Attached files

file filename
8-K/A - 8-K/A - Carey Watermark Investors Inca12-29103_28ka.htm
EX-99.1 - EX-99.1 - Carey Watermark Investors Inca12-29103_2ex99d1.htm

Exhibit 99.2         

 

INDEX TO PRO FORMA FINANCIAL STATEMENTS

 

Carey Watermark Investors Incorporated:

 

 

 

 

 

Pro Forma Condensed Consolidated Financial Information

 

 

 

 

 

Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2012 (Unaudited)

 

3

Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2011 (Unaudited)

 

4

Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2012 (Unaudited)

 

5

Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)

 

6

 



 

CAREY WATERMARK INVESTORS INCORPORATED

 

 

The pro forma condensed consolidated financial statements of Carey Watermark Investors Incorporated (“we, us, and our”), which are unaudited, have been prepared based on our historical financial statements. Our pro forma consolidated balance sheet as of September 30, 2012 has been prepared as if the significant investment entered into during the fourth quarter of 2012 (in the Westin Atlanta Venture, described herein) had been entered into as of September 30, 2012. Our pro forma condensed consolidated statements of operations for the year ended December 31, 2011 and nine months ended September 30, 2012 have been prepared as if our investment in the Westin Atlanta Venture and our other significant investments and related financings (also noted herein) had occurred on January 1, 2011. In addition, adjustments have been recorded to revenues earned and expenses incurred related to each of these acquisitions. Pro forma adjustments are intended to reflect what the effect would have been, had we held our ownership interests as of January 1, 2011, less amounts which have been recorded in our historical consolidated statements of operations. In our opinion, all adjustments necessary to reflect the effects of these investments have been made. The pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements and notes thereto of our Annual Report on Form 10-K for the year ended December 31, 2011 and our Quarterly Report on Form 10-Q for the nine months ended September 30, 2012.

 

The pro forma information is not necessarily indicative of the financial condition or results of operations had the investments occurred on or been in effect during the periods indicated, nor are they necessarily indicative of the financial position, cash flows or results of operations of future periods. In addition, the provisional acquisition accounting is preliminary and therefore subject to change. Those changes could have a material effect on the financial statements.

 

2



 

CAREY WATERMARK INVESTORS INCORPORATED

 

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

 

September 30, 2012

 

(Unaudited)

 

 

 

 

 

Pro Forma

 

 

 

 

Historical

 

Adjustments

 

Pro Forma

Assets

 

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

Hotels, at cost

 

  $

55,245,800

 

  $

-

 

  $

55,245,800

Accumulated depreciation

 

(620,662)

 

-

 

(620,662)

Net investments in hotels

 

54,625,138

 

 

 

54,625,138

Equity investments in real estate

 

32,820,570

 

13,170,406

 A

45,990,976

Net investments in real estate

 

87,445,708

 

13,170,406

 

100,616,114

Cash and cash equivalents

 

41,540,616

 

(13,170,406)

 A

28,370,210

Due from affiliates

 

89,597

 

-

 

89,597

Intangible assets, net

 

20,966

 

-

 

20,966

Accounts receivable

 

655,523

 

-

 

655,523

Restricted cash

 

5,901,921

 

-

 

5,901,921

Other assets

 

1,858,785

 

-

 

1,858,785

Total assets

 

  $

137,513,116

 

  $

-

 

  $

137,513,116

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Limited-recourse and non-recourse debt

 

  $

36,683,081

 

  $

-

 

  $

36,683,081

Accounts payable, accrued expenses and other liabilities

 

3,490,882

 

-

 

3,490,882

Due to affiliates

 

727,287

 

-

 

727,287

Distributions payable

 

1,222,045

 

-

 

1,222,045

Total liabilities

 

42,123,295

 

-

 

42,123,295

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

CWI stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 300,000,000 shares authorized; 11,178,315 and 4,791,523 shares issued and outstanding, respectively

 

11,104

 

-

 

11,104

 

 

 

 

 

 

 

Additional paid-in capital

 

98,082,469

 

-

 

98,082,469

Distributions in excess of accumulated losses

 

(3,205,840)

 

-

 

(3,205,840)

Accumulated other comprehensive income

 

(32,992)

 

-

 

(32,992)

Less, treasury stock at cost, 23,112 and 0 shares, respectively

 

(228,064)

 

-

 

(228,064)

Total CWI shareholders’ equity

 

94,626,677

 

-

 

94,626,677

Noncontrolling interest

 

763,144

 

-

 

763,144

Total equity

 

95,389,821

 

-

 

95,389,821

Total liabilities and equity

 

  $

137,513,116

 

  $

-

 

  $

137,513,116

 

 

 

‘The accompanying notes are an integral part of these pro forma condensed consolidated financial statements.

