DiamondRock Hospitality Company Reports Third Quarter Results And Announces The Sale Of The Westin Atlanta Perimeter North

BETHESDA, Md., Oct. 12, 2012 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") (NYSE: DRH) today announced results of operations for its third fiscal quarter ended September 7, 2012. The Company is a lodging-focused real estate investment trust that owns a portfolio of twenty-six premium hotels in North America.

(Logo: http://photos.prnewswire.com/prnh/20040708/DCTH028 )

Recent Developments

  • Sale of the Westin Atlanta Perimeter North: On October 3, 2012, the Company sold the non-core 372-room Westin Atlanta Perimeter North.    

Third Quarter 2012 Highlights

  • Revenue Growth: The Company's Pro Forma Revenue grew 6.2% from the comparable period in 2011.
  • RevPAR Growth: The Company's Pro Forma RevPAR increased to $139.44, representing 3.4% growth from the comparable period in 2011.
  • Hotel Adjusted EBITDA Margin: The Company's Pro Forma Hotel Adjusted EBITDA margin improved to 27.86%, an increase of 59 basis points from the comparable period in 2011.
  • Adjusted EBITDA: The Company's Adjusted EBITDA was $46.0 million, an increase of 10% from the comparable period in 2011.
  • Adjusted FFO: The Company's Adjusted FFO was $34.4 million and Adjusted FFO per diluted share was $0.18.
  • Dividends: The Company declared a quarterly dividend of $0.08 per share during the third quarter.

Mark W. Brugger, Chief Executive Officer of DiamondRock Hospitality Company, stated, "The Company's results for the third quarter show solid revenue growth of over 6 percent and are consistent with our prior expectations.  We are particularly pleased with the profit margin expansion on 3.4% RevPAR growth as many of our asset management initiatives for cost containment were fully implemented. Additionally, we continued to execute on our strategy of improving portfolio quality with our latest disposition, the sale of the non-core Westin Atlanta Perimeter North.  Our total dispositions for the year now exceed $300 million."

Operating Results

Please see "Certain Definitions" and "Non-GAAP Financial Measures" attached to this press release for an explanation of the terms "EBITDA," "Adjusted EBITDA," "Hotel Adjusted EBITDA Margin," "FFO" and "Adjusted FFO."  The discussions of "Pro Forma RevPAR," "Pro Forma Revenue" and "Pro Forma Hotel Adjusted EBITDA Margin" assume all of the Company's 27 hotels owned as of September 7, 2012 were owned since January 1, 2011. 

For the third quarter beginning June 16, 2012 and ending September 7, 2012, the Company reported the following:

  • Pro Forma RevPAR growth of 3.4% and Pro Forma Hotel Adjusted EBITDA margin expansion of 59 basis points compared to the comparable period in 2011.
  • Pro Forma Revenue growth of 6.2% to $199.6 million compared to $188.0 million for the comparable period in 2011, which includes amounts reported in discontinued operations.
  • Adjusted EBITDA of $46.0 million compared to $41.7 million for the comparable period in 2011.
  • Adjusted FFO of $34.4 million and Adjusted FFO per diluted share of $0.18 based on 187.0 million diluted weighted average shares compared to $26.2 million and $0.16, respectively, for the comparable period in 2011. 
  • Net loss of $44.8 million (or $0.24 per diluted share) compared to a net loss of $1.0 million (or $0.01 per diluted share) for the comparable period in 2011.

The Company's third quarter Pro Forma RevPAR growth of 3.4% (from $134.82 to $139.44) was driven by a 4.3% increase in the average daily rate (from $163.22 to $170.20) offset by a 0.7 percentage point decrease in occupancy (from 82.6% to 81.9%). The third quarter Pro Forma Hotel Adjusted EBITDA margin increased 59 basis points (from 27.27% to 27.86%) from the comparable period in 2011.

For the Company's period of ownership, third quarter RevPAR growth was 3.5% driven by a 4.4% increase in the average daily rate offset by a 0.7 percentage point decrease in occupancy and the third quarter Hotel Adjusted EBITDA margin increased 69 basis points from the comparable period in 2011.

