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Table of Contents

 

 

 

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, 2012

 

OR

 

o

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 001-35169

 


 

RLJ LODGING TRUST

(Exact Name of Registrant as Specified in Its Charter)

 


 

Maryland

 

27-4706509

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3 Bethesda Metro Center, Suite 1000

 

 

Bethesda, Maryland

 

20814

(Address of Principal Executive Offices)

 

(Zip Code)

 

(301) 280-7777

(Registrant’s Telephone Number, Including Area Code)

 


 

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.    x Yes    o   No

 

* The registrant became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, on May 10, 2011.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    oNo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of May 7, 2012, 106,693,177 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements.

 

 

 

 

 

Combined Consolidated Financial Statements (unaudited)

 

 

Balance Sheets as of March 31, 2012 and December 31, 2011

1

 

Statements of Operations and Comprehensive Loss for the three months ended March 31, 2012 and 2011

2

 

Statement of Changes in Equity for the three months ended March 31, 2012 and 2011

3

 

Statements of Cash Flows for the three months ended March 31, 2012 and 2011

4

 

Notes to Combined Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

29

Item 4.

Controls and Procedures.

30

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

30

Item 1A.

Risk Factors.

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

30

Item 3.

Defaults Upon Senior Securities.

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information.

31

Item 6.

Exhibits.

31

 

 

 

Signatures

 

33

 

ii



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

RLJ Lodging Trust

Combined Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Investment in hotel properties, net

 

$

2,829,497

 

$

2,820,457

 

Investment in loans

 

12,545

 

12,633

 

Cash and cash equivalents

 

261,065

 

310,231

 

Restricted cash reserves

 

86,307

 

87,288

 

Hotel receivables, net of allowance of $141 and $150, respectively

 

26,530

 

20,081

 

Deferred financing costs, net

 

8,662

 

9,639

 

Deferred income tax asset

 

1,369

 

1,369

 

Prepaid expense and other assets

 

24,963

 

28,320

 

Total assets

 

$

3,250,938

 

$

3,290,018

 

Liabilities and Equity

 

 

 

 

 

Mortgage loans

 

$

1,338,484

 

$

1,341,735

 

Interest rate swap liability

 

1,802

 

1,796

 

Accounts payable and accrued expense

 

69,898

 

86,213

 

Deferred income tax liability

 

3,303

 

3,314

 

Advance deposits and deferred revenue

 

7,044

 

4,781

 

Accrued interest

 

2,286

 

2,115

 

Distributions payable

 

17,744

 

16,076

 

Total liabilities

 

1,440,561

 

1,456,030

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively.

 

 

 

Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 106,646,242 and 106,279,049 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively.

 

1,067

 

1,063

 

Additional paid-in-capital

 

1,836,067

 

1,835,011

 

Accumulated other comprehensive loss

 

(1,788

)

(1,782

)

Distributions in excess of net earnings

 

(43,069

)

(18,960

)

Total shareholders’ equity

 

1,792,277

 

1,815,332

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

Noncontrolling interest in joint venture

 

6,800

 

7,170

 

Noncontrolling interest in Operating Partnership

 

11,300

 

11,486

 

Total noncontrolling interest

 

18,100

 

18,656

 

Total equity

 

1,810,377

 

1,833,988

 

Total liabilities and equity

 

$

3,250,938

 

$

3,290,018

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

1



Table of Contents

 

RLJ Lodging Trust

Combined Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands, except share and per share data)

(unaudited)

 

 

 

For the three months ended March 31,

 

 

 

2012

 

2011

 

Revenue

 

 

 

 

 

Hotel operating revenue

 

 

 

 

 

Room revenue

 

$

158,579

 

$

144,725

 

Food and beverage revenue

 

19,505

 

18,913

 

Other operating department revenue

 

5,109

 

4,531

 

Total revenue

 

183,193

 

168,169

 

 

 

 

 

 

 

Expense

 

 

 

 

 

Hotel operating expense

 

 

 

 

 

Room

 

36,930

 

33,608

 

Food and beverage

 

14,440

 

13,419

 

Management fees

 

6,304

 

5,779

 

Other hotel expenses

 

58,558

 

54,287

 

Total hotel operating expense

 

116,232

 

107,093

 

 

 

 

 

 

 

Depreciation and amortization

 

33,697

 

31,751

 

Property tax, insurance and other

 

12,634

 

11,420

 

General and administrative

 

7,260

 

5,010

 

Transaction and pursuit costs

 

19

 

2,698

 

Total operating expense

 

169,842

 

157,972

 

Operating income

 

13,351

 

10,197

 

Other income

 

84

 

155

 

Interest income

 

419

 

483

 

Interest expense

 

(20,181

)

(25,858

)

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

(6,327

)

(15,023

)

 

 

 

 

 

 

Income tax expense

 

(594

)

(281

)

Loss from continuing operations

 

(6,921

)

(15,304

)

 

 

 

 

 

 

Loss from discontinued operations

 

 

(972

)

 

 

 

 

 

 

Net loss

 

(6,921

)

(16,276

)

Net loss attributable to non-controlling interests

 

 

 

 

 

Noncontrolling interest in joint venture

 

370

 

160

 

Noncontrolling interest in common units of Operating Partnership

 

38

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

(6,513

)

(16,116

)

 

 

 

 

 

 

Distributions to preferred unitholders

 

 

(16

)

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(6,513

)

$

(16,132

)

 

 

 

 

 

 

Basic and diluted per common share data:

 

 

 

 

 

Net loss per share attributable to common shareholders - basic and diluted

 

$

(0.06

)

 

 

Weighted-average number of common shares - basic and diluted

 

105,332,812

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

Net loss attributable to the Company

 

$

(6,513

)

$

(16,116

)

Unrealized (loss) gain on interest rate derivatives

 

(6

)

1,196

 

Comprehensive loss attributable to the Company

 

$

(6,519

)

$

(14,920

)

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

2



Table of Contents

 

RLJ Lodging Trust

Combined Consolidated Statement of Changes in Equity

(Amounts in thousands, except share data)

(unaudited)

 

 

 

Shareholders’ Equity

 

Accumulated

 

Noncontrolling Interests

 

 

 

 

 

Common Stock

 

Distributions

 

Other

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Additional Paid-

 

in excess of

 

Comprehensive

 

Operating

 

Consolidated

 

Noncontrolling

 

 

 

 

 

Shares

 

Par Value

 

in-Capital

 

net earnings

 

Loss

 

Partnership

 

Joint Venture

 

Interests

 

Total Equity

 

Balance at December 31, 2011

 

106,279,049

 

$

1,063

 

$

1,835,011

 

$

(18,960

)

$

(1,782

)

$

11,486

 

$

7,170

 

$

18,656

 

$

1,833,988

 

Net loss

 

 

 

 

(6,513

)

 

(38

)

(370

)

(408

)

(6,921

)

Unrealized loss on interest rate derivative

 

 

 

 

 

(6

)

 

 

 

(6

)

Issuance of restricted stock

 

389,711

 

4

 

(4

)

 

 

 

 

 

 

Amortization of share based compensation

 

 

 

1,459

 

 

 

 

 

 

1,459

 

Share grants to trustees

 

2,146

 

 

40

 

 

 

 

 

 

40

 

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock

 

(24,664

)

 

(439

)

 

 

 

 

 

(439

)

Distributions on common shares and units

 

 

 

 

(17,596

)

 

(148

)

 

(148

)

(17,744

)

Balance at March 31, 2012

 

106,646,242

 

$

1,067

 

$

1,836,067

 

$

(43,069

)

$

(1,788

)

$

11,300

 

$

6,800

 

$

18,100

 

$

1,810,377

 

 

 

 

Partners’ Capital

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Fund II

 

Fund III

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Limited

 

General

 

Limited

 

Members’ Capital

 

Preferred Units

 

Comprehensive

 

Consolidated

 

 

 

 

 

General Partner

 

Partners

 

Partner

 

Partners

 

Class A

 

Class B

 

Fund II

 