 

3



 

CAREY WATERMARK INVESTORS INCORPORATED

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

For the Year Ended December 31, 2011

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

 

 

 

Other 2012

 

Westin

 

(Weighted

 

 

 

 

Historical

 

2011 Acquisitions

 

Acquisitions

 

Acquisition

 

Average Shares)

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Rooms, net

 

  $

-

 

  $

-

 

  $

14,374,258

B

  $

-

 

 

 

  $

14,374,258

Food and beverage

 

-

 

-

 

4,900,175

B

-

 

 

 

4,900,175

Other hotel income

 

-

 

-

 

2,573,430

B

-

 

 

 

2,573,430

 

 

-

 

-

 

21,847,863

 

-

 

 

 

21,847,863

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

-

 

-

 

(4,094,619)

C

-

 

 

 

(4,094,619)

Food and beverage

 

-

 

-

 

(4,106,945)

C

-

 

 

 

(4,106,945)

Repairs and maintenance

 

-

 

-

 

(1,250,443)

C

-

 

 

 

(1,250,443)

Utilities

 

-

 

-

 

(1,008,983)

C

-

 

 

 

(1,008,983)

Sales and marketing

 

-

 

-

 

(1,878,136)

C

-

 

 

 

(1,878,136)

Management fees

 

-

 

-

 

(536,913)

C

-

 

 

 

(536,913)

General and administrative

 

-

 

-

 

(2,620,118)

C

-

 

 

 

(2,620,118)

Depreciation and amortization

 

-

 

-

 

(2,263,664)

C

-

 

 

 

(2,263,664)

Property taxes and insurance

 

-

 

-

 

(874,943)

C

-

 

 

 

(874,943)

Operating expenses

 

-

 

-

 

(1,790,348)

C

-

 

 

 

(1,790,348)

 

 

-

 

-

 

(20,425,112)

 

-

 

 

 

(20,425,112)

Other Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition related expenses

 

(498,472)

 

481,604

I

-

 

-

 

 

 

(16,868)

Management expenes

 

(487,574)

 

-

 

-

 

-

 

 

 

(487,574)

Corporate general and administrative

 

(626,065)

 

-

 

-

 

-

 

 

 

(626,065)

Asset management fees

 

(170,694)

 

(184,212)

D

(290,483)

D

(158,387)

D

 

 

(803,776)

 

 

(1,782,805)

 

297,392

 

(290,483)

 

(158,387)

 

 

 

(1,934,283)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income and (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from equity investments in real estate

 

1,081,590

 

698,910

E

-

 

(2,431,868)

E

 

 

(651,368)

Interest expense

 

(10,642)

 

-

 

(1,854,330)

F

-

 

 

 

(1,864,972)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income taxes

 

(711,857)

 

996,302

 

(722,062)

 

(2,590,255)

 

 

 

(3,027,872)

Provision for income taxes

 

 

 

-

 

(293,224)

G

-

 

 

 

(293,224)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(711,857)

 

996,302

 

(1,015,286)

 

(2,590,255)

 

 

 

(3,321,096)

Loss attributable to noncontrolling interests

 

-

 

-

 

906,086

H

-

 

 

 

906,086

Net (loss) income attributable to CWI Stockholders

 

  $

(711,857)

 

  $

996,302

 

  $

(109,200)

 

  $

(2,590,255)

 

 

 

  $

(2,415,010)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share attributable to CWI Stockholders

 

  $

(0.27)

 

 

 

 

 

 

 

 

 

  $

(0.29)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted Average Shares Outstanding

 

2,630,328

 

 

 

 

 

 

 

5,704,335

K

8,334,663

 

 

 

‘The accompanying notes are an integral part of these pro forma condensed consolidated financial statements.