For the period from January 1, 2012 to September 7, 2012, the Company reported the following:

  • Pro Forma RevPAR growth of 5.9% and Pro Forma Hotel Adjusted EBITDA margin expansion of 93 basis points compared to the comparable period in 2011.
  • Pro Forma Revenue growth of 7.4% to $542.3 million compared to $504.9 million for the comparable period in 2011, which includes amounts reported in discontinued operations.
  • Adjusted EBITDA of $117.4 million compared to $101.7 million for the comparable period in 2011.
  • Adjusted FFO of $83.7 million and Adjusted FFO per diluted share of $0.48 based on 174.2 million diluted weighted average shares compared to $63.6 million and $0.38, respectively, for the comparable period in 2011. 
  • Net loss of $33.2 million (or $0.19 per diluted share) compared to a net loss of $12.6 million (or $0.08 per diluted share) for the comparable period in 2011.

The Company's year-to-date Pro Forma RevPAR growth of 5.9% (from $123.60 to $130.94) was driven by a 4.0% increase in the average daily rate (from $162.47 to $168.96) and a 1.4 percentage point increase in occupancy (from 76.1% to 77.5%). The Company's year-to-date Pro Forma Hotel Adjusted EBITDA margin increased 93 basis points (from 25.29% to 26.22%) from the comparable period in 2011.

For the Company's period of ownership, year-to-date RevPAR growth was 6.1% driven by a 3.9% increase in the average daily rate and a 1.7 percentage point increase in occupancy and the year-to-date Hotel Adjusted EBITDA margin increased 101 basis points from the comparable period in 2011.

Blackstone Portfolio Update

The hotels acquired from affiliates of Blackstone Real Estate Partners VI ("Blackstone") on July 12, 2012 achieved strong growth during the third quarter.  Specific highlights include:

  • Hilton Boston Downtown: The hotel's third quarter RevPAR of $210.98 grew 9.7% with Hotel Adjusted EBITDA margin expansion of 138 basis points from the comparable period of 2011.  During the fourth quarter, the Company expects to replace the current manager, WHM, LLC, with Davidson Hotel Company ("Davidson").  Davidson, a nationally recognized third party operator, expects to improve the hotel's market positioning through the implementation of aggressive revenue management and marketing strategies. Additionally, the Company expects to engage a broker during the fourth quarter to lease 4,000 square feet of currently unoccupied desirable retail space.
  • Westin San Diego: The hotel's third quarter RevPAR of $135.48 grew 9.8% from  the comparable period of 2011. We expect the hotel to benefit from the opening of the half-million square foot U.S. Federal Courthouse, which is scheduled for late 2012. In total, there is over $1 billion in new development within 2 blocks of the hotel slated to come on line over the next 4 years. In addition, the Company expects to improve the hotel's position in the market through a comprehensive capital investment program.
  • Hilton Burlington: The hotel's third quarter RevPAR of $162.91 grew 16.3% from the comparable period of 2011.  The hotel achieved Hotel Adjusted EBITDA margin expansion of 755 basis points from the comparable period of 2011. The hotel expects to achieve strong growth in 2013, with 2013 group booking pace up over 35% from the comparable period of 2012.
  • Westin Washington D.C.: The Washington D.C. hotel market has been challenging in 2012, including the third quarter.  The hotel's third quarter RevPAR of $142.31 was 7.7% below the comparable period of 2011 and the hotel continues to lose market share because of its tired condition. The Company is planning a comprehensive capital investment at the hotel that is expected to reposition this well-located hotel. 

The Company has underwritten significant upside potential at these hotels, partially through the investment of capital to improve and reposition the assets in order to capture higher-rated group and business transient customers. In the aggregate, the Company plans to invest $35 million in the four hotels over the next two years.  The Company is evaluating the optimal timing and scope of the capital investment program, but currently expects to complete the capital investment program for the Westin Washington D.C. during the middle of 2013 and the capital investment programs for the Hilton Boston and Hilton Burlington in early 2014.  The Company is evaluating whether to complete the capital investment program for the Westin San Diego in 2013 or 2014.

Sale of Westin Atlanta Perimeter North

On October 3, 2012, the Company sold the 372-room Westin Atlanta Perimeter North for a contractual sales price of $39.6 million to a joint venture among Carey Watermark Investors Incorporated, The Arden Group, Inc. and Marcus Hotels & Resorts.  Under the Starwood Hotels & Resorts franchise agreement, the hotel is subject to a property improvement plan ("PIP") and the purchaser's total investment in the hotel, after completing the PIP, will be approximately $57 million.  The Company used the net sale proceeds to reduce the amount outstanding on its senior unsecured credit facility. The Company was advised on the sale by Jones Lang LaSalle Hotels. The hotel generated $2.5 million of Hotel Adjusted EBITDA during the year ended December 31, 2011.      