Fund III

 

Loss

 

Joint Venture

 

Total Equity

 

Balance at December 31, 2010

 

$

(13,409

)

$

433,013

 

$

(23,328

)

$

811,918

 

$

6,592

 

$

4,751

 

$

189

 

$

190

 

$

(3,806

)

$

7,623

 

$

1,223,733

 

Net loss

 

(7

)

(9,758

)

(3

)

(6,182

)

(125

)

(41

)

 

 

 

(160

)

(16,276

)

Unrealized gain on interest rate derivatives

 

 

 

 

 

 

 

 

 

1,196

 

 

1,196

 

Partners’ contributions

 

1,712

 

2,161

 

2,099

 

112,777

 

 

 

 

 

 

 

118,749

 

Partners’ distributions

 

(2,161

)

(2,161

)

(2,494

)

 

 

 

 

 

 

 

(6,816

)

Members’ distributions

 

 

 

 

 

(600

)

(200

)

 

 

 

 

(800

)

Distributions to preferred unitholders

 

 

(8

)

 

(8

)

 

 

 

 

 

 

(16

)

Balance at March 31, 2011

 

$

(13,865

)

$

423,247

 

$

(23,726

)

$

918,505

 

$

5,867

 

$

4,510

 

$

189

 

$

190

 

$

(2,610

)

$

7,463

 

$

1,319,770

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

3



Table of Contents

 

RLJ Lodging Trust

Combined Consolidated Statements of Cash Flows

(Amounts in thousands)

(unaudited)

 

 

 

For the three months ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(6,921

)

$

(16,276

)

Adjustments to reconcile net loss to cash flow provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

33,697

 

32,701

 

Amortization of deferred financing costs

 

1,000

 

1,202

 

Amortization of deferred management fees

 

250

 

250

 

Share grants to trustees

 

40

 

 

Amortization of share based compensation

 

1,459

 

 

Deferred income tax liability

 

(11

)

 

Changes in assets and liabilities:

 

 

 

 

 

Hotel receivables, net

 

(6,449

)

(4,625

)

Prepaid expense and other assets

 

3,058

 

(8,210

)

Accounts payable and accrued expense

 

(18,090

)

7,237

 

Advance deposits and deferred revenue

 

2,263

 

2,197

 

Accrued interest

 

171

 

851

 

Preferred distributions payable

 

 

86

 

Net cash flow provided by operating activities

 

10,467

 

15,413

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of hotel properties, net of cash acquired

 

 

(194,830

)

Proceeds from principal payments on investment in loans

 

88

 

60

 

Improvements and additions to hotel properties

 

(40,866

)

(7,848

)

Additions to property and equipment

 

(47

)

(6

)

Advances from related parties

 

 

350

 

Repayments to related parties

 

 

(286

)

Funding of restricted cash reserves, net

 

981

 

(1,400

)

Net cash flow used in investing activities

 

(39,844

)

(203,960

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from term loan

 

 

140,000

 

Payment of mortgage principal

 

(3,251

)

(5,753

)

Payment of members’ distributions

 

 

(800

)

Proceeds from partners’ contributions

 

 

118,749

 

Payment of partners’ distributions

 

 

(6,816

)

Repurchase of common stock

 

(439

)

 

Distributions on common shares

 

(15,942

)

 

Distributions on OP units

 

(134

)

 

Payment of deferred financing costs

 

(23

)

(660

)

Net cash flow (used in) provided by financing activities

 

(19,789

)

244,720

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(49,166

)

56,173

 

Cash and cash equivalents, beginning of period

 

310,231

 

267,454

 

Cash and cash equivalents, end of period

 

$

261,065

 

$

323,627

 

 

The accompanying notes are an integral part of these combined consolidated financial statements.

 

4



Table of Contents

 

RLJ Lodging Trust
Notes to the Combined Consolidated Financial Statements

 (unaudited)

 

1.              Organization

 

RLJ Lodging Trust (the “Company”) was formed as a Maryland real estate investment trust (“REIT”) on January 31, 2011. The Company is a self-advised and self-administered REIT that invests primarily in premium-branded, focused-service and compact full-service hotels. The Company completed the initial public offering of its common shares of beneficial interest (the “IPO”) on May 16, 2011. The IPO resulted in the sale of 27,500,000 common shares at a price per share of $18.00 and generated gross proceeds of $495.0 million.  The aggregate proceeds to the Company, net of underwriters’ discounts in connection with the IPO, were approximately $464.1 million.  On June 3, 2011, the Company issued and sold an additional 4,095,000 common shares at a price per share of $18.00 upon exercise of the underwriters’ overallotment option (the “Overallotment”), generating gross proceeds of approximately $73.7 million.  The Company received aggregate proceeds, net of underwriters’ discounts, in connection with the Overallotment of approximately $69.1 million.  Subsequent to the IPO, the Company contributed the net proceeds from the IPO, including proceeds received from the Overallotment, to the Company’s operating partnership, RLJ Lodging Trust, L.P. (the “Operating Partnership”), which was formed as a Delaware limited partnership on January 31, 2011, in exchange for units of limited partnership interest in the Operating Partnership (“OP units”).  The Operating Partnership holds substantially all of the Company’s assets and conducts substantially all of its business. Upon completion of the IPO, the Company owned approximately 99.1% of the aggregate OP units.  The Company intends to elect and qualify to be taxed as a REIT, for U.S. federal income tax purposes, commencing with the portion of its taxable year ending December 31, 2011.

 

Upon completion of the IPO and related formation transactions, the Company succeeded to the operations and hotel investment and ownership platform of RLJ Development, LLC (“RLJ Development”), and the lodging assets of RLJ Lodging Fund II, L.P. (and its parallel fund) (“Fund II”) and RLJ Real Estate Fund III, L.P. (and its parallel fund) (“Fund III”), which collectively comprise the Company’s predecessor (the “RLJ Predecessor”). Accordingly, the RLJ Predecessor was not a separate legal entity. RLJ Development, Fund II and Fund III were entities under the common control of Robert L. Johnson, the Company’s Executive Chairman, and were formed for the purpose of acquiring and operating hotel properties. Upon completion of the IPO and formation transactions, all of the existing investors in RLJ Development, Fund II and Fund III received common shares or OP units, as applicable, as consideration for their respective interests in RLJ Development, Fund II and Fund III, and as a result became equity owners of the Company and/or the Operating Partnership, as applicable.

 

Due to the timing of the IPO and the formation transactions, the Company’s results of operations for the three months ended March 31, 2011 reflect the financial condition and results of operations of the RLJ Predecessor. The financial condition as of December 31, 2011 and March 31, 2012 and results of operations for the three months ended March 31, 2012 reflect solely the Company.

 

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. As of March 31, 2012, there were 107,540,242 OP units outstanding and the Company owned, through a combination of direct and indirect interests, 99.2% of the outstanding OP units.

 

As of March 31, 2012, the Company owned interests in 141 hotels with 20,646 rooms located in 20 states and the District of Columbia, interests in land parcels located adjacent to certain hotels and an interest in two mortgage loans secured by hotels.  The Company, through wholly-owned subsidiaries, owned a 100% interest in all of its assets, with the exception of the Doubletree Metropolitan Hotel New York City, in which the Company, through wholly-owned subsidiaries, owned a 95% interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the Doubletree Metropolitan hotel. An independent hotel operator manages each hotel.

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited interim combined consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to interim financial information.

 

5



Table of Contents

 

As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC.  The accompanying unaudited interim financial statements include adjustments based on management’s estimates (consisting of normal recurring adjustments), which the Company considers necessary for a fair statement of the combined consolidated balance sheets, statements of operations and comprehensive loss, statements of changes in equity and statements of cash flows for the interim periods presented. The unaudited interim combined consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on March 8, 2012.  Operating results for the three months ended March 31, 2012 are not necessarily indicative of actual operating results for the entire year

 

The unaudited interim combined consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries, including a joint venture.  All significant intercompany balances have been eliminated in consolidation.