 

4



 

CAREY WATERMARK INVESTORS INCORPORATED

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

For the Nine Months Ended September 30, 2012

 

(Unaudited)

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

 

Other 2012

 

Westin

 

(Weighted

 

 

 

 

Historical

 

Acquisitions

 

Acquisition

 

Average Shares)

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

Hotel Revenue

 

 

 

 

 

 

 

 

 

 

Rooms, net

 

  $

4,627,249

 

  $

6,538,608

B

  $

-

 

 

 

  $

11,165,857

Food and beverage

 

1,398,388

 

1,902,471

B

-

 

 

 

3,300,859

Other hotel income

 

688,487

 

1,217,755

B

-

 

 

 

1,906,242

 

 

6,714,124

 

9,658,834

 

-

 

 

 

16,372,958

 

 

 

 

 

 

 

 

 

 

 

Other Revenue

 

 

 

 

 

 

 

 

 

 

Other real estate income

 

63,750

 

-

 

-

 

 

 

63,750

 

 

6,777,874

 

9,658,834

 

-

 

 

 

16,436,708

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Hotel Expenses

 

 

 

 

 

 

 

 

 

 

Rooms

 

(1,254,008)

 

(1,834,063)

C

-

 

 

 

(3,088,071)

Food and beverage

 

(1,097,496)

 

(1,842,004)

C

-

 

 

 

(2,939,500)

Repairs and maintenance

 

(315,910)

 

(583,478)

C

-

 

 

 

(899,388)

Utilities

 

(373,422)

 

(442,829)

C

-

 

 

 

(816,251)

Sales and marketing

 

(593,280)

 

(986,351)

C

-

 

 

 

(1,579,631)

Management fees

 

(103,341)

 

(348,367)

C

-

 

 

 

(451,708)

General and administrative

 

(604,389)

 

(1,516,685)

C

-

 

 

 

(2,121,074)

Depreciation and amortization

 

(621,021)

 

(1,072,319)

C

-

 

 

 

(1,693,340)

Property taxes and insurance

 

(312,592)

 

(476,468)

C

-

 

 

 

(789,060)

Operating expenses

 

(427,665)

 

(663,902)

C

-

 

 

 

(1,091,567)

 

 

(5,703,124)

 

(9,766,466)

 

-

 

 

 

(15,469,590)

Other Operating Expenses

 

 

 

 

 

 

 

 

 

 

Acquisition-related expenses

 

(2,825,925)

 

2,519,262

I

-

 

 

 

(306,663)

Management expenses

 

(479,302)

 

-

 

-

 

 

 

(479,302)

Corporate general and administrative

 

(1,187,488)

 

-

 

-

 

 

 

(1,187,488)

Asset management fees

 

(358,447)

 

(164,427)

D

(118,790)

D

 

 

(641,664)

 

 

(4,851,162)

 

2,354,835

 

(118,790)

 

 

 

(2,615,117)

 

 

 

 

 

 

 

 

 

 

 

Other Income and (Expenses)

 

 

 

 

 

 

 

 

 

 

Income from equity investments in real estate

 

1,345,034

 

-

 

723,669

E

 

 

2,068,703

Other income

 

84,875

 

-

 

-

 

 

 

84,875

Bargain purchase gain

 

3,809,441

 

(3,809,441)

J

-

 

 

 

-

Interest expense

 

(559,205)

 

(876,154)

F

-

 

 

 

(1,435,359)

 

 

4,680,145

 

(4,685,595)

 

723,669

 

 

 

718,219

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before income taxes

 

903,733

 

(2,438,392)

 

604,879

 

 

 

(929,780)

(Provision for) benefit from income taxes

 

(255,763)

 

83,173

G

-

 

 

 

(172,590)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

647,970

 

(2,355,219)

 

604,879

 

 

 

(1,102,370)

(Income) loss attributable to noncontrolling interests

 

872,384

 

(487,557)

H

-

 

 

 

384,827

Net income (loss) attributable to CWI Stockholders

 

  $

 1,520,354

 

  $

 (2,842,776)

 

  $

 604,879

 

 

 

  $

 (717,543)

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share attributable to CWI Stockholders

 

  $

 0.20

 

 

 

 

 

 

 

  $

 (0.07)

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted Average Shares Outstanding

 

7,508,313

 

 

 

 

 

3,132,030

K

10,640,343

 

 

‘The accompanying notes are an integral part of these pro forma condensed consolidated financial statements.