Impairment of Hotels

During the quarter ended September 7, 2012, the Company reviewed the carrying value of the Oak Brook Hills Marriott Resort and recorded an impairment of $30.4 million to reduce the carrying value of the hotel to the current estimate of fair value.  Additionally, the Company recorded an impairment of approximately $14.7 million on the Westin Atlanta Perimeter North to reduce the carrying value of the hotel to the estimated net sales proceeds.  The impairment and the results of operations of the hotel are included in discontinued operations.

Lexington Hotel New York Update

During 2012, the Company signed a franchise agreement with Marriott to convert the Lexington Hotel to be a member of Marriott's Autograph Collection upon satisfactory completion of a $32 to $34 million capital improvement plan, net of the expected financial contribution from Marriott.  The renovation will be comprehensive and touch every aspect of the hotel that the guest experiences.  The Company terminated its franchise agreement with Radisson on September 15, 2012 and the hotel is operating as an independent hotel until the capital improvement plan is completed in 2013.

Allerton Update

The Allerton Hotel bankruptcy proceedings are ongoing.  The Company objected to the Debtor's Plan of Reorganization and a hearing on the Plan commenced on July 23, 2012 and is scheduled to resume in late October. The Company expects the final resolution of this matter in the second or third quarter of 2013.  Since acquiring the $69 million note for $60 million, the Company has received $6.7 million in interest payments and incurred approximately $4.5 million in legal fees in connection with this matter.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.08 per share to stockholders of record as of September 7, 2012.  The dividend was paid on September 19, 2012.

Capital Expenditures

In 2012, the Company expects to spend approximately $50 million on capital improvements at its hotels, $20 million of which is expected to be funded from corporate cash.  The Company has spent approximately $26.4 million for capital improvements as of September 7, 2012.  The most significant projects for 2012 include the following:

  • Conrad Chicago:  The Company expects to spend $3.5 million to add 4,100 square feet of new meeting space, reposition the food and beverage outlets and re-concept the hotel lobby.  The addition of the new meeting space was completed in August 2012 and the lobby repositioning is scheduled for the first quarter of 2013.
  • Renaissance WorthingtonThe Company is currently undertaking a comprehensive restoration of the concrete facade of the hotel.  This $1.2 million project was originally scheduled to be completed in two phases during 2012 and 2013.  The Company now expects to substantially complete the restoration in 2012.
  • Marriott Atlanta AlpharettaThe Company recently completed a $2.4 million renovation of the guest rooms at the hotel.
  • Frenchman's ReefThe Company expects to spend $1.6 million to renovate the premium Morning Star guest rooms during the fourth quarter and upgrade the boat dock in early 2013. 

Renovation Disruption

The Company is currently planning renovations of several of its hotel during 2013.  A description of the most significant capital projects planned for 2013 are as follows:

  • Lexington Hotel New York: In connection with executing the rebranding strategy at the Lexington Hotel, the Company is currently planning a comprehensive renovation of the hotel, including the lobby, corridors, guest rooms and guest bathrooms. The renovation is expected to cost approximately $32 to $34 million, net, and is expected to be completed by the middle of 2013.
  • Manhattan Courtyards:  The Company expects to renovate the guest rooms and guest bathrooms at the Courtyard Manhattan/Midtown East and Courtyard Manhattan/Fifth Avenue.  The renovation scope at the Courtyard Midtown East will also include the public space and the addition of five new guest rooms.  The renovations are expected to cost approximately $10 million, of which approximately $7 million will be funded from existing reserves.  The renovations will be substantially complete in the first quarter of 2013.
  • Westin Washington D.C.:  The Company expects to undertake a comprehensive renovation during 2013 to reposition the hotel to capture higher-rated business, leisure and group customers.  The renovation scope will touch every aspect of the guest experience, including the guest rooms, corridors, meeting space and the arrival and restaurant experience. 