 

The unaudited interim combined consolidated financial statements of RLJ Lodging Trust for the periods prior to the IPO include the accounts of Fund II, Fund III, and RLJ Development and their respective wholly-owned subsidiaries.  All significant intercompany balances have been eliminated in consolidation.  RLJ Development, Fund II and Fund III were entities under the common control of Robert L. Johnson and were formed for the purpose of acquiring and operating hotel properties.  As part of the IPO and related formation transactions, the Company acquired certain of the assets of RLJ Development, including employees, furniture, fixtures and equipment (“FF&E”) and leases, which represented substantially all of RLJ Development’s business.  Since these three entities were under common control and the Company succeeded to their operations and businesses, the combined entities of Fund II, Fund III and RLJ Development, for the periods prior to the IPO, are presented as the RLJ Predecessor and referred to as the Company.

 

Reporting Periods

 

As of March 31, 2012, the Company owned four hotels that are managed by affiliates of Marriott International (“Marriott”).  The Company’s hotels managed by Marriott are accounted for on a fiscal year comprised of 52 or 53 weeks ending on the Friday closest to December 31. The Company’s results for the three months ended March 31, 2012 and 2011 include the results of operations for the Company’s Marriott-managed hotels for the 12 week period ending March 23, 2012 and March 25, 2011, respectively.

 

Use of Estimates

 

The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income, owners’ equity or cash flows.

 

Investment in Hotel Properties

 

Hotel acquisitions consist almost exclusively of land, land improvements, buildings, building improvements, furniture, fixtures and equipment and inventory. The Company records the purchase price among these asset classes based on their respective fair values. When the Company acquires properties, they are acquired for use. Generally, the Company does not acquire any significant in-place leases or other intangible assets (e.g., management agreements, franchise agreements or trademarks) when hotels are acquired.  The only intangible assets acquired through March 31, 2012 consisted of favorable lease agreements and miscellaneous operating agreements, which are short-term in nature.  In conjunction with the acquisition of a hotel, the Company typically negotiates new franchise and management agreements with the selected brand and manager.

 

The Company’s investments in hotels are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five

 

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Table of Contents

 

years for furniture, fixtures and equipment. Intangible assets arising from favorable or unfavorable leases are amortized using the straight-line method over the non-cancelable portion of the term of the agreement.  Maintenance and repairs are expensed and major renewals or improvements are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in discontinued operations.

 

The Company considers each individual hotel to be an identifiable component of the business.  In accordance with the guidance on impairment or disposal of long-lived assets, the Company does not consider a hotel as “held for sale” until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met.  Once a hotel is designated as “held for sale” the operations for that hotel are included in discontinued operations.  The Company does not depreciate hotel assets so long as they are classified as “held for sale.”  Upon designation of a hotel as being “held for sale” and quarterly thereafter, the Company reviews the realizability of the carrying value, less cost to sell, in accordance with the guidance.  Any such adjustment in the carrying value of a hotel classified as “held for sale” is reflected in discontinued operations.  The Company includes in discontinued operations the operating results of those hotels that are classified as “held for sale.”

 

The Company assesses the carrying values of each hotel whenever events or changes in circumstances indicate that the carrying amounts of these hotels may not be fully recoverable.  Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows which take into account current market conditions and the Company’s intent with respect to holding or disposing of the hotel.  If the Company’s analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value of the hotel. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.

 

The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and the Company’s plans to manage the underlying hotels.  However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective.  Changes in economic and operating conditions and the Company’s ultimate investment intent that occur subsequent to a current impairment analysis could impact these assumptions and result in future impairment charges of the hotels.

 

Franchise Agreements

 

As of March 31, 2012, 137 of the Company’s hotel properties are operated under franchise agreements with terms ranging from 15 to 25 years. The franchise agreements for these hotels allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee of between 2.0% and 3.0% of food and beverage revenues.  Franchise fees are included in other hotel expenses in the accompanying unaudited interim combined consolidated financial statements.

 

Earnings Per Share

 

Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period excluding the weighted average number of unvested restricted shares (“participating securities” as defined in Note 10). The basic earnings per share calculation includes the effect of such participating securities.  Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants or shares that would be issued in the event of conversion of OP units. No adjustment is made for shares that are anti-dilutive during a period.

 

Share Based Compensation

 

From time to time, the Company may award non-vested shares under the 2011 Equity Incentive Plan (the “2011 Plan”), as compensation to officers, employees and non-employee trustees (see Note 9). The shares issued to officers and employees vest over a period of time as determined by the Board of Trustees at the date of grant. The Company recognizes compensation expense for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of grant, adjusted for forfeitures.

 

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Table of Contents

 

Recent Accounting Pronouncements

 

Recently Adopted

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure requirements in U.S.GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 provides new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. The guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not expect this ASU to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 revised guidance over the manner in which entities present comprehensive income in the financial statements. This guidance removes the previous presentation options and provides that entities must report comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. This guidance does not change the items that must be reported in other comprehensive income nor does it require incremental disclosures in addition to those previously required. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this ASU to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

Recently Issued But Not Yet Adopted

 

In December 2011, the FASB issued ASU No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (“ASU No. 2011-10”).  ASU No. 2011-10 represents the consensus reached in EITF Issue No. 10-E, “Derecognition of in Substance Real Estate.” The objective of this ASU is to resolve the diversity in practice about whether the guidance in FASB Accounting Standards CodificationTM (Codification) Subtopic 360-20, “Property, Plant, and Equipment — Real Estate Sales,” of Codification Topic 360, Property, Plant, and Equipment, applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt.

 

ASU 2011-10 provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Codification Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.

 

This guidance should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. The Company does not expect this ASU to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

3.              Acquisition of Hotel Properties

 

The Company did not acquire any hotels during the three months ended March 31, 2012.  During the three months ended March 31, 2011, the Company, through wholly-owned subsidiaries, acquired the following hotels, which were funded by capital contributions:

 

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Table of Contents

 

Hotel

 

Location

 

Acquisition Date

 

Management Company

 

Rooms

 

Purchase Price

 

%
Interest

 

Embassy Suites Columbus

 

Columbus, OH

 

January 11, 2011

 

Crescent Hotels and Resorts

 

221

 

$

9.5

million

 

100

%

Renaissance Pittsburgh Hotel

 

Pittsburgh, PA

 

January 12, 2011

 

Sage Hospitality

 

300

 

47.1

million

 

100

%

Courtyard Atlanta Buckhead

 

Atlanta, GA

 

January 18, 2011

 

Noble

 

181

 

27.0

million

 

100

%

Doubletree Hotel Columbia

 

Columbia, MD

 

January 18, 2011

 

Urgo Hotels

 

152

 

10.5

million

 

100

%

Denver Airport Marriott at Gateway Park

 

Denver, CO

 

January 18, 2011

 

Sage Hospitality

 

238

 

46.0

million

 

100

%

Embassy Suites West Palm Beach-Central

 

West Palm Beach, FL

 

January 18, 2011

 

Windsor Capital Group

 

194

 

16.0

million

 

100

%

Hilton Garden Inn Raleigh Durham-Research Triangle Park

 

Durham, NC

 

January 24, 2011

 

Noble Management Group

 

177

 

7.0

million

 

100

%

Hilton Garden Inn Pittsburgh University Place

 

Pittsburgh, PA

 

January 24, 2011

 

Urgo Hotels

 

202

 

21.2

million

 

100

%

Hampton Inn Houston-Near the Galleria

 

Houston, TX

 

March 14, 2011

 

Interstate Hotels and Resorts

 

176

 

20.3

million

 

100

%

 

 

 

 

 

 

 

 

1,841

 

$

204.6 

million

 

100

%

 

The allocation of purchase price for the hotel properties acquired was as follows (in thousands):

 

 

 

March 31,

 

 

 

2011

 

Land and land improvements

 

$

29,131

 

Buildings and improvements

 

155,995

 

Furniture, fixtures and equipment

 

21,900

 

Deferred tax liabilities assumed

 

(2,438

)

Total Purchase Price

 

$

204,588

 

 

There were no contingent consideration arrangements associated with these acquisitions nor was any goodwill recognized.  See Note 14 for detail of non-cash prorations assumed at acquisition dates.