 

5



 

CAREY WATERMARK INVESTORS INCORPORATED

 

NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Note 1. Basis of Presentation

 

The pro forma condensed consolidated statement of operations for the year ended December 31, 2011 was derived from the historical audited consolidated financial statements as of and for the year ended December 31, 2011 included in our Annual Report on Form 10-K.  The pro forma condensed consolidated balance sheet as of September 30, 2012 and the pro forma condensed consolidated statement of operations for the nine months ended September 30, 2012 were derived from the unaudited consolidated financial statements included in our Quarterly Report on Form 10-Q for the nine months ended September 30, 2012.

 

 

Note 2. Historical Acquisitions

 

2011 Acquisitions

 

Long Beach Venture

 

On May 5, 2011, we completed a joint venture investment in Long Beach Hotel Properties, LLC with LBHP-Ensemble Hotel Partners, LLC (“Ensemble”), the members of which were the then owners of the leasehold interests in two waterfront hotel properties in Long Beach, California: the Hotel Maya, a DoubleTree by Hilton Hotel (the “Hotel Maya”); and the Residence Inn Long Beach Downtown (the “Residence Inn”).

 

We acquired a 49% noncontrolling interest in this venture (the “Long Beach Venture”) with assets totaling $43,642,044, which includes our allocable share of the Long Beach Venture’s debt of $22,851,003, a capital contribution of $19,699,086 and an acquisition fee of $1,085,206 paid to the advisor as well as other transaction costs. On the date of our acquisition, the Long Beach Venture’s total capitalization, including partner equity and debt, was approximately $88,000,000. We have the right, subject to certain conditions, to increase our ownership in the Long Beach Venture to 50%. Our investment was financed in part by a $4,000,000 loan from a subsidiary of W. P. Carey Inc., which was repaid in full at maturity on June 6, 2011. Our investment was made in the form of a preferred equity interest that carries a cumulative preferred dividend of 9.5% per year and is senior to Ensemble’s equity interest.

 

Both properties are subject to existing mortgage financing. The debt on the Hotel Maya, which was refinanced in June 2012, is a three-year $15,000,000 mortgage that now bears interest at LIBOR plus 2.5% per year and has a maturity date of July 1, 2015. The interest rate on this obligation is effectively capped at 4.5% through an interest rate hedge. The loan is interest only for the first three years and has a 30-year amortization period thereafter. The financing on the Residence Inn is a 10-year, $31,875,000 mortgage that bears interest at 7.25% per year and has a maturity date of September 1, 2017. The Long Beach Venture is a guarantor of the mortgage financing on the Hotel Maya. Ensemble has agreed to be responsible for, and has indemnified us regarding, any and all amounts due under the guarantee.

 

Hyatt French Quarter Venture

 

On September 6, 2011, we completed a joint venture investment with HRI Properties (“HRI”), the owner of the leasehold interests in the Chateau Bourbon Hotel, an upscale full-service hotel located in the French Quarter of New Orleans, Louisiana, and an adjacent parking garage. The property also includes approximately 20,000 square feet of leasable commercial space. On May 15, 2012, the hotel began operating as the Hyatt French Quarter Hotel.

 

We acquired an approximate 80% noncontrolling interest in the joint venture (the “Hyatt French Quarter Venture”) with assets totaling $31,300,000, which includes our commitment related to our allocable share of the Hyatt French Quarter Venture’s debt and a capital contribution of $12,300,000. We paid an acquisition fee to our advisor in the amount of $857,072. The Hyatt French Quarter Venture’s expected project funding, including partner equity and debt, is approximately $45,700,000. Our investment was made in the form of a preferred equity interest that carries a cumulative preferred dividend of 8.5% per year and is senior to HRI’s equity interest. The Hyatt French Quarter Venture is subject to joint control and, therefore, we use the equity method to account for this investment.

 

6



 

The property is subject to $23,800,000 of debt financing, consisting of a non-amortizing $22,800,000 mortgage with a fixed annual interest rate of 11.5% and maturity date of September 2, 2014 and a $1,000,000 non-recourse unsecured community development loan from the State of Louisiana with a fixed annual interest rate of 1.0% and maturity date of September 1, 2018. Our investment was financed in part by a $2,000,000 loan from a subsidiary of W. P. Carey Inc., which was repaid in full as of October 6, 2011.

 

2012 Acquisitions

 

The following investments have been reflected in the historical balance sheet at September 30, 2012.