The Company is currently finalizing the coordination of each of these renovation projects.  The Company plans to schedule each of the renovations during time periods that will minimize the profit disruption. However, profit disruption is anticipated during 2013, and based on the preliminary scope and timing estimates, the Company expects renovation disruption of $7 to $10 million of Hotel Adjusted EBITDA during the year ended December 31, 2013.

Balance Sheet

The Company continues to maintain its straightforward capital structure.  The Company has no preferred equity outstanding and continues to own 100% of its properties. The Company maintains balance sheet flexibility with no near term debt maturities, capacity on its senior unsecured credit facility and 15 of its 26 hotels unencumbered by mortgage debt. DiamondRock remains committed to its core strategy of maintaining a simple capital structure with conservative leverage.

As of September 7, 2012, the Company had $21.6 million of unrestricted cash on hand and approximately $1.0 billion of total debt, which consists of $898.5 million of property-specific mortgage debt with no near-term maturities and $120 million outstanding on the Company's senior unsecured credit facility. Subsequent to the end of the quarter, the Company used the proceeds from the sale of the Westin Atlanta North to repay $35 million on the credit facility. The Company expects to end the year with approximately $50 million outstanding on the credit facility.

Outlook and Guidance

The Company is providing guidance, but does not undertake to update it for any developments in its business.  Achievement of the anticipated results is subject to the risks disclosed in the Company's filings with the Securities and Exchange Commission.  The Company's 2012 RevPAR guidance includes the Company's 26 hotels and assumes that they were owned since January 1, 2011.

The Company's 2012 Adjusted EBITDA and Adjusted FFO guidance includes $8.4 million of Adjusted EBITDA and $6.0 million of Adjusted FFO for the period of ownership of the four hotels sold in 2012 and excludes cash interest payments and legal fees related to the Allerton Hotel.

The Company is revising its full year 2012 guidance to incorporate the following:

  • Sale of the Westin Atlanta Perimeter North: The sale of the hotel eliminates approximately $1.0 million of Hotel Adjusted EBITDA from the Company's fourth quarter.

  • September Results: September results were negatively impacted by the timing of Rosh Hashanah and Yom Kippur.  In addition, the Company's portfolio in New York City was impacted by lower than expected attendance at the United Nations General Assembly.  In addition, the softness in September demand has added incremental risk to the fourth quarter results of the Lexington Hotel due to the hotel currently operating as an independent hotel.

  • Frenchman's Reef:  Recent increases in airfare prices to the USVI as a result of the limitation of government subsidies have contributed to softening demand at the hotel. In addition, the hotel will undergo unexpected maintenance during the fourth quarter.  These items have resulted in incremental risk to the hotel's fourth quarter forecast.

  • Washington D.C.:  The Company expects continued softness in the Washington D.C. market as a result of lower transient and group demand leading up to the November election.

    • Worthington Disruption: The facade project at the Renaissance Worthington was originally scheduled to be completed in two phases during 2012 and 2013.  The Company now expects to complete the most disruptive work during 2012. Moving the second phase into 2012 will create incremental disruption of approximately $1.0 million, but will eliminate the potential disruption in 2013. 

    Based on its outlook, the Company now expects the following full year 2012 results:

    • Pro Forma Room Revenue growth of 6 percent to 7 percent;

    • Pro Forma RevPAR growth of 5 percent to 6 percent;

    • Adjusted EBITDA of $184 million to $190 million;

    • Adjusted FFO of $133 million to $137 million, which assumes an income tax benefit ranging from $4.4 million to $2.4 million; and

    • Adjusted FFO per share of $0.74 to $0.76 based on 180.8 million diluted weighted average shares.

    In addition, the Company expects the following results for the fourth fiscal quarter:

    • Pro Forma Room Revenue growth of 5 percent to 7 percent;

    • Pro Forma RevPAR growth of 3 percent to 5 percent;

    • Adjusted EBITDA of $67 million to $73 million;

    • Adjusted FFO of $49 million to $53 million, which assumes an income tax expense ranging from $1.4 million to $3.4 million; and

    • Adjusted FFO per share of $0.25 to $0.27 based on 195.7 million diluted weighted average shares.

    Earnings Call

    The Company will host a conference call to discuss its third quarter results on Friday, October 12, 2012, at 10:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 866-730-5771 (for domestic callers) or 857-350-1595 (for international callers).  The participant passcode is 36057575. A live webcast of the call will be available via the investor relations section of DiamondRock Hospitality Company's website at www.drhc.com or www.earnings.com. A replay of the webcast will also be archived on the website for one year.