 

Total revenues and net loss from the hotels acquired during the three months ended March 31, 2011 of $14.0 million and $2.6 million, respectively, are included in the accompanying combined consolidated statements of operations for the three months ended March 31, 2011.

 

The unaudited condensed pro forma financial information excludes discontinued operations and is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2011 acquisitions had taken place on the latter of January 1, 2011 or the opening date of the hotel, nor does it purport to represent the results of operations for future periods.  The unaudited condensed pro forma financial information, excluding discontinued operations, is as follows (in thousands):

 

 

 

For the three months
ended March 31,
2011

 

Revenue

 

$

171,735

 

Net loss

 

$

(12,743

)

 

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Table of Contents

 

4.              Discontinued Operations

 

In February 2010, Fund II received a notice of event of default for failure to make the required monthly payment on its mortgage loan secured by the New York LaGuardia Airport Marriott located in New York, NY.  The mortgage loan matured in July 2010.  In April 2011, Fund II escrowed an executed deed in lieu of foreclosure agreement for the benefit of the lenders.  On August 5, 2011, the Company transferred title to the hotel to the lenders pursuant to the deed in lieu of foreclosure arrangement.  The Company recorded a gain on extinguishment of indebtedness of approximately $23.5 million to discontinued operations in August 2011 and removed the hotel’s net assets and liabilities from its combined consolidated balance sheet at that time.

 

Operating results of discontinued operations were as follows (in thousands):

 

 

 

For the three months
ended March 31,
2011

 

Net revenues

 

$

6,121

 

Operating expenses

 

6,887

 

Operating loss

 

(766

)

Interest expense

 

(206

)

Net loss from discontinued operations

 

$

(972

)

 

5.              Investment in Hotel Properties

 

Investment in hotel properties as of March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Land and land improvements

 

$

516,137

 

$

515,957

 

Buildings and improvements

 

2,416,943

 

2,392,669

 

Furniture, fixtures and equipment

 

387,562

 

375,561

 

Intangibles

 

1,857

 

1,857

 

 

 

3,322,499

 

3,286,044

 

Accumulated depreciation and amortization

 

(493,002

)

(465,587

)

Investment in hotel properties, net

 

$

2,829,497

 

$

2,820,457

 

 

For the three months ended March 31, 2012 and 2011, depreciation and amortization expense related to investment in hotel properties was approximately $33.6 million and $31.4 million (excluding discontinued operations), respectively.

 

Impairment

 

During each of the three months ended March 31, 2012 and 2011, the Company determined there was no impairment on its investment in hotels.

 

6.              Debt

 

Credit Facility

 

The Company entered into an unsecured revolving credit facility on June 20, 2011, that provides for maximum borrowings of up to $300.0 million.  The credit facility requires that a group of no less than 15 of the Company’s hotel properties remain unencumbered by outstanding indebtedness.  The credit facility contains certain financial covenants relating

 

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Table of Contents

 

to the Company’s maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible net worth and maximum secured indebtedness.  If an event of default exists, under the terms of the credit facility, the Company is not permitted to make distributions to shareholders, other than those required to qualify for and maintain REIT status.  As of March 31, 2012, the Company was in compliance with all financial covenants.

 

The credit facility matures on June 20, 2014 and may be extended for an additional year at the Company’s option.  In addition, the Company has the option to increase the revolving loan commitment to $450.0 million, subject to certain conditions (including consent of the lenders).  The Company incurred $3.0 million in fees related to the credit facility which are being deferred and amortized over the term of the credit facility.  The computed amortization approximates the amount that would be computed using the effective interest method.

 

Borrowings under the credit facility bear interest at variable rates equal to the London InterBank Offered Rate (“LIBOR”) plus an applicable margin.  The margin ranges from 2.25% to 3.25%, depending on the Company’s leverage ratio, as calculated under the terms of the credit facility.  The Company incurs an unused facility fee of between 0.30% and 0.40%, based on the amount by which the maximum borrowing amount exceeds the total principal balance of outstanding borrowings.

 

Under the terms of the credit facility, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $30.0 million, may be issued on behalf of the Company by the lenders holding the credit facility.  The Company will incur a fee of 0.125% of the value of each standby letter of credit that is issued on its behalf.  Any outstanding standby letters of credit would reduce the available borrowings on the credit facility by a corresponding amount.  No standby letters of credit were outstanding at March 31, 2012. The Company also may borrow up to a maximum aggregate outstanding balance of $40.0 million of swingline loans.  Any outstanding swingline loans would reduce the available borrowings on the credit facility by a corresponding amount.  No swingline loans were outstanding at March 31, 2012.

 

The Company did not incur any interest expense on the credit facility for the three months ended March 31, 2012. For the three months ended March 31, 2012, the Company incurred an unused commitment fee of approximately $0.3 million.  There were no borrowings outstanding at March 31, 2012.

 

RLJ Predecessor Credit Facility

 

Fund III, through wholly-owned subsidiaries, maintained a credit facility that provided for maximum borrowings of up to $200.0 million.  The credit facility was collateralized by Fund III’s partners’ committed and uncalled capital and was guaranteed by Fund III.  Borrowings under the credit facility bore interest at variable rates equal to the LIBOR plus a margin of 0.75%.  The credit facility matured on January 31, 2011.

 

Fund III incurred no interest expense related to the credit facility was incurred for the three months ended March 31, 2011.  Additionally, there was an unused commitment fee of 0.15% of the unused portion of the credit facility.  For the three months ended March 31, 2011, Fund III incurred an unused commitment fee of approximately $12,000.

 

Mortgage Loans

 

As of March 31, 2012 and December 31, 2011, the Company was subject to the following mortgage loans (in thousands):

 

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Table of Contents

 

 

 

Number

 

Interest rate at

 

 

 

 

 

 

 

 

 

of Assets

 

March 31,

 

Maturity

 

Principal balance at,

 

Lender 

 

Encumbered

 

2012 (1)

 

Date

 

March 31, 2012

 

December 31, 2011

 

Keybank (2)

 

6

 

1.48

%(3)

April 2012

(4)

$

48,000

 

$

48,000

 

State Street Bank (2)

 

 

 

3.00

%(3)

April 2012

(4)

37,000

 

37,000

 

Wells Fargo

 

1

 

4.24

%(5)

June 2013

(6)

60,000

 

60,000

 

Wells Fargo

 

1

 

5.50

%(5)

Oct 2013

(6)

40,000

 

40,000

 

Wells Fargo

 

1

 

5.50

%(5)

Oct 2013

(6)

31,000

 

31,000

 

Wells Fargo (7)

 

1

 

4.90

%(8)

Dec 2013

(6)

150,000

 

150,000

 

Blackstone (7)

 

 

 

10.75

%(8)

Dec 2013

(6)

50,000

 

50,000

 

Wells Fargo

 

1

 

3.84

%(5)

Oct 2014

(6)

68,500

 

68,500

 

Wells Fargo

 

1

 

3.84

%(5)

Oct 2014

(6)

17,500

 

17,500

 

Wells Fargo

 

1

 

3.84

%(5)

Oct 2014

(6)

21,000

 

21,000

 

Wells Fargo

 

1

 

3.84

%(5)

Oct 2014

(6)

11,000

 

11,000

 

Wells Fargo

 

1

 

3.84

%(5)

Oct 2014

(6)

24,000

 

24,000

 

Capmark Financial Group

 

1

 

6.12

%

April 2015

 

4,296

 

4,327

 

Capmark Financial Group

 

1

 

5.50

%

May 2015

 

5,014

 

5,014

 

Capmark Financial Group

 

1

 

5.55

%

June 2015

 

11,567

 

11,656

 

Capmark Financial Group

 

1

 

5.55

%

June 2015

 

5,018

 

5,057

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

2,622

 

2,642

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

4,303

 