 

Hampton Inn

 

On May 31, 2012, we completed the acquisition of the Hampton Inn (the “Hampton Inn”) from NMG-Braintree, LLC, an unaffiliated third party, for $12,500,000. The 4-story, 103-room select service hotel is located in Braintree, Massachusetts. The hotel is managed by StepStone Hospitality. In connection with this acquisition, we paid acquisition costs of $601,571. Acquisition costs of $601,571 are reflected in the historical statement of operations for the nine months ended September 30, 2012. We have reflected a pro forma adjustment, described below, to exclude these costs in our pro forma statements of operations.

 

Hilton Garden Inn

 

On June 8, 2012, we obtained an 87.56% controlling interest in the Hilton Garden Inn New Orleans French Quarter/CBD venture (the “Hilton Garden Inn”) for a capital contribution of $9,910,000. The noncontrolling interest is held by HRI, an unaffiliated third party and the former property owner. The 155-room select service hotel is located in New Orleans, Louisiana. The hotel is managed by HRI Lodging, Inc., an affiliate of HRI. Our investment was made in the form of a preferred equity interest that carries a cumulative preferred dividend of 8.5% per year and is senior to HRI’s equity interest. The noncontrolling interest was recorded at its fair value of $1,408,118. The venture, which we consolidate, acquired the property for $17,584,500 and paid acquisition costs of $786,027. Our pro forma loss and income attributable to noncontrolling interests would be approximately $678,676 and $276,315, for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, based upon our cumulative 8.5% preferred dividend on our initial capital contribution. Acquisition costs of $786,027 are reflected in the historical statement of operations for the nine months ended September 30, 2012. We have reflected a pro forma adjustment, described below, to exclude these costs in our pro forma statements of operations.

 

Lake Arrowhead Resort

 

On July 9, 2012, we obtained a 97.35% controlling interest in the Lake Arrowhead Resort & Spa (“Lake Arrowhead”) for a total investment of approximately $25,900,000, which includes a cash investment of approximately $8,345,000 and our allocable share of the venture’s debt. The Lake Arrowhead venture’s total capitalization, including partner equity and debt, is approximately $26,700,000. Our investment was made in the form of a preferred equity interest on which our return is calculated as follows: (i) first, a cumulative non-compounded annual return of 12.0% on our initial contribution; (ii) second, 100% to us until such time as we have earned a 25.0% internal rate of return with respect to our contribution and (iii) thereafter, 35.0% to us and 65.0% to our partner. The noncontrolling interest is held by Fulton Village Green Investors, LLC, an unaffiliated third party and the former property owner. The 173-room resort is located in Lake Arrowhead, California. The hotel is managed by Crescent Hotels and Resorts.

 

Acquisition costs of $1,131,664 are reflected in the historical statement of operations for the nine months ended September 30, 2012. We have reflected a pro forma adjustment, described below, to exclude these costs in our pro forma statements of operations. Had the acquisition costs been absorbed by the venture partner, the amount of losses absorbed by the venture partner during the periods presented would have been reduced up to the venture partner’s equity.

 

7



 

Note 3. Pro Forma Adjustments

 

A.  Investment

 

Westin Atlanta Venture

 

On October 3, 2012, we acquired a 57% non-controlling interest in the CWI AM Atlanta Perimeter Hotel, LLC venture (“Westin Atlanta Venture”) with Arden-Marcus Perimeter LLC, a joint venture between The Arden Group, Inc. and Marcus Hotels & Resorts, a division of The Marcus Corporation, from an affiliate of DiamondRock Hospitality Company, an unaffiliated third party, for a capital contribution of $12,355,727 to the Westin Atlanta Venture plus an acquisition fee of $814,679 to the advisor. This venture owns the 372-room Westin Atlanta Perimeter North hotel located in Atlanta, Georgia. Total funding for the investment, including debt but excluding the acquisition fee, was $56,700,000. A $14,400,000 renovation is expected to be completed in early 2014. The hotel will be managed by Marcus Hotels & Resorts, which is also an approximately 11% partner in the joint venture. Our investment was made in the form of a preferred equity interest, which entitles us to a cumulative, compound preferred return of 8.5% per year through December 31, 2014.