    About the Company

    DiamondRock Hospitality Company is a self-advised real estate investment trust (REIT) that is an owner of premium hotel properties.  The Company owns 26 premium hotels with approximately 11,500 rooms and holds one senior mortgage loan.  The Company's hotels are generally operated under globally recognized brands such as Hilton, Marriott, and Westin. For further information, please visit DiamondRock Hospitality Company's website at www.drhc.com.

    This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as "believe," "expect," "intend," "project," "forecast," "plan" and other similar terms and phrases, including references to assumptions and forecasts of future results.  Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made.  These risks include, but are not limited to: national and local economic and business conditions, including the potential for additional terrorist attacks, that will affect occupancy rates at the Company's hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of the Company's indebtedness; relationships with property managers; the ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations which influence or determine wages, prices, construction procedures and costs; risks associated with the bankruptcy proceedings on the Allerton Hotel; risks associated with the development of a hotel by a third-party developer; risks associated with the rebranding of the Lexington Hotel New York; and other risk factors contained in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of the date of this release, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

    Reporting Periods for Statement of Operations

    The results reported in the Company's consolidated statements of operations are based on results of its hotels reported by hotel managers. The Company's hotel managers use different reporting periods. Marriott International, the manager of most of the Company's properties, uses a fiscal year ending on the Friday closest to December 31 and reports 12 weeks of operations for the first three quarters and 16 or 17 weeks for the fourth quarter of the year for its domestic managed hotels. In contrast, Marriott International for its non-domestic hotels (including Frenchman's Reef), Davidson Hotel Company, manager of the Westin Atlanta North, Vail Resorts, manager of the Vail Marriott, Hilton Hotels Corporation, manager of the Conrad Chicago and the Hilton Minneapolis, Westin Hotel Management, L.P., manager of the Westin Boston Waterfront, Alliance Hospitality Management, manager of the Hilton Garden Inn Chelsea, Sage Hospitality, manager of the JW Marriott Denver Cherry Creek and the Courtyard Denver, Highgate Hotels, manager of the Lexington Hotel, Interstate Hotels and Resorts, manager of the Westin Washington D.C., the Westin San Diego and the Hilton Burlington, and WHM, LLC, manager of the Hilton Boston report results on a monthly basis. Additionally, the Company, as a REIT, is required by U.S. federal tax laws to report results on a calendar year basis. As a result, the Company has adopted the reporting periods used by Marriott International for its domestic hotels, except that the fiscal year always ends on December 31 to comply with REIT rules. The first three fiscal quarters end on the same day as Marriott International's fiscal quarters but the fourth quarter ends on December 31 and full year results, as reported in the statement of operations, always include the same number of days as the calendar year.

    Two consequences of the reporting cycle the Company has adopted are: (1) quarterly start dates will usually differ between years, except for the first quarter which always commences on January 1, and (2) the first and fourth quarters of operations and year-to-date operations may not include the same number of days as reflected in prior years.

    While the reporting calendar the Company adopted is more closely aligned with the reporting calendar used by the manager of most of its properties, one final consequence of the calendar is the Company is unable to report any results for Frenchman's Reef, Westin Atlanta North, Vail Marriott, Conrad Chicago, Westin Boston Waterfront, Hilton Minneapolis, Hilton Garden Inn Chelsea, JW Marriott Denver Cherry Creek, Courtyard Denver, Lexington Hotel, Westin Washington D.C., the Westin San Diego and the Hilton Burlington or the Hilton Boston for the month of operations that ends after its fiscal quarter-end because none of Vail Resorts, Davidson Hotel Company,  Hilton Hotels Corporation, Westin Hotel Management, L.P., Alliance Hospitality Management, Sage Hospitality, Highgate Hotels, Interstate Hotels and Resorts, WHM, LLC  and Marriott International (for international hotels) make mid-month results available. As a result, the quarterly results of operations include results from these hotels as follows: first quarter (January and February), second quarter (March to May), third quarter (June to August) and fourth quarter (September to December). While this does not affect full-year results, it does affect the reporting of quarterly results.