4,336

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

10,030

 

10,107

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

8,952

 

9,020

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

8,023

 

8,084

 

Barclay’s Bank

 

1

 

5.60

%

June 2015

 

5,562

 

5,603

 

Barclay’s Bank

 

1

 

5.60

%

June 2015

 

8,642

 

8,707

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

5,256

 

5,296

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

34,850

 

35,115

 

Barclay’s Bank

 

1

 

5.60

%

June 2015

 

6,619

 

6,669

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

5,898

 

5,943

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

6,778

 

6,830

 

Barclay’s Bank

 

1

 

5.60

%

June 2015

 

8,636

 

8,701

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

6,770

 

6,821

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

7,451

 

7,508

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

6,778

 

6,830

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

7,737

 

7,796

 

Barclay’s Bank

 

1

 

5.55

%

June 2015

 

9,710

 

9,783

 

Capmark Financial Group

 

1

 

5.50

%

July 2015

 

6,831

 

6,883

 

Barclay’s Bank

 

1

 

5.44

%

Sept 2015

 

11,139

 

11,223

 

Merrill Lynch

 

1

 

6.29

%

July 2016

 

9,265

 

9,294

 

Merrill Lynch

 

1

 

6.29

%

July 2016

 

5,552

 

5,552

 

Merrill Lynch

 

1

 

6.29

%

July 2016

 

7,756

 

7,780

 

Merrill Lynch

 

1

 

6.29

%

July 2016

 

9,279

 

9,307

 

Wachovia Securities (9)

 

43

 

6.29

%

July 2016

 

491,837

 

493,358

 

Wachovia Securities

 

1

 

6.29

%

July 2016

 

6,643

 

6,664

 

Wells Fargo / Morgan Stanley

 

2

 

6.29

%

July 2016

 

35,147

 

35,256

 

Wells Fargo / Morgan Stanley

 

1

 

6.29

%

July 2016

 

6,817

 

6,837

 

Wells Fargo / Morgan Stanley

 

1

 

6.29

%

July 2016

 

9,706

 

9,736

 

 

 

91

 

 

 

 

 

$

1,338,484

 

$

1,341,735

 

 


(1)         Interest rate at March 31, 2012 gives effect to interest rate swaps and LIBOR floors, where applicable.

(2)         The Keybank and State Street Bank loans are comprised of a senior and a mezzanine loan, which, as of March 31, 2012 had outstanding balances of $48 million and $37 million, respectively.

(3)         Requires payments of interest only.

(4)         The Keybank and State Street Bank loans were paid off with borrowings on the $300.0 million Credit Facility at maturity on April 9, 2012.

(5)         Requires payments of interest only until the commencement of the extension periods.

(6)         Maturity date may be extended for up to two additional one-year terms at the Company’s option (subject to the Company’s prior satisfaction of certain conditions and advance notice of the exercise of the Company’s option).

(7)         The Wells Fargo and Blackstone loans are a senior and a mezzanine loan, respectively, which, as of March 31, 2012, had outstanding balances of $150.0 million and $50.0 million, respectively.

(8)         Requires payments of interest only until the commencement of the second extension period.

(9)         The 43 Wachovia Securities loans are cross-collateralized.

 

Some mortgage agreements are subject to customary financial covenants.  The Company was in compliance with these covenants at March 31, 2012 and December 31, 2011.

 

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Table of Contents

 

In November, 2011, the Company elected to cease the subsidization of debt service on the mortgage loans secured by the Courtyard Goshen, Indiana and SpringHill Suites Southfield, Michigan.  In December 2011, the Company received notice of an event of default for failure to make the required monthly payment on its mortgage loan secured by the Courtyard Goshen.  In January 2012, the Company received notice of an event of default for failure to make the required monthly payment on its mortgage loan secured by the SpringHill Suites Southfield.  As of March 31, 2012, the principal balances outstanding were $5.6 million and $5.0 million, for the Courtyard Goshen and SpringHill Suites Southfield, respectively.  The loans mature in July 2016 and June 2015, respectively.  The Company is working with the lenders to transfer the assets in an orderly manner.

 

Term Loan

 

On January 14, 2011, Fund III entered into a $140.0 million unsecured term loan. Fund III agreed to maintain an unencumbered asset pool of ten hotel properties during the term of the term loan. The term loan had an original maturity date of September 30, 2011, with two six month extension options, and bore interest at LIBOR plus 4.25%, with a LIBOR floor of 1.00%.  For the three months ended March 31, 2011, the Company incurred $1.5 million of interest expense, related to the term loan.

 

7.              Income Taxes

 

The Company intends to elect to be taxed as a real estate investment trust under Section 856 through 860 of the Internal Revenue Code when it files its U.S. federal tax return for its short taxable year ended December 31, 2011.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its owners.  The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT.  As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its owners.  However, the Company’s taxable REIT subsidiaries (“TRS”) will generally be subject to federal, state, and local income taxes.

 

The Company accounts for income taxes using the asset and liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.

 

The Company had no accruals for tax uncertainties as of March 31, 2012 and March 31, 2011.

 

8.              Commitments and Contingencies

 

The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging from 1.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Amounts will be capitalized as incurred. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. Additionally, some mortgage agreements require the Company to reserve restricted cash for the periodic payment of real estate taxes and insurance. As of March 31, 2012 and December 31, 2011, approximately $86.3 million and $87.3 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.

 

Litigation

 

Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.

 

9.              Equity Incentive Plan

 

The Company may issue equity-based awards to officers, employees, non-employee trustees and other eligible persons

 

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under the 2011 Plan. The 2011 Plan provides for a maximum of 5,000,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, unrestricted share awards, share units, dividend equivalent rights, long-term incentive units, other equity-based awards and cash bonus awards.  In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2011 Plan during any calendar year to any one individual is limited to 1,000,000 shares.  The exercise price of share options is determined by the Board of Trustees, but may not be less than 100% of the fair market value of the common shares on the date of grant.  For grantees that own greater than ten percent of the total combined voting power of all classes of outstanding voting securities of the Company, the exercise price of share options may not be less than 110% of the fair market value of the common shares on the date of grant.  The fair market value for all other types of share awards is determined by the closing price on the date of grant.  As of March 31, 2012, there were 3,482,503 common shares available for future grant under the 2011 Plan.

 

Non-vested Restricted Share Awards

 

From time to time, the Company may award non-vested shares under the 2011 Plan, as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees vest over a period of time as determined by the Board of Trustees at the date of grant. The Company recognizes compensation expense for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.

 

A summary of the non-vested shares as of March 31, 2012 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Grant Date Fair
Value

 

Unvested at January 1, 2012

 

970,288

 

$

17.93

 

Granted

 

389,711

 

17.41

 

Vested

 

(73,766

)

17.93

 

Forfeited

 

 

 

Unvested at March 31, 2012

 

1,286,233

 

$

17.77

 

 

For the three months ended March 31, 2012, the Company recognized approximately $1.5 million of share-based compensation expense related to these restricted share awards.  As of March 31, 2012, there was $22.1 million of total unrecognized compensation costs related to non-vested share awards.  As of March 31, 2012, these costs were expected to be primarily recognized over a weighted-average period of 3.4 years. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three months ended March 31, 2012 was approximately $1.3 million.

 

10.       Earnings per Common Share

 

The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common shares of beneficial interest under certain circumstances) have been excluded from the diluted earnings per share calculation as there was no effect on the amounts for the three months ended March 31, 2012, since the limited partners’ share of income would also be added back to net income. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested restricted shares (participating securities) have been excluded, as applicable, from net income or loss attributable to common shareholders utilized in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of noncontrolling interests in the earnings per share calculations.  The weighted average number of OP units held by the noncontrolling interest was 894,000 for the three months ended March 31, 2012.

 

For the three months ended March 31, 2012, diluted weighted average common shares do not include the impact of unvested compensation-related shares because the effect of these items on diluted earnings per share would be anti-dilutive. For the three months ended March 31, 2012 there were 1,286,233 anti-dilutive compensation-related shares outstanding.