 

The property is subject to a $35,000,000 limited-recourse mortgage loan with a maturity date of October 2, 2015 and the option for two one-year extensions. The annual interest rate during the initial three-year term and first extension term is 6.0% plus one-month LIBOR, which has been effectively fixed at 7.0% through the use of an interest rate cap designated as a cash flow hedge that matures at the end of the initial three-year term.

 

 

B. Hotel Revenue

 

Pro forma adjustments for hotel revenues related to our 2012 acquisitions are derived from the historical financial statements of each of our investments. The pro forma adjustments for the nine months ended September 30, 2012 represent revenues earned from January 1, 2012 to their respective acquisition dates and are as follows:

 

 

 

Year Ended December 31, 2011

 

 

Hampton Inn

 

Hilton
Garden Inn

 

Arrowhead

 

Total

Rooms

 

$3,585,543

 

$5,911,216

 

$4,877,499

 

$14,374,258

Food and beverage

 

112,275

 

620,418

 

4,167,482

 

4,900,175

Other hotel income

 

 

951,534

 

1,621,896

 

2,573,430

 

 

$3,697,818

 

$7,483,168

 

$10,666,877

 

$21,847,863

 

 

 

Nine Months Ended September 30, 2012

 

 

Hampton Inn

 

Hilton
Garden Inn

 

Arrowhead

 

Total

Rooms

 

$1,379,851

 

$3,194,670

 

$1,964,087

 

$6,538,608

Food and beverage

 

18,186

 

235,717

 

1,648,568

 

1,902,471

Other hotel income

 

40,067

 

278,115

 

899,573

 

1,217,755

 

 

$1,438,104

 

$3,708,502

 

$4,512,228

 

$9,658,834

 

8



 

C.  Hotel Expenses

 

Pro forma adjustments for hotel expenses related to our 2012 acquisitions are derived from the historical financial statements of each of our investments except for those related to depreciation and amortization. Pro forma adjustments reflect depreciation and amortization of the acquired assets at fair value on a straight-line basis using an estimated useful life not to exceed 40 years for building and building improvements, two to ten years for furniture, fixtures and equipment and approximately 15 years for intangible assets. The pro forma adjustments for the nine months ended September 30, 2012 represent expenses recognized from January 1, 2012 to their respective acquisition dates and are as follows:

 

 

 

Year Ended December 31, 2011

 

 

Hampton Inn

 

Hilton
Garden Inn

 

Arrowhead

 

Total

Rooms

 

$(774,096)

 

$(2,003,077)

 

$(1,317,446)

 

$(4,094,619)

Food and beverage

 

 

(675,748)

 

(3,431,197)

 

(4,106,945)

Repairs and maintenance

 

(174,814)

 

(457,884)

 

(617,745)

 

(1,250,443)

Utilities

 

(238,866)

 

(291,923)

 

(478,194)

 

(1,008,983)

Sales and marketing

 

(466,422)

 

(697,684)

 

(714,030)

 

(1,878,136)

Management fees

 

(168,889)

 

(145,903)

 

(222,121)

 

(536,913)

General and administrative

 

(281,824)

 

(718,420)

 

(1,619,874)

 

(2,620,118)

Depreciation and amortization

 

(552,862)

 

(583,239)

 

(1,127,563)

 

(2,263,664)

Property taxes and insurance

 

(161,406)

 

(298,055)

 

(415,482)

 

(874,943)

Operating expenses

 

(123,780)

 

(735,111)

 

(931,457)

 

(1,790,348)

 

 

$(2,942,959)

 

$(6,607,044)

 

$(10,875,109)

 

$(20,425,112)

 

 

 

Nine Months Ended September 30, 2012

 

 

Hampton Inn

 

Hilton
Garden Inn

 

Arrowhead

 

Total

Rooms

 

$(323,535)

 

$(893,493)

 

$(617,035)

 

$(1,834,063)

Food and beverage

 

 

(294,596)

 

(1,547,408)

 

(1,842,004)

Repairs and maintenance

 

(76,663)

 

(206,646)

 

(300,169)

 

(583,478)

Utilities

 

(79,268)

 

(117,366)

 

(246,195)

 

(442,829)

Sales and marketing

 

(195,463)

 

(329,333)

 

(461,555)

 

(986,351)

Management fees

 

(83,584)

 

(150,019)

 

(114,764)

 

(348,367)

General and administrative

 

(156,419)

 

(305,187)