    Marriott International announced preliminary plans to change their current fiscal year to a calendar year effective January 1, 2013. Marriott International expects to make the fiscal year change on a prospective basis and will not adjust the prior year operating results.  The change to Marriott's fiscal year will not impact the Company's full year results, which are currently reported on a calendar year.  However, the preliminary change will impact the prior year comparability of each of the Company's 2013 fiscal quarters. 

    DIAMONDROCK HOSPITALITY COMPANY
    CONSOLIDATED BALANCE SHEETS

    As of September 7, 2012 and December 31, 2011

    (in thousands, except share and per share amounts)

     


    September 7, 2012


    December 31, 2011


    (Unaudited)



    ASSETS




    Property and equipment, at cost

    $

    3,089,494



    $

    2,667,682


    Less: accumulated depreciation

    (482,641)



    (433,178)



    2,606,853



    2,234,504


    Assets held for sale

    41,819



    263,399


    Deferred financing costs, net

    8,261



    5,869


    Restricted cash

    60,263



    53,871


    Due from hotel managers

    70,569



    50,728


    Note receivable

    54,237



    54,788


    Favorable lease assets, net

    40,746



    43,285


    Prepaid and other assets

    68,890



    65,900


    Cash and cash equivalents

    21,604



    26,291


    Total assets

    $

    2,973,242



    $

    2,798,635


    LIABILITIES AND STOCKHOLDERS' EQUITY




    Liabilities:




    Mortgage debt

    $

    898,471



    $

    762,933


    Mortgage debt of assets held for sale



    180,000


    Senior unsecured credit facility

    120,000



    100,000


    Total debt

    1,018,471



    1,042,933






    Deferred income related to key money, net

    24,414



    24,593


    Unfavorable contract liabilities, net

    80,619



    81,914


    Due to hotel managers

    49,115



    41,676


    Liabilities of assets held for sale

    1,735



    3,805


    Dividends declared and unpaid

    15,871



    13,594


    Accounts payable and accrued expenses

    81,615



    87,963


    Total other liabilities

    253,369



    253,545


    Stockholders' Equity:




    Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares

       issued and outstanding




    Common stock, $0.01 par value; 400,000,000 shares authorized;

       195,141,934 and 167,502,359 shares issued and outstanding at

       September 7, 2012 and December 31, 2011, respectively

    1,951



    1,675


    Additional paid-in capital

    1,983,404



    1,708,427


    Accumulated deficit

    (283,953)



    (207,945)


    Total stockholders' equity

    1,701,402



    1,502,157


    Total liabilities and stockholders' equity

    $

    2,973,242



    $

    2,798,635


     

    DIAMONDROCK HOSPITALITY COMPANY
    CONSOLIDATED STATEMENTS OF OPERATIONS

     

    For the Fiscal Quarters Ended September 7, 2012 and September 9, 2011 and

    the Periods from January 1, 2012 to September 7, 2012 and January 1, 2011 to September 9, 2011

    (in thousands, except share and per share amounts)

     


    Fiscal Quarter Ended


    Period From






    January 1, 2012 to


    January 1, 2011 to


    September 7, 2012


    September 9, 2011


    September 7, 2012


    September 9, 2011


    (Unaudited)


    (Unaudited)


    (Unaudited)


    (Unaudited)

    Revenues:








    Rooms

    $

    132,578



    $

    111,984



    $

    338,043



    $

    278,215


    Food and beverage

    40,791



    36,676



    117,415



    105,379


    Other

    10,504



    8,177



    27,787



    20,442


    Total revenues

    183,873



    156,837



    483,245



    404,036


    Operating Expenses:








    Rooms

    35,428



    30,141



    92,386



    75,043


    Food and beverage

    30,008



    26,170



    85,731



    76,177


    Management fees

    5,744



    4,551



    15,313



    13,488


    Other hotel expenses

    64,098



    55,772



    171,131



    145,887


    Depreciation and amortization

    22,612



    20,577



    62,802



    57,170


    Impairment losses

    30,376





    30,844




    Hotel acquisition costs

    8,314



    445



    10,345



    2,604


    Corporate expenses

    6,227



    6,453



    15,711



    14,900


    Total operating expenses

    202,807



    144,109



    484,263



    385,269


    Operating (loss) profit

    (18,934)



    12,728



    (1,018)



    18,767


    Other Expenses (Income):








    Interest income

    (60)