 

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The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share data):

 

 

 

For the three
months ended,

 

 

 

March 31, 2012

 

Numerator:

 

 

 

Net loss attributable to common shareholders

 

$

(6,513

)

Less: Dividends paid on unvested restricted shares

 

(212

)

Net loss attributable to common shareholders excluding amounts attributable to unvested restricted shares

 

$

(6,725

)

 

 

 

 

Denominator:

 

 

 

Weighted-average number of common shares - basic

 

105,332,812

 

Unvested restricted shares

 

 

Weighted-average number of common shares - diluted

 

105,332,812

 

Net loss per share attributable to common shareholders - basic and diluted

 

$

(0.06

)

 

Unvested restricted shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share.

 

11.       Financial Instruments: Derivatives and Hedging

 

The Company employs interest rate swaps and caps to hedge against interest rate fluctuations. Unrealized gains and losses are reported in other comprehensive loss with no effect recognized in earnings as long as the characteristics of the swap and the hedged item are closely matched.  The ineffective portion of all hedges is recognized in earnings in the current period.  As of both March 31, 2012 and December 31, 2011, approximately 25.2% of the Company’s borrowings were subject to variable rates, after taking into consideration the effect of interest rate swaps and caps.

 

As of March 31, 2012 and December 31, 2011, the Company has entered into the following interest rate swaps and caps, which the Company has designated as cash flow hedges (in thousands):

 

 

 

Notional value at

 

Hedge

 

 

 

Fair value at

 

Hedge type

 

March 31, 2012

 

December 31, 2011

 

interest rate

 

Maturity

 

March 31, 2012

 

December 31, 2011

 

Interest rate cap

 

$

48,000

 

$

48,000

 

6.00

%

4/9/2012

 

$

 

$

 

Interest rate cap

 

37,000

 

37,000

 

6.00

%

4/9/2012

 

 

 

Interest rate cap

 

60,000

 

60,000

 

5.00

%

6/29/2012

 

 

 

Interest rate cap

 

50,000

 

50,000

 

3.50

%

12/23/2012

 

1

 

3

 

Swap-cash flow

 

150,000

 

150,000

 

1.15

%

12/23/2012

 

(1,066

)

(1,145

)

Swap-cash flow

 

40,000

 

40,000

 

1.00

%

10/6/2013

 

(415

)

(369

)

Swap-cash flow

 

31,000

 

31,000

 

1.00

%

10/6/2013

 

(322

)

(285

)

 

 

$

416,000

 

$

416,000

 

 

 

 

 

$

(1,802

)

$

(1,796

)

 

As of both March 31, 2012 and December 31, 2011, there was approximately $1.8 million in unrealized losses included in accumulated other comprehensive loss, a component of shareholders’ equity, related to interest rate hedges that are effective in offsetting the variable cash flows.  There were no ineffective hedges during either the three months ended March 31, 2012 or 2011.

 

12.       Fair Value

 

Fair Value of Financial Instruments

 

The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methods.  Considerable judgment is required in interpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methods

 

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may have a material effect on the estimated fair value amounts.  The Company used the following market assumptions and/or estimation methods:

 

·                  Cash and cash equivalents, hotel receivables, accounts payable and accrued expenses - The carrying amounts reported in the combined consolidated balance sheet for these financial instruments approximate fair value because of their short maturities.

 

·                  Investment in collateralized loans - Fair value is determined by discounting the future contractual cash flows to the present value using a current market interest rate. The market rate is determined by giving consideration to one or both of the following criteria, as appropriate: (1) interest rates for loans of comparable quality and maturity, and (2) the value of the underlying collateral. The fair values of the Company’s investment in collateralized loans are generally classified within Level 3 of the valuation hierarchy.  The fair value estimated at both March 31, 2012 and December 31, 2011 was $22.6 million.

 

·                  Interest rate swaps and caps - The fair value of interest rate swaps and caps is determined as discussed in Note 11 to these financial statements.

 

·                  Variable rate mortgage notes payable and borrowings under the credit facility - The carrying amounts reported in the combined consolidated balance sheets for these financial instruments approximate fair value.  The Company estimates the fair value of its variable rate debt by using quoted market rates for similar loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.

 

·                  Fixed rate mortgage notes payable - The fair value estimated at March 31, 2012 and December 31, 2011 of $768.9 million and $771.5 million, respectively (excluding loans collateralized by properties held for sale), is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.

 

Fair Value Measurement

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:

 

·                  Level 1— Inputs include quoted market prices in an active market for identical assets or liabilities.

 

·                  Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

 

·                  Level 3 — Inputs are unobservable and corroborated by little or no market data.

 

Recurring Fair Value Measurements:  The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 (in thousands).

 

 

 

Fair Value at March 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Interest rate swap and cap liability

 

$

 

$

(1,802

)

$

 

$

(1,802

)

Total

 

$

 

$

(1,802

)

$

 

$

(1,802

)

 

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques

 

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including discounted cash flow analysis on the expected cash flows of each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2012, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

13.       Related Party Transactions

 

Upon completion of the IPO, the management fee obligation of the RLJ Predecessor ceased to exist.  The Company paid monthly fees for management advisory services to the managing member of RLJ Development.  Such fees amounted to $0.6 million for the three months ended March 31, 2011 and are included in general and administrative expense.

 

The Company periodically pays certain amounts on behalf of RLJ Companies LLC, an entity controlled by Robert L. Johnson, our Executive Chairman. As of March 31, 2012 and December 31, 2011, there was $52,000 and $33,000, respectively, due from RLJ Companies, LLC, which was included in prepaid and other assets.

 

14.       Supplemental Information to Statements of Cash Flows (in thousands)

 

 

 

For the three months ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Interest paid

 

$

19,010

 

$

24,011

 

 

 

 

 

 

 

Income taxes paid

 

$

265

 

$

281

 

 

 

 

 

 

 

Supplemental investing and financing transactions:

 

 

 

 

 

In conjunction with the hotel acquisitions, the Company assumed the following assets and liabilities:

 

 

 

 

 

Purchase of real estate

 

$

 

$

204,588

 

Accounts receivable

 

 

457

 

Other assets

 

 

862

 

Advance deposits

 

 

(368

)

Accounts payable and accrued expenses

 

 

(2,209

)

Application of purchase deposit

 

 

(8,500

)

Acquisition of hotel properties

 

$

 

$

194,830

 

 

 

 

 

 

 

Supplemental non-cash transactions:

 

 

 

 

 

Change in fair market value of interest rate swaps

 

$

(6

)

$

1,196

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

1,775

 

$

 

 

 

 

 

 

 

Distributions payable

 

$

17,744

 

$

 

 

15.       Subsequent Events

 

On April 5, 2012, the Company borrowed $85.0 million on its $300.0 million credit facility to fund the repayment of the Keybank and State Street Bank loans.

 

On April 9, 2012, the Company paid off the Keybank and State Street Bank loans which had outstanding balances of $48.0 million and $37.0 million, respectively.

 

On April 13, 2012, the Company paid a dividend of $0.165 per common share of beneficial interest to shareholders of record at March 30, 2012.

 

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Table of Contents

 

On May 4, 2012, the Company granted 46,935 restricted common shares of beneficial interest to certain employees and members of the Board of Trustees.

 

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Table of Contents

 

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

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 8, 2012 (the “Annual Report”), which is accessible on the SEC’s website at www.sec.gov.

 

Statement Regarding Forward-Looking Information

 

The following information contains forward-looking statements within the meaning Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, cash flows, earnings before interest, tax, depreciation and amortization (“EBITDA”), funds from operations (“FFO”) and plans and objectives or the current or future state of the lodging industry.  These statements generally are characterized by the use of the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions.  Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.  Some factors that might cause such a difference include the following: the current global economic downturn, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, availability of proceeds from offerings of our common shares, our ability to identify suitable investments, our ability to close on identified investments and inaccuracies of our accounting estimates.  Given these uncertainties, undue reliance should not be placed on such statements.  We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

 

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. We caution investors not to place undue reliance on these forward-looking statements and urge you to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled “Risk Factors,” “Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.

