Strategic Hotels & Resorts Reports Third Quarter 2010 Results

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Consolidated Statements of Operations

(in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Revenues:

Rooms

$  105,771

$    97,895

$  295,647

$  281,776

Food and beverage

55,987

52,489

177,830

162,017

Other hotel operating revenue

19,065

19,233

58,049

67,736

180,823

169,617

531,526

511,529

Lease revenue

1,108

1,224

3,383

3,513

Total revenues

181,931

170,841

534,909

515,042

Operating Costs and Expenses:

Rooms

29,191

28,070

83,003

80,057

Food and beverage

42,481

40,505

128,273

121,145

Other departmental expenses

51,602

49,017

151,340

148,652

Management fees

5,866

6,030

18,583

19,553

Other hotel expenses

12,971

12,926

40,798

39,168

Lease expense

4,182

4,355

12,311

12,480

Depreciation and amortization

32,779

34,421

99,906

98,047

Impairment losses and other charges

-

-

-

50,214

Corporate expenses

8,904

5,020

22,484

19,996

Total operating costs and expenses

187,976

180,344

556,698

589,312

Operating loss

(6,045)

(9,503)

(21,789)

(74,270)

Interest expense

(22,118)

(24,635)

(68,488)

(70,674)

Interest income

68

176

373

628

Loss on early extinguishment of debt

(39)

-

(925)

(883)

Loss on early termination of derivative financial instruments

-

-

(18,263)

-

Equity in earnings of joint ventures

3,001

1,573

2,900

2,144

Foreign currency exchange loss

(134)

(379)

(1,399)

(1,233)

Other income, net

1,605

125

2,299

168

Loss before income taxes and discontinued operations

(23,662)

(32,643)

(105,292)

(144,120)

Income tax (expense) benefit

(407)

236

(1,359)

(2,515)

Loss from continuing operations

(24,069)

(32,407)

(106,651)

(146,635)

(Loss) income from discontinued operations, net of tax

(6,717)

(33,481)

2,692

(34,087)

Net loss

(30,786)

(65,888)

(103,959)

(180,722)

Net loss attributable to the noncontrolling interests in SHR's operating partnership

192

844

879

2,297

Net income attributable to the noncontrolling interests in consolidated affiliates

(1,086)

(696)

(858)

(1,044)

Net loss attributable to SHR

(31,680)

(65,740)

(103,938)

(179,469)

Preferred shareholder dividends

(7,721)

(7,721)

(23,164)

(23,164)

Net loss attributable to SHR common shareholders

$   (39,401)

$   (73,461)

$ (127,102)

$ (202,633)

Basic and Diluted Loss Per Share:

Loss from continuing operations attributable to SHR common shareholders

$       (0.22)

$       (0.53)

$       (1.14)

$       (2.24)

(Loss) income from discontinued operations attributable to SHR

(0.04)

(0.44)

0.02

(0.45)

Net loss attributable to SHR common shareholders

$       (0.26)

$       (0.97)

$       (1.12)

$       (2.69)

Weighted average common shares outstanding

151,635

75,441

113,237

75,265

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Consolidated Balance Sheets

(in thousands, except share data)

September 30,

December 31,

2010

2009

Assets

Investment in hotel properties, net

$       1,970,242

$       2,162,584

Goodwill

40,359

75,758

Intangible assets, net of accumulated amortization of $6,006 and $4,400

33,352

34,046

Assets held for sale

159,902

-

Investment in joint ventures

48,754

46,745

Cash and cash equivalents

65,841

116,310

Restricted cash and cash equivalents

39,512

22,829

Accounts receivable, net of allowance for doubtful accounts of $2,096 and $2,657

48,648

54,524

Deferred financing costs, net of accumulated amortization of $14,176 and $12,543

4,915

11,225

Deferred tax assets

32,548

34,244

Other assets

38,407

39,878

Total assets

$       2,482,480

$       2,598,143

Liabilities and Equity

Liabilities:

Mortgages payable

$       1,119,131

$       1,300,745

Exchangeable senior notes, net of discount

-

169,452

Bank credit facility

36,000

178,000

Liabilities of assets held for sale

166,668

-

Accounts payable and accrued expenses

283,159

236,269

Deferred tax liabilities

1,722

16,940

Deferred gain on sale of hotels

93,206

101,852

Total liabilities

1,699,886

2,003,258

Noncontrolling interests in SHR's operating partnership

4,047

2,717

Equity:

SHR's shareholders' equity:

8.50% Series A Cumulative Redeemable Preferred Stock ($0.01 par value; 4,488,750 shares

issued and outstanding; liquidation preference $25.00 per share and $128,911 in the aggregate)

108,206

108,206

8.25% Series B Cumulative Redeemable Preferred Stock ($0.01 par value; 4,600,000 shares

issued and outstanding; liquidation preference $25.00 per share and $131,603 in the aggregate)

110,775

110,775

8.25% Series C Cumulative Redeemable Preferred Stock ($0.01 par value; 5,750,000 shares

issued and outstanding; liquidation preference $25.00 per share and $164,504 in the aggregate)

138,940

138,940

Common shares ($0.01 par value; 250,000,000 common shares authorized; 151,301,562 and

75,253,252 common shares issued and outstanding)

1,513

752

Additional paid-in capital

1,554,677

1,233,856

Accumulated deficit

(1,058,181)

(954,208)

Accumulated other comprehensive loss

(101,467)

(69,341)

Total SHR's shareholders' equity

754,463

568,980

Noncontrolling interests in consolidated affiliates

24,084

23,188

Total equity

778,547

592,168

Total liabilities and equity

$       2,482,480

$       2,598,143

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

FINANCIAL HIGHLIGHTS

Supplemental Financial Data

(in thousands, except per share information)

September 30, 2010

Pro Rata Share

Consolidated

Capitalization

Common shares outstanding

151,302

151,302

Operating partnership units outstanding

955

955

Restricted stock units outstanding

1,071

1,071

Combined shares, options and units outstanding

153,328

153,328

Common stock price at end of period

$                4.24

$                4.24

Common equity capitalization

$          650,111

$          650,111

Preferred equity capitalization (at $25.00 face value)

370,236

370,236

Consolidated debt

1,293,642

1,293,642

Pro rata share of unconsolidated debt

282,825

-

Pro rata share of consolidated debt

(107,065)

-

Cash and cash equivalents

(65,841)

(65,841)

Total enterprise value

$       2,423,908

$       2,248,148

Net Debt / Total Enterprise Value

57.9%

54.6%

Preferred Equity / Total Enterprise Value

15.3%

16.5%

Common Equity / Total Enterprise Value

26.8%

28.9%

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Discontinued Operations

The results of operations of hotels sold or held for sale are classified as discontinued operations and segregated in the consolidated statements of operations for all periods presented.  On September 22, 2010, we entered into an agreement to sell the InterContinental Prague hotel for estimated consideration of approximately EUR 110.6 million on the signing date. The sale is scheduled to close in the fourth quarter of 2010.  The following hotels were sold during 2009 (in thousands):  

Hotel

Date Sold

Net Sales Proceeds

Renaissance Paris Hotel Le Parc Trocadero

December 21, 2009

$                 50,275

Four Seasons Mexico City

October 29, 2009

$                 52,156

The following is a summary of  (loss) income from discontinued operations, net of tax for the three and nine months ended September 30, 2010 and 2009 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Hotel operating revenues

$                     6,457

$                 16,142

$              18,843

$                 45,163

Operating costs and expenses

4,427

11,951

13,807

35,493

Depreciation and amortization

1,289

3,943

3,702

9,631

Impairment losses

-

30,795

-

30,795

Total operating costs and expenses

5,716

46,689

17,509

75,919

Operating income (loss)

741

(30,547)

1,334

(30,756)

Interest expense

(2,378)

(2,268)

(7,716)

(6,454)

Interest income

4

26

15

86

Foreign currency exchange (loss) gain

(5,094)

(814)

7,495

946

Income tax benefit

10

122

327

2,091

Gain on sale (a)

-

-

1,237

-

(Loss) income from discontinued operations, net of tax

$                   (6,717)

$                (33,481)

$                2,692

$               (34,087)

(a)

In the second quarter of 2010, we agreed to accept payment of $1,850,000 to settle the remaining obligation owed to us by the purchaser of the Hyatt Regency New Orleans hotel, which was sold in December 2007.  During the nine months ended September 30, 2010, we recognized a $1,850,000 gain on sale of the hotel, which we had previously deferred.

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Investment in the Hotel del Coronado

(in thousands)

On January 9, 2006, we purchased a 45% interest in the joint venture that owns the Hotel del Coronado.  We account for this investment using the equity method of accounting.  