    (24)



    (278)



    (579)


    Interest expense

    12,732



    11,281



    36,710



    30,114


    Gain on early extinguishment of debt





    (144)




    Total other expenses

    12,672



    11,257



    36,288



    29,535


    (Loss) income from continuing

    operations before income taxes

    (31,606)



    1,471



    (37,306)



    (10,768)


    Income tax benefit (expense)

    916



    (2,239)



    4,992



    (1,646)


    Loss from continuing operations

    (30,690)



    (768)



    (32,314)



    (12,414)


    Loss from discontinued operations,

    net of income taxes

    (14,089)



    (247)



    (905)



    (199)


    Net loss

    $

    (44,779)



    $

    (1,015)



    $

    (33,219)



    $

    (12,613)


    Loss per share:








    Continuing operations

    $

    (0.16)



    $

    (0.01)



    $

    (0.19)



    $

    (0.08)


    Discontinued operations

    (0.08)



    (0.00)



    (0.00)



    (0.00)


    Basic and diluted loss per share

    $

    (0.24)



    $

    (0.01)



    $

    (0.19)



    $

    (0.08)



    Non-GAAP Financial Measures

    We use the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: EBITDA, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP.  EBITDA, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.

    EBITDA and FFO

    EBITDA represents net (loss) income excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from  our operating results. In addition, covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.

    The Company computes FFO in accordance with standards established by NAREIT, which defines FFO as net (loss) income determined in accordance with GAAP, excluding gains or losses from sales of properties and impairment losses, plus depreciation and amortization. The Company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it is a measure of the Company's operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets.  The Company also uses FFO as one measure in assessing its results.

    Adjustments to EBITDA and FFO

    We adjust FFO and EBITDA when evaluating our performance because we believe that the exclusion of certain additional recurring and non-recurring items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA and Adjusted FFO, when combined with GAAP net income, EBITDA and FFO, is beneficial to an investor's complete understanding of our operating performance.  We adjust EBITDA and FFO for the following items:

    • Non-Cash Ground Rent: We exclude the non-cash expense incurred from straight lining the rent from our ground lease obligations and the non-cash amortization of our favorable lease assets.
    • Non-Cash Amortization of Unfavorable Contract Liabilities: We exclude the non-cash amortization of the unfavorable contract liabilities recorded in conjunction with our acquisitions of the Bethesda Marriott Suites, the Chicago Marriott Downtown, the Renaissance Charleston and the Lexington Hotel New York.  The amortization of the unfavorable contract liabilities does not reflect the underlying operating performance of our hotels.
    • Cumulative Effect of a Change in Accounting Principle: Infrequently, the Financial Accounting Standards Board (FASB) promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle.  We exclude the effect of these one-time adjustments because they do not reflect its actual performance for that period.
    • Gains from Early Extinguishment of Debt: We exclude the effect of gains recorded on the early extinguishment of debt because we believe they do not accurately reflect the underlying performance of the Company.
    • Acquisition Costs:  We exclude acquisition transaction costs expensed during the period because we believe they do not reflect the underlying performance of the Company.
    • Allerton Loan:  In 2011, we included cash payments received on the senior loan secured by the Allerton Hotel in Adjusted EBITDA and Adjusted FFO. GAAP requires us to record the cash received from the borrower as a reduction of our basis in the mortgage loan due to the uncertainty over the timing and amount of cash payments on the loan.  Beginning in 2012, due to the uncertainty of the timing of the bankruptcy resolution, we exclude both cash interest payments received from the borrower and the legal costs incurred as a result of the bankruptcy proceedings from our calculation of Adjusted EBITDA and Adjusted FFO.  We have not adjusted our 2011 Adjusted EBITDA and Adjusted FFO calculations to reflect this change in presentation.
    • Other Non-Cash and /or Unusual Items:  We exclude the effect of certain non-cash and/or unusual items because we believe they do not reflect the underlying performance of the Company.  In 2012, we excluded the franchise termination fee paid to Radisson because we believe that including it would not be consistent with reflecting the ongoing performance of the hotel. In 2011, we excluded the accrual for net key money repayment to Hilton in conjunction with entering into a termination agreement for the Conrad Chicago because we believe that including it was not consistent with reflecting the ongoing performance of the hotel.

