25,769				29,922				(3,843	)			155,143
Operating income			967				3,922				4,188				2,734				3,843				15,654
Interest income			120				266				—				—				(266	)(9)			120
Interest expense			(2,344	)			(4,058	)			—				(1,539	)			(1,177	)(10)			(9,118	)
Gain on derivatives			—				420				—				—				(420	)(11)			—
Income (loss) before income taxes			(1,257	)			550				4,188				1,195				1,980				6,656
Income tax benefit (expense)			583				—				—				—				(607	)(12)			(24	)
Net income (loss)		$	(674	)		$	550			$	4,188			$	1,195			$	1,373			$	6,632
Net income (loss) available per share – basic and diluted:		$	(0.07	)																		$	0.21
Weighted-average number of common shares outstanding – basic and diluted:			11,236,120																				31,734,215	(13)

Footnotes:

(1)	Reflects the results of operations of the five hotels acquired in 2010 for the period prior to their acquisition.

(2)	Reflects the results of operations of the W Chicago – City Center for the year ended December 31, 2010.

(3)	Reflects the results of operations of the Denver Marriott City Center for the year ended December 31, 2010.

(4)

Reflects adjustment to depreciation expense based on the Trust’s cost basis in the acquired hotels and its accounting policy for depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for building and seven years for furniture, fixtures and equipment.

(5)

Reflects adjustment to amortization of intangible asset expense based on the Trust’s cost basis in an acquired long-term air rights contract associated with a 2010 hotel acquisition and its accounting policy for amortization. Intangible asset amortization is computed using the straight-line method over the term of the contract, which expires in 2079.

(6)	Reflects adjustment to record full year of share-based compensation expense for the Trust’s board of trustees and executives with management contracts as if the Trust had commenced operations on January 1, 2010.

(7)	Reflects adjustment to record transaction costs related to the acquisitions of the W Chicago – City Center and the Denver Marriott City Center.

(8)

Reflects adjustment to record full year of corporate general and administrative expenses, including employee payroll and benefits, board of trustees fees, investor relations costs, professional services fees, and other costs of being a public company as if the Trust had commenced operations on January 1, 2010.

(9)	Reflects removal of historical interest income related to a note receivable not assumed in conjunction with a 2010 hotel acquisition.

(10)

Reflects removal of historical interest expense related to debt not assumed in conjunction with the 2010 hotel acquisitions and the acquisition of the Denver Marriott City Center, and includes adjustment for interest expense related to incremental financings in conjunction with the acquisitions of the W Chicago - City Center and the Denver Marriott City Center.

(11)	Reflects removal of historical gain on derivatives related to an interest rate swap contract not assumed in conjunction with a 2010 hotel acquisition.

(12)	Reflects adjustment to record pro forma income taxes related to the Trust’s taxable REIT subsidiary as if all acquisitions had occurred on January 1, 2010.

(13)	Reflects number of common shares issued and outstanding as if the Trust’s IPO, private placements, and follow-on offerings had occurred on January 1, 2010.