 

Overview

 

We are a self-advised and self-administered Maryland real estate investment trust, which invests primarily in premium-branded, focused-service and compact full-service hotels. As of March 31, 2012, we owned 141 hotels in 20 states and the District of Columbia comprising 20,646 rooms. We are one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our hotels are concentrated in urban and dense suburban markets that we believe generally exhibit multiple demand generators and high barriers to entry.

 

Our strategy is to invest primarily in premium-branded, focused-service and compact full-service hotels. Focused-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve revenue per available room (“RevPAR”) levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.

 

We recognize the challenging geopolitical environment and the possibility that the current economic recovery might not be as robust as anticipated or that economic conditions could deteriorate.  However, with expected growth in lodging supply expected to be below historical averages for the next few years and corporate profits rising, we currently do not anticipate any significant slowdown in lodging fundamentals.  Accordingly, we remain cautiously optimistic that we are in the midst of a multiyear lodging recovery.

 

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Table of Contents

 

Furthermore, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market.  We believe our cash on hand and expected access to capital (including availability under our revolving credit facility) along with our senior management team’s experience, extensive industry relationships and asset management expertise, will enable us to compete effectively for such acquisitions and enable us to generate additional internal and external growth.

 

Our Customers

 

Substantially all of our hotels consist of premium-branded focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our hotels are located in the business districts and suburban markets of major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.

 

Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our hotels, this group of business represents a smaller component of our customer base.

 

A number of our hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer. Reasons for extended-stays may include, but are not limited to, training and/or special project business, relocation, litigation and insurance claims.

 

Our Revenues and Expenses

 

Our revenue is derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consist of telephone, parking and other guest services.

 

Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other hotel expenses. Room expense includes housekeeping, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expense primarily includes food, beverage and associated labor costs. Other hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

 

Critical Accounting Policies

 

Our discussion and analysis of the historical financial condition and results of operations of our predecessor is based on our predecessor’s combined consolidated financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the historical combined consolidated financial statements of our predecessor included elsewhere in this filing. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.

 

Investment in Hotel Properties

 

Hotel acquisitions consist almost exclusively of land, land improvements, buildings, building improvements, furniture, fixtures and equipment and inventory. We record the purchase price among these asset classes based on their respective fair values. When we acquire hotels, we acquire them for use. Generally, we do not acquire any significant in-

 

20



Table of Contents

 

place leases or other intangible assets (e.g., management agreements, franchise agreements or trademarks) when hotels are acquired. The only intangible assets acquired through March 31, 2012 consisted of favorable lease agreements and miscellaneous operating agreements, which are short-term in nature. In conjunction with the acquisition of a hotel, we typically negotiate new franchise and management agreements with the selected brand and manager.

 

Our investments in hotels are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for furniture, fixtures and equipment. Intangible assets arising from favorable or unfavorable leases are amortized using the straight-line method over the term of the non-cancelable term of the agreement. Maintenance and repairs are expensed and major renewals or improvements are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in discontinued operations.

 

We assess the carrying values of each hotel whenever events or changes in circumstances indicate that the carrying amounts of these hotels may not be fully recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the hotel. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary.

 

The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and our strategic plans to manage the underlying hotels. However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions and our ultimate investment intent that occur subsequent to a current impairment analysis could impact these assumptions and result in future impairment charges of the hotels.

 

Results of Operations

 

At March 31, 2012 and 2011, we owned 141 and 140 hotels respectively (excluding one hotel carried as discontinued operations in 2011).  All hotels owned during these periods, excluding discontinued operations, have been included in our results of operations during those respective periods or since their date of acquisition.  Operating results for the ten hotels acquired during 2011 and the Fairfield Inn & Suites Washington DC / Downtown, which was closed for renovations for the majority of the three months ended March 31, 2011, are not comparable for the three month periods ended March 31, 2012 and 2011.  These eleven hotels are hereafter referred to as non-comparable hotels.

 

Comparison of the three months ended March 31, 2012 to the three months ended March 31, 2011

 

Net loss from continuing operations for the three months ended March 31, 2012 was $6.9 million compared to a net loss from continuing operations of $15.3 million for the three months ended March 31, 2011, representing a decrease of $8.4 million. This improved performance was primarily due to a $15.0 million, or 8.9%, increase in total revenue (including $5.3 million arising from hotel acquisitions) and a $5.7 million, or 22.0%, decrease in interest expense, partially offset by an $11.9 million, or 7.5%, increase in operating expenses.

 

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Table of Contents

 

 

 

For the three months ended
March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ change

 

% change

 

 

 

(amounts in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Hotel operating revenue

 

 

 

 

 

 

 

 

 

Room revenue

 

$

158,579

 

$

144,725

 

$

13,854

 

9.6

%

Food and beverage revenue

 

19,505

 

18,913

 

592

 

3.1

%

Other operating department revenue

 

5,109

 

4,531

 

578

 

12.8

%

Total revenue

 

183,193

 

168,169

 

15,024

 

8.9

%

Expense

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

 

 

 

 

 

 

 

 

Room

 

36,930

 

33,608

 

3,322

 

9.9

%

Food and beverage

 

14,440

 

13,419

 

1,021

 

7.6

%

Management fees

 

6,304

 

5,779

 

525

 

9.1

%

Other hotel expenses

 

58,558

 

54,287

 

4,271

 

7.9

%

Total hotel operating expense

 

116,232

 

107,093

 

9,139

 

8.5

%

Depreciation and amortization

 

33,697

 

31,751

 

1,946

 

6.1

%

Property tax, insurance and other

 

12,634

 

11,420

 

1,214

 

10.6

%

General and administrative

 

7,260

 

5,010

 

2,250

 

44.9

%

Transaction and pursuit costs

 

19

 

2,698

 

(2,679

)

(99.3

)%

Total operating expense

 

169,842

 

157,972

 

11,870

 

7.5

%

Operating income

 

13,351

 

10,197

 

3,154

 

30.9

%

Other income

 

84

 

155

 

(71

)

(45.8

)%

Interest income

 

419

 

483

 

(64

)

(13.3

)%

Interest expense

 

(20,181

)

(25,858

)

5,677

 

(22.0

)%

Loss from continuing operations before income taxes

 

(6,327

)

(15,023

)

8,696

 

(57.9

)%

Income tax expense

 

(594

)

(281

)

(313

)

111.4

%

Loss from continuing operations

 

(6,921

)

(15,304

)

8,383

 

(54.8

)%

Loss from discontinued operations

 

 

(972

)

972

 

(100.0

)%

Net loss

 

(6,921

)

(16,276

)

9,355

 

(57.5

)%

Net loss attributable to non-controlling interests Noncontrolling interest in joint venture

 

370

 

160

 

210

 

131.3

%

Noncontrolling interest in common units of Operating Partnership

 

38

 

 

38

 

 

Net loss attributable to the Company

 

(6,513

)

(16,116

)

9,603

 

(59.6

)%

Distributions to preferred unitholders

 

 

(16

)

16

 

(100.0

)%

Net loss attributable to common shareholders

 

$

(6,513

)

$

(16,132

)

$

9,619

 

(59.6

)%

 

Revenue

 

Total revenue increased $15.0 million, or 8.9%, to $183.2 million for the three months ended March 31, 2012 from $168.2 million for the three months ended March 31, 2011. The increase was a result of $7.6 million in revenue attributable to non-comparable hotels and a 4.7% increase in ADR at the remaining properties.

 

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Table of Contents

 

The following are the key hotel operating statistics for hotels owned at March 31, 2012 and 2011, respectively:

 

 

 

For the three months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2012

 

2011

 

% Change

 

Number of hotels (at end of period)

 

141

 

140

 

0.7

%

Occupancy %

 

67.8

%

68.6

%

(1.2

)%

ADR

 

$

125.62

 

$

119.12

 

5.5

%

RevPAR

 

$

85.11

 

$

81.73

 

4.1

%

 

Portfolio RevPAR increased to $85.11 from $81.73, a 4.1% increase.  RevPAR, excluding non-comparable hotels, increased 4.0% and was driven by a 4.7% increase in ADR and a 0.7% decline in occupancy.  RevPAR at non-comparable hotels increased 4.4%, driven by an ADR increase of 12.5% and an occupancy decrease of 7.1%.