    In addition, to derive Adjusted EBITDA we exclude gains or losses on dispositions and impairment losses because we believe that including them in EBITDA is not consistent with reflecting the ongoing performance of our hotels. Additionally, the gain or loss on dispositions and impairment losses represent either accelerated depreciation or excess depreciation in previous periods, and depreciation is excluded from EBITDA.

    In addition, to derive Adjusted FFO we exclude any fair value adjustments to debt instruments.  Specifically, we exclude the impact of the non-cash amortization of the debt premium recorded in conjunction with the acquisition of the JW Marriott Denver at Cherry Creek and fair market value adjustments to the Company's interest rate cap agreement.

    The following tables are reconciliations of our U.S. GAAP net income (loss) to EBITDA and Adjusted EBITDA (in thousands):


    Fiscal Quarter Ended


    Period from


    September 7,


    September 9,


    January 1, 2012

    to September 7,


    January 1, 2011

    to September 9,


    2012


    2011


    2012


    2011

    Net loss

    $

    (44,779)



    $

    (1,015)



    $

    (33,219)



    $

    (12,613)


    Interest expense (1)

    12,732



    13,605



    39,007



    37,088


    Income tax (benefit) expense (2)

    (1,063)



    1,798



    (4,803)



    795


    Real estate depreciation and amortization (3)

    23,060



    23,801



    64,149



    66,835


    EBITDA

    (10,050)



    38,189



    65,134



    92,105


    Non-cash ground rent

    1,515



    1,658



    4,621



    4,878


    Non-cash amortization of unfavorable contract

    liabilities

    (432)



    (432)



    (1,296)



    (1,284)


    (Loss) gain on sale of hotel properties

    476





    (9,541)




    Gain on early extinguishment of debt





    (144)




    Acquisition costs

    8,314



    445



    10,345



    2,604


    Allerton loan interest payments



    1,099





    1,704


    Allerton loan legal fees

    1,106





    2,017




    Franchise termination fee





    750




    Accrual for net key money repayment



    (864)






    Litigation settlement



    1,650





    1,650


    Impairment losses

    45,066





    45,534




    Adjusted EBITDA

    $

    45,995



    $

    41,745



    $

    117,420



    $

    101,657


     

    (1)

    Amounts include interest expense included in discontinued operations as follows: $2.3 million in the fiscal quarter ended September 9, 2011; $2.3 million in the period from January 1, 2012 to September 7, 2012;  and $7.0 million in the period from January 1, 2011 to September 9, 2011.

    (2)

    Amounts include income tax (expense) benefit included in discontinued operations as follows: $0.4 million in the quarter ended September 9, 2011; $0.1 million in the quarter ended September 7, 2012; ($0.2 million) in the period from January 1, 2012 to September 7, 2012; and $0.8 million in the period from January 1, 2011 to September 9, 2011.

    (3)

    Amounts include depreciation expense included in discontinued operations as follows: $3.2 million in the quarter ended September 7, 2011; $0.4 million in the quarter ended September 7, 2012; $1.3 million in the period from January 1, 2012 to September 7, 2012 and $9.7 million in the period from January 1, 2011 to September 9, 2011.

     


    Guidance


    Quarter 4, 2012


    Full Year 2012


    Low End


    High End


    Low End


    High End

    Net income (loss)

    $

    14,570



    $

    17,570



    $

    (17,245)



    $

    (12,245)


    Interest expense

    16,500



    16,500



    55,000



    55,000


    Income tax expense (benefit)

    1,400



    3,400



    (4,400)



    (2,400)


    Real estate related depreciation and amortization

    32,000



    33,000



    96,000



    95,000


    EBITDA

    64,470



    70,470



    129,355



    135,355


    Non-cash ground rent

    1,900



    1,900



    6,500



    6,500


    Non-cash amortization of unfavorable contract

    liabilities

    (570)



    (570)



    (1,850)



    (1,850)


    Loss on sales of hotel properties





    5,000



    5,000


    Gain on early extinguishment of debt





    (144)



    (144)


    Acquisition costs





    10,345



    10,345


    Allerton loan legal fees

    1,200



    1,200



    3,200



    3,200


    Franchise termination fee





    750



    750


    Impairment losses





    30,844



    30,844


    Adjusted EBITDA

    $

    67,000



    $

    73,000



    $

    184,000



    $

    190,000