 

(1,055,079)

 

(1,516,685)

Depreciation and amortization

 

(230,359)

 

(251,997)

 

(589,963)

 

(1,072,319)

Property taxes and insurance

 

(61,966)

 

(133,301)

 

(281,201)

 

(476,468)

Operating expenses

 

(42,428)

 

(214,875)

 

(406,599)

 

(663,902)

 

 

$(1,249,685)

 

$(2,896,813)

 

$(5,619,968)

 

$(9,766,466)

 

9



 

D.  Transactions with the Advisor

 

We pay our advisor an annual asset management fee equal to 0.50% of the aggregate average monthly market value of our investments. Pro forma adjustments for such fees are reflected in the accompanying pro forma condensed consolidated statements of operations in order to reflect what the fee would have been had the investments been made on January 1, 2011. The pro forma adjustments for the Long Beach Venture and Hyatt French Quarter Venture for the year ended December 31, 2011 represent incremental asset management fees that would have been incurred in addition to asset management fees presented in the historical financial statements. The pro forma adjustments for Hampton Inn, Hilton Garden Inn and Lake Arrowhead for the nine months ended September 30, 2012 represent incremental asset management fees that would have been incurred in addition to asset management fees presented in the historical financial statements.

 

 

 

Year Ended

 

Nine Months Ended

 

 

December 31, 2011

 

September 30, 2012

Long Beach Venture

 

 $

 (72,792)

 

 $

-

Hyatt French Quarter Venture

 

(111,420)

 

-

Total 2011 Acquisitions

 

 $

 (184,212)

 

 $

-

 

 

 

 

 

Hampton Inn

 

 $

 (73,862)

 

 $

 (30,994)

Hilton Garden Inn

 

(94,983)

 

(41,423)

Arrowhead

 

(121,638)

 

(92,010)

Total Other 2012 Acquisitions

 

 $

 (290,483)

 

 $

 (164,427)

 

 

 

 

 

Westin Atlanta Venture

 

 $

 (158,387)

 

 $

 (118,790)

 

 

E.  Income from Equity Investments in Real Estate

 

Earnings for our equity method investments are recognized in accordance with each respective investment agreement and are based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period. Under the conventional approach, an investor applies its percentage ownership interest to the venture’s net income to determine the investor’s share of the earnings or losses of the venture. This approach is difficult to use if the venture’s capital structure gives different rights and priorities to its investors as it is difficult to describe an investor’s interest in a venture simply as a specified percentage. As we have priority return on our investments, we follow the hypothetical liquidation at book value method in determining our share of the ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Due to our preferred interests, we are not responsible and will not reflect losses to the extent our partners continue to have equity in the investments.

 

Based on the hypothetical liquidation at book value method, our pro forma equity in earnings in the Long Beach Venture would have been $735,000 for the year ended December 31, 2011. Our pro forma equity in earnings in the New

 

10



 

Orleans Venture would have been approximately $1,045,500 for the year ended December 31, 2011 based upon our cumulative 8.5% preferred dividend on our cash contribution. The historical statements of operations for the year ended December 31, 2011 includes $735,000 and $346,590 related to equity earnings from the Long Beach Venture and Hyatt French Quarter Venture, respectively, since their acquisition dates. Accordingly, we have included a pro forma adjustment of $698,910 representing the incremental difference related to the Hyatt French Quarter Venture.

 

Based on the hypothetical liquidation at book value method, our pro forma equity in (loss) earnings in the Westin Atlanta Venture would have been approximately $(2,427,529) and $632,684 for the year ended December 31, 2011 and nine months ended September 30, 2012, respectively.

 

F.  Interest Expense

 

We acquired the Hampton Inn property through a wholly-owned subsidiary and obtained a mortgage in the amount of up to $9,800,000, of which $7,930,581 was drawn upon purchase. The mortgage has an initial 36-month term plus options for two 12-month extensions and a maturity date of May 31, 2015. The interest rate is effectively fixed at 5.0% for the first 36 months. The loan is interest-only for the first 12 months and has a 25-year amortization period thereafter. We have reflected pro forma adjustments of $402,036 and $166,322 for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, in order to reflect what the expense would have been had the investment and related financing been made on January 1, 2011.