 

Room Revenue

 

Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales.  Room revenue increased $13.9 million, or 9.6%, to $158.6 million for the three months ended March 31, 2012 from $144.7 million for the three months ended March 31, 2011.  This increase was a result of $7.0 million of room revenue from non-comparable hotels and a 4.0% RevPAR growth in comparable properties.

 

Food and Beverage Revenue

 

Food and beverage revenue increased $0.6 million, or 3.1%, to $19.5 million for the three months ended March 31, 2012 from $18.9 million for the three months ended March 31, 2011. The increase includes $0.3 million in food and beverage revenue arising from non-comparable hotels.

 

Other Operating Department Revenue

 

Other operating department revenue, which includes revenue derived from ancillary sources, increased $0.6 million, or 12.8%, to $5.1 million for the three months ended March 31, 2012 from $4.5 million for the three months ended March 31, 2011 primarily due to non-comparable hotels.

 

Hotel Operating Expense

 

Hotel operating expense increased $9.1 million, or 8.5%, to $116.2 million for the three months ended March 31, 2012 from $107.1 million for the three months ended March 31, 2011. This increase includes $4.2 million in hotel operating expense as a result of non-comparable hotels. The remaining increase was primarily attributable to higher room expense, other operating department costs, and management and franchise fees.  Room expense and other operating department costs were driven by higher occupancy at hotels not under renovation.  Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased $1.9 million, or 6.1%, to $33.7 million for the three months ended March 31, 2012 from $31.8 million for the three months ended March 31, 2011. The increase reflects a $1.0 million increase in depreciation on building and furniture, fixtures and equipment for capital expenditures made during the three months ended March 31, 2012, a $1.2 million increase in depreciation and amortization expense arising from non-comparable hotels and $3.1 million of accelerated depreciation of furniture, fixtures and equipment at certain hotels that underwent renovations during the period. The offsetting decrease is a result of furniture, fixtures and equipment being fully depreciated during the periods.

 

Property Tax, Ground Rent and Insurance

 

Property tax, ground rent and insurance expense increased $1.2 million, or 10.6%, to $12.6 million for the three

 

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Table of Contents

 

months ended March 31, 2012 from $11.4 million for the three months ended March 31, 2011.  The increase includes $0.5 million in property tax, ground rent and insurance expense arising from non-comparable hotels.  Property tax, ground rent and insurance expense for the remainder of the portfolio increased $0.7 million.

 

General and Administrative

 

General and administrative expense increased $2.3 million, or 44.9%, to $7.3 million for the three months ended March 31, 2012 from $5.0 million for the three months ended March 31, 2011.  The increase in general and administrative expense is attributable to an increase in amortization of restricted share awards of $1.4 million, professional fees of $0.6 million and public company expenses of $0.3 million.  There were no restricted share awards or public company expenses during the three months ended March 31, 2011.

 

Transaction and Pursuit costs

 

Transaction and pursuit costs decreased $2.7 million to less than $0.1 million for the three months ended March 31, 2012 from $2.7 million for the three months ended March 31, 2011. There were no acquisitions during the three months ended March 31, 2012 compared to nine acquisitions during the three months ended March 31, 2011 resulting in transaction costs of $2.7 million for the period.

 

Interest Income

 

Interest income decreased $0.1 million, or 13.3%, to $0.4 million for the three months ended March 31, 2012 from $0.5 million for the three months ended March 31, 2011.

 

Interest Expense

 

Interest expense decreased $5.7 million, or 22.0%, to $20.2 million for the three months ended March 31, 2012 from $25.9 million for the three months ended March 31, 2011.  The decrease in interest expense was the result of a $3.6 million decrease in mortgage interest expense due to approximately $472.6 million of mortgage principal balances that were paid down with proceeds from our IPO, $1.6 million of interest expense related to the term loan which was incurred during the three months ended March 31, 2011 but not in 2012, the expiration of unfavorable interest rate hedges resulting in a decrease in hedge related interest expense of $0.9 million and a decrease in deferred financing fee expense of $0.2 million.  The offsetting increase was primarily due to interest incurred on mortgages entered into during 2011 of $0.3 million and unused fee incurred on the $300.0 million credit facility during the three months ended March 31, 2011 of $0.3 million.

 

Income Taxes

 

As part of the structure, the Company owns TRSs that are subject to federal and state income taxes; as such the Company calculates an effective rate for each quarter.  The effective tax rates were 3.11% and 1.56% for the three months ended March 31, 2012 and March 31, 2011, respectively.  The increase in rate is primarily due to an increase in taxes at the Operating Partnership.  The Company recorded tax expense of $0.6 million and $0.3 million for the three months ended March 31, 2012 and March 31, 2011, respectively, primarily as a result of state taxes based on revenues as well as taxes in the Operating Partnership.

 

Loss from Discontinued Operations

 

Net loss from discontinued operations decreased $1.0 million to zero for the three months ended March 31, 2012 from $1.0 million for the three months ended March 31, 2011. The decrease in net income from discontinued operations arose from the transfer of title to the New York LaGuardia Airport Marriott pursuant to a deed in lieu of foreclosure arrangement on August 5, 2011.

 

Non-GAAP Financial Measures

 

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, and (4) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as a measure of our operating performance.

 

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Table of Contents

 

FFO, Adjusted FFO, EBITDA and Adjusted EBITDA, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.

 

Funds From Operations

 

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance by excluding the effect of depreciation and amortization, gains or losses from sales for real estate, extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting, and that FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.  We present FFO attributable to common shareholders, which includes our OP units, because our OP units are redeemable for common shares of beneficial interest.  We believe it is meaningful for the investor to understand FFO attributable to all common shares of beneficial interest and OP units.

 

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, such as hotel transaction and pursuit costs, the amortization of share based compensation and other nonrecurring expenses that were the result of the IPO and related formation transactions. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs.

 

The following is a reconciliation of our GAAP net loss to FFO and Adjusted FFO for the three months ended March 31, 2012 and 2011 (in thousands):

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

Net loss (1)

 

$

(6,921

)

$

(16,276

)

Depreciation and amortization

 

33,697

 

31,751

 

Depreciation and amortization, discontinued operations

 

 

950

 

Distributions to preferred unitholders

 

 

(16

)

Noncontrolling interest in joint venture

 

370

 

160

 

Adjustments related to joint venture (2)

 

(98

)

(69

)

FFO attributable to common shareholders

 

27,048

 

16,500

 

 

 

 

 

 

 

Transaction and pursuit costs

 

19

 

2,698

 

Amortization of share based compensation

 

1,459

 

 

Other expenses (3)

 

 

781

 

Adjusted FFO

 

$

28,526

 

$

19,979

 

 


(1)  Includes net loss of discontinued operations.

(2)  Includes depreciation and amortization expense allocated to the noncontrolling interest in joint venture.

(3)  Includes certain compensation obligations of our predecessor not continued.

 

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Table of Contents

 

Earnings Before Interest, Taxes, Depreciation and Amortization

 

EBITDA is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results.  In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions. We present EBITDA attributable to common shareholders, which includes our OP units, because our OP units are redeemable for common shares of beneficial interest. We believe it is meaningful for the investor to understand EBITDA attributable to all common shares of beneficial interest and OP units.

 

We further adjust EBITDA for certain additional items such as hotel transaction and pursuit costs, the amortization of share based compensation, disposal of assets and other nonrecurring expenses that were the result of the IPO and related formation transactions. We believe that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

 

The following is a reconciliation of our GAAP net loss to EBITDA and Adjusted EBITDA for the three months ended March 31, 2012 and 2011 (in thousands):

 

 

 

For the three months ended
March 31,