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Total revenues (100%)

$              39,683

$              38,424

$              94,167

$              96,620

Property EBITDA (100%)

$              15,593

$              14,274

$              30,871

$              32,221

Equity in earnings of joint venture (SHR 45% ownership)

  Property EBITDA

$                7,017

$                6,423

$              13,892

$              14,499

Depreciation and amortization

(2,015)

(1,938)

(6,003)

(5,763)

Interest expense

(1,981)

(1,894)

(5,711)

(5,925)

Other expenses, net

(15)

(91)

(163)

(233)

Income taxes

(272)

(751)

111

(551)

Equity in earnings of joint venture

$                2,734

$                1,749

$                2,126

$                2,027

EBITDA Contribution from investment in Hotel del Coronado

Equity in earnings of joint venture

$                2,734

$                1,749

$                2,126

$                2,027

Depreciation and amortization

2,015

1,938

6,003

5,763

Interest expense

1,981

1,894

5,711

5,925

Income taxes

272

751

(111)

551

EBITDA Contribution from investment in Hotel del Coronado

$                7,002

$                6,332

$              13,729

$              14,266

FFO Contribution from investment in Hotel del Coronado

Equity in earnings of joint venture

$                2,734

$                1,749

$                2,126

$                2,027

Depreciation and amortization

2,015

1,938

6,003

5,763

FFO Contribution from investment in Hotel del Coronado

$                4,749

$                3,687

$                8,129

$                7,790

Spread over

Debt

Interest Rate

LIBOR

Loan Amount

Maturity

CMBS Mortgage and Mezzanine

2.34%

208 bp

$            610,000

January 2011

Revolving Credit Facility

2.76%

250 bp

18,500

January 2011

628,500

Cash and cash equivalents

(24,024)

Net Debt

$            604,476

Effective

Cap

Date

LIBOR Cap Rate

Notional Amount

Maturity

CMBS Mortgage and Mezzanine Loan

January 2010

2.0%

$            630,000

January 2011

    and Revolving Credit Facility Cap

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Leasehold Information

(in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Paris Marriott Champs Elysees:

Property EBITDA

$                 6,784

$                 6,119

$               15,858

$               13,371

Revenue (a)

$                 6,784

$                 6,119

$               15,858

$               13,371

Lease Expense

(3,076)

(3,136)

(8,915)

(8,983)

Less: Deferred Gain on Sale Leaseback

(1,088)

(1,202)

(3,321)

(3,448)

Adjusted Lease Expense

(4,164)

(4,338)

(12,236)

(12,431)

EBITDA Contribution from Leasehold

$                 2,620

$                 1,781

$                 3,622

$                    940

Marriott Hamburg:

Property EBITDA

$                 1,620

$                 1,505

$                 4,369

$                 4,280

Revenue (a)

$                 1,108

$                 1,224

$                 3,383

$                 3,513

Lease Expense

(1,106)

(1,219)

(3,396)

(3,497)

Less: Deferred Gain on Sale Leaseback

(51)

(55)

(154)

(159)

Adjusted Lease Expense

(1,157)

(1,274)

(3,550)

(3,656)

EBITDA Contribution from Leasehold

$                    (49)

$                    (50)

$                  (167)

$                  (143)

Total Leaseholds:

Property EBITDA

$                 8,404

$                 7,624

$               20,227

$               17,651

Revenue (a)

$                 7,892

$                 7,343

$               19,241

$               16,884

Lease Expense

(4,182)

(4,355)

(12,311)

(12,480)

Less: Deferred Gain on Sale Leaseback

(1,139)

(1,257)

(3,475)

(3,607)

Adjusted Lease Expense

(5,321)

(5,612)

(15,786)

(16,087)

EBITDA Contribution from Leaseholds

$                 2,571

$                 1,731

$                 3,455

$                    797

September 30,

December 31,

Security Deposits (b):  

2010

2009

Paris Marriott Champs Elysees

$               14,137

$               10,720

Marriott Hamburg

2,590

7,158

Total

$               16,727

$               17,878

(a) For the three and nine months ended September 30, 2010 and 2009, Revenue for the Paris Marriott Champs Elysees represents Property EBITDA. For the three and nine months ended September 30, 2010 and 2009, Revenue for the Marriott Hamburg represents lease revenue.

(b) The security deposits are recorded in other assets on the consolidated balance sheets.

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Non-GAAP Financial Measures

In addition to REIT hotel income, five other non-GAAP financial measures are presented for the Company that we believe are useful to management and investors as key measures of our operating performance: Funds from Operations (FFO); FFO - Fully Diluted; Comparable FFO; Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA); and Comparable EBITDA. A reconciliation of these measures to net loss attributable to SHR common shareholders, the most directly comparable GAAP measure, is set forth in the following tables.