 

We acquired the Hilton Garden Inn property through a wholly-owned subsidiary and obtained a non-recourse mortgage in the amount of $11,000,000. The mortgage requires monthly principal and interest payments beginning August 1, 2012 and has a 30-year amortization period thereafter. The interest rate is fixed at 5.3% and the maturity date is July 1, 2019. We have reflected pro forma adjustments of $587,627 and $258,547 for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, in order to reflect what the expense would have been had the investment and related financing been made on January 1, 2011.

 

We acquired the Lake Arrowhead Resort property through a wholly-owned subsidiary, subject to a mortgage, which we assumed. The mortgage has a 36-month term and a maturity date of July 1, 2015. The mortgage agreement allows early settlement at any time prior to maturity upon 60 days notice with no penalty at a discounted amount of up to $18,000,000 comprised of a discounted payoff of $16,000,000 and a lender participation payment of up to $2,000,000, provided there is no uncured event of default under the loan agreement. The loan is interest-only with an interest rate of 3.0% in year 1, 4.0% in year 2 and 6.0% in year 3. Upon assumption of the mortgage, we recorded a fair market value adjustment of $270,000. We have reflected pro forma adjustments of $864,667 and $451,285 for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, in order to reflect what the expense would have been, using the effective interest method, had the investment and related financing been made on January 1, 2011.

 

The combined pro forma adjustments to interest expense described above were $1,854,330 and $876,154 for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively.

 

11



 

G.  (Provision For) Benefit From Income Taxes

 

We have reflected pro forma adjustments related to each of our investments based upon estimated effective tax rates for each investment which take into account the fact that certain activities are taxable and other activities are pass-through items for income tax purposes. These pro forma adjustments reflect what the income tax provisions would have been had the investments been made on January 1, 2011. The pro forma adjustments for the nine months ended September 30, 2012 represent incremental tax expense that would have been incurred in addition to income tax presented in the historical financial statements.

 

 

 

Year Ended
December 31,
2011

 

Nine
Months Ended
September 30,
2012

Hampton Inn

 

$(79,704)

 

$(31,349)

Hilton Garden Inn

 

(69,823)

 

(129,663)

Arrowhead

 

(143,697)

 

244,185

 

 

$(293,224)

 

$83,173

 

H.  (Income) Loss Attributable to Noncontrolling Interests

 

Our pro forma adjustments to (income) loss attributable to noncontrolling interests for our Hilton Garden Inn investment would have been approximately $678,676 and $(260,147) for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, based upon our cumulative 8.5% preferred dividend on our initial capital contribution.

 

Our pro forma adjustments to (income) loss attributable to noncontrolling interests for our Lake Arrowhead investment would have been approximately $227,410 and $(227,410), for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively, based upon our 12.0% preferred equity interest calculation. Noncontrolling interest is not required to fund any losses upon depletion of its initial equity.

 

The combined pro forma adjustments to (income) loss attributable to noncontrolling interest described above were $906,086 and $(487,557) for the year ended December 31, 2011 and the nine months ended September 30, 2012, respectively.

 

I.  Acquisition-Related Expenses

 

Acquisition costs of $481,604 related to our Long Beach Venture and Hyatt French Quarter Venture are reflected in the historical statement of operations for the year ended December 31, 2011. We have reflected a pro forma adjustment to exclude these costs in our pro forma condensed consolidated statement of operations for the year ended December 31, 2011.

 

Acquisition costs of $601,571, $786,027 and $1,131,664 related to our Hampton Inn, Hilton Garden Inn and Lake Arrowhead investments, respectively, are reflected in the historical statement of operations for the nine months ended September 30, 2012. We have reflected a pro forma adjustment to exclude the total costs of $2,519,262 in our pro forma condensed consolidated statement of operations for the nine months ended September 30, 2012.

 

J.  Bargain Purchase Gain

 

A bargain purchase gain of $3,809,441 is reflected in the historical statement of operations for the nine months ended September 30, 2012 related to our acquisition of the Lake Arrowhead Resort. We have reflected a pro forma adjustment to exclude this transaction-related gain in our pro forma condensed consolidated statements of operations for the nine months ended September 30, 2012, as this is not expected to have a recurring impact on us.

 

K.  Weighted Average Shares

 

The pro forma weighted average shares outstanding were determined as if the number of shares required to raise the funds used for each acquisition included in these pro forma condensed consolidated financial statements were issued on January 1, 2011.

 

12