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which adopted a definition of FFO in order to promote an industry-wide standard measure of REIT operating performance. NAREIT defines FFO as net income (or loss) (computed in accordance with GAAP) excluding losses or gains from sales of depreciable property plus real estate-related depreciation and amortization, and after adjustments for our portion of these items related to unconsolidated partnerships and joint ventures. We also present FFO - Fully Diluted, which is FFO plus income or loss on income attributable to convertible noncontrolling interests. We also present Comparable FFO, which is FFO - Fully Diluted excluding the impact of any gains or losses on early extinguishment of debt, impairment losses, foreign currency exchange gains or losses and other non-recurring charges. We believe that the presentation of FFO, FFO - Fully Diluted and Comparable FFO provides useful information to management and investors regarding our results of operations because they are measures of our ability to fund capital expenditures and expand our business.  In addition, FFO is widely used in the real estate industry to measure operating performance without regard to items such as depreciation and amortization.  We also present Comparable FFO per diluted share as a non-GAAP measure of our performance.  We calculate Comparable FFO per diluted share for a given operating period as our Comparable FFO (as defined above) divided by the weighted average of fully diluted shares outstanding.  Comparable FFO per diluted share, in accordance with NAREIT, is adjusted for the effects of dilutive securities.  Dilutive securities may include shares granted under share-based compensation plans, operating partnership units and exchangeable debt securities.  No effect is shown for securities that are anti-dilutive.

EBITDA represents net loss attributable to SHR common shareholders excluding: (i) interest expense, (ii) income taxes, including deferred income tax benefits and expenses applicable to our foreign subsidiaries and income taxes applicable to sale of assets; and (iii) depreciation and amortization. EBITDA also excludes interest expense, income taxes and depreciation and amortization of our equity method investments. EBITDA is presented on a full participation basis, which means we have assumed conversion of all convertible noncontrolling interests of our operating partnership into our common stock and includes preferred dividends.  We believe this treatment of noncontrolling interests provides more useful information for management and our investors and appropriately considers our current capital structure.  We also present Comparable EBITDA, which eliminates the effect of realizing deferred gains on our sale leasebacks, as well as the effect of gains or losses on sales of assets, early extinguishment of debt, impairment losses, foreign currency exchange gains or losses and other non-recurring charges. We believe EBITDA and Comparable EBITDA are useful to management and investors in evaluating our operating performance because they provide management and investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe they help management and investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA and Comparable EBITDA as measures in determining the value of acquisitions and dispositions.

We caution investors that amounts presented in accordance with our definitions of FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner.  FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA should not be considered as an alternative measure of our net loss or operating performance. FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA can enhance your understanding of our financial condition and results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to comparable GAAP measures such as net loss attributable to SHR common shareholders. In addition, you should be aware that adverse economic and market conditions might negatively impact our cash flow. We have provided a quantitative reconciliation of FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA to the most directly comparable GAAP financial performance measure, which is net loss attributable to SHR common shareholders.

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Reconciliation of Net Loss Attributable to SHR Common Shareholders to EBITDA and Comparable EBITDA

(in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Net loss attributable to SHR common shareholders

$   (39,401)

$   (73,461)

$ (127,102)

$ (202,633)

Depreciation and amortization - continuing operations

32,779

34,421

99,906

98,047

Depreciation and amortization - discontinued operations

1,289

3,943

3,702

9,631

Interest expense - continuing operations

22,118

24,635

68,488

70,674

Interest expense - discontinued operations

2,378

2,268

7,716

6,454

Income taxes - continuing operations

407

(236)

1,359

2,515

Income taxes - discontinued operations

(10)

(122)

(327)

(2,091)

Noncontrolling interests

(192)

(844)

(879)

(2,297)

Adjustments from consolidated affiliates

(1,978)

(2,508)

(5,596)

(6,813)

Adjustments from unconsolidated affiliates

4,332

4,612

11,890

12,436

Preferred shareholder dividends

7,721

7,721

23,164

23,164

EBITDA

29,443

429

82,321

9,087

Realized portion of deferred gain on sale leasebacks

(1,139)

(1,257)

(3,475)

(3,607)

Loss on sale of assets - continuing operations

-

-

-

5

Gain on sale of assets -  discontinued operations

-

-

(1,237)

-

Impairment losses and other charges - continuing operations

-

-

-

50,214

Impairment losses and other charges - discontinued operations

-

30,795

-

30,795

Impairment losses and other charges - adjustments from consolidated affiliates

-

-

-

(169)

Loss on early extinguishment of debt

39

-

925

883

Loss on early termination of derivative financial instruments

-

-

18,263

-

Foreign currency exchange loss - continuing operations (a)

134

379

1,399

1,233

Foreign currency exchange loss (gain) - discontinued operations (a)

5,094

814

(7,495)

(946)

Comparable EBITDA

$    33,571

$    31,160

$    90,701

$    87,495

(a) Foreign currency exchange gains or losses applicable to third-party and inter-company debt and certain balance sheet items held by foreign subsidiaries.

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Reconciliation of Net Loss Attributable to SHR Common Shareholders to

Funds From Operations (FFO), FFO - Fully Diluted and Comparable FFO

(in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Net loss attributable to SHR common shareholders

$   (39,401)

$   (73,461)

$ (127,102)

$ (202,633)

Depreciation and amortization - continuing operations

32,779

34,421

99,906

98,047

Depreciation and amortization - discontinued operations

1,289

3,943

3,702

9,631

Corporate depreciation

(304)

(305)

(914)

(913)

Loss on sale of assets - continuing operations

-

-

-

5

Gain on sale of assets - discontinued operations

-

-

(1,237)

-

Realized portion of deferred gain on sale leasebacks

(1,139)

(1,257)

(3,475)

(3,607)

Deferred tax expense on realized portion of deferred gain on sale leasebacks

340

375

1,036

1,076

Noncontrolling interests adjustments

(230)

(511)

(937)

(1,440)

Adjustments from consolidated affiliates

(1,342)

(1,956)

(4,644)

(5,648)

Adjustments from unconsolidated affiliates

2,047

1,970

6,099

5,859

FFO

(5,961)

(36,781)

(27,566)

(99,623)

Convertible noncontrolling interests

38

(333)

58

(857)

FFO - Fully Diluted

(5,923)

(37,114)

(27,508)

(100,480)

Impairment losses and other charges - continuing operations

-

-

-

50,214

Impairment losses and other charges - discontinued operations

-

30,795

-

30,795

Impairment losses and other charges - adjustments from consolidated affiliates

-

-

-

(169)

Non-cash mark to market of interest rate swaps

5,597

-

9,778

-

Loss on early extinguishment of debt

39

-

925

883

Loss on early termination of derivative financial instruments

-

-

18,263

-

Foreign currency exchange loss (a) - continuing operations

134

379

1,399

1,233

Foreign currency exchange loss (gain), net of tax (a) - discontinued operations

5,083

758

(7,520)

(1,512)

Comparable FFO

$      4,930

$     (5,182)

$     (4,663)

$   (19,036)

Comparable FFO per diluted share

$        0.03

$       (0.07)

$       (0.04)

$       (0.25)

Weighted average diluted shares

153,093

75,441

113,237

75,265

(a) Foreign currency exchange gains or losses applicable to third-party and inter-company debt and certain balance sheet items held by foreign subsidiaries.

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Debt Summary

(dollars in thousands)

Loan

Debt

Interest Rate

Spread (a)

Amount

Maturity (b)

Bank credit facility

4.01%

375 bp

$               36,000

March 2011

Fairmont Scottsdale

0.82%

56 bp

180,000

September 2011

InterContinental Chicago

1.32%

106 bp

121,000

October 2011

InterContinental Miami

0.99%

73 bp

90,000

October 2011

Loews Santa Monica Beach Hotel

0.89%

63 bp

118,250

March 2012

Ritz-Carlton Half Moon Bay

0.93%

67 bp

76,500

March 2012

Hyatt Regency La Jolla

1.26%

100 bp

97,500

September 2012

Marriott London Grosvenor Square (c)

1.83%

110 bp (c)

118,131

October 2013

InterContinental Prague (d)

2.09%

120 bp (d)

138,511

March 2015

Westin St. Francis

6.09%

Fixed

220,000

June 2017

Fairmont Chicago

6.09%

Fixed

97,750

June 2017

$          1,293,642

(a)  Spread over LIBOR (0.26% at September 30, 2010).

(b)  Includes extension options, excluding the conditional one-year extension option on the bank credit facility.

(c)  Principal balance of BPS 75,190,000 at September 30, 2010.  Spread over three-month GBP LIBOR (0.73% at September 30, 2010).

(d)  Principal balance of EUR 101,600,000 at September 30, 2010.  Spread over three-month EURIBOR (0.89% at September 30, 2010). The spread increases to 180 basis points in March 2012 through the maturity date. As of September 30, 2010, the mortgage debt outstanding has been reclassified to liabilities of assets held for sale.

Domestic and European Interest Rate Swaps