UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 1-14045
LASALLE HOTEL PROPERTIES
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 36-4219376
------------------------- ---------------------------------
(State or other jurisdic- (IRS Employer Identification No.)
tion of incorporation or
organization)
1401 Eye Street, NW, Suite 900, Washington, D.C. 20005
- ------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 202/222-2600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of common shares of beneficial interest of each class
outstanding as of the latest practicable date.
Outstanding at
Class May 10, 1999
----- ----------------
Common Shares of Beneficial 15,240,563
Interest ($0.01 par value)
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities and Use of Proceeds . . . . . . 21
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . 21
Item 5. Other Matters . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 22
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASALLE HOTEL PROPERTIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
------
Investment in hotel properties, net. . . . . $ 468,287 $ 467,552
Investment in affiliated lessee. . . . . . . (135) (21)
Cash and cash equivalents. . . . . . . . . . 1,165 1,570
Restricted cash reserves . . . . . . . . . . 8,040 9,789
Rent receivable from lessees:
Affiliated lessee. . . . . . . . . . . . . 1,440 --
Other lessees. . . . . . . . . . . . . . . 5,056 3,088
Notes receivable:
Affiliated lessee. . . . . . . . . . . . . 3,900 1,500
Other lessees. . . . . . . . . . . . . . . 3,451 3,451
Other. . . . . . . . . . . . . . . . . . . 400 --
Deferred financing costs, net. . . . . . . . 1,977 1,754
Prepaid expenses and other assets. . . . . . 1,854 7,655
---------- ----------
Total assets . . . . . . . . . . . $ 495,435 $ 496,338
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings under credit facility . . . . . . $ 169,200 $ 164,700
Bonds payable, net . . . . . . . . . . . . . 42,514 42,828
Due to JLL . . . . . . . . . . . . . . . . . 754 886
Due to affiliated lessee . . . . . . . . . . -- 614
Accounts payable and accrued expenses. . . . 3,659 4,320
Minority interest in Operating
Partnership. . . . . . . . . . . . . . . . 48,246 47,694
Minority interest in other partnerships. . . 10 10
Distributions payable. . . . . . . . . . . . -- 6,902
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred shares of beneficial interest,
$.01 par value, 20,000,000 shares
authorized, no shares issued and
outstanding. . . . . . . . . . . . . . . -- --
Common shares of beneficial interest,
$.01 par value, 100,000,000 shares
authorized 15,240,563 shares
issued and outstanding . . . . . . . . . 152 152
Additional paid-in capital . . . . . . . . 231,536 231,376
Retained earnings. . . . . . . . . . . . . -- --
Distributions in excess of
Retained Earnings. . . . . . . . . . . . (636) (3,144)
---------- ----------
Total shareholders' equity . . . . 231,052 228,384
---------- ----------
Total liabilities and
shareholders' equity . . . . . . $ 495,435 $ 496,338
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
For the three
months ended
March 31, 1999
-------------
Revenues:
Participating lease revenue:
Affiliated lessee. . . . . . . . . . . . . . . . $ 4,599
Other lessee . . . . . . . . . . . . . . . . . . 11,507
Interest income:
Affiliated lessee. . . . . . . . . . . . . . . . 57
Other lessees. . . . . . . . . . . . . . . . . . 50
Equity in (loss) of affiliated lessee. . . . . . . (114)
Other income . . . . . . . . . . . . . . . . . . . 113
----------
Total revenues . . . . . . . . . . . . . . 16,212
----------
Expenses:
Depreciation and other amortization. . . . . . . . 5,742
Real estate, personal property taxes
and insurance. . . . . . . . . . . . . . . . . . 1,997
Ground rent. . . . . . . . . . . . . . . . . . . . 651
General and administrative . . . . . . . . . . . . 355
Interest . . . . . . . . . . . . . . . . . . . . . 3,505
Amortization of deferred financing costs . . . . . 241
Advisory fee . . . . . . . . . . . . . . . . . . . 661
----------
Total expenses . . . . . . . . . . . . . . 13,152
----------
Income before minority interest. . . . . . . . . . . 3,060
Minority interest in Operating Partnership . . . . . 552
----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 2,508
==========
Net income per weighted average common share
outstanding - basic and diluted. . . . . . . . . . $ 0.16
==========
Weighted average number of common shares
outstanding - basic and diluted. . . . . . . . . . 15,230,052
==========
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
LASALLE HOTEL PROPERTIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands, except per share data)
(Unaudited)
For the three
months ended
March 31, 1999
--------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 2,508
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation and other amortization. . . . . . . . 5,742
Amortization of deferred financing costs . . . . . 241
Bond premium amortization. . . . . . . . . . . . . (314)
Minority interest in Operating Partnership . . . . 552
Equity in loss of Affiliated Lessee. . . . . . . . 114
Changes in assets and liabilities:
Rent receivable from lessees . . . . . . . . . . . (3,326)
Prepaid expenses and other assets. . . . . . . . . 2,950
Due to JLL . . . . . . . . . . . . . . . . . . . . 23
Accounts payable and accrued expenses. . . . . . . 21
----------
Net cash flow provided by
operating activities . . . . . . . . . . . 8,511
----------
Cash flows from investing activities:
Improvements and additions to hotel properties . . . (7,410)
Funding of notes receivable. . . . . . . . . . . . . (400)
Funding of restricted cash reserves. . . . . . . . . (5,004)
Proceeds from restricted cash reserves . . . . . . . 6,753
----------
Net cash flow used in
investing activities . . . . . . . . . . . (6,061)
----------
Cash flows from financing activities:
Borrowings under credit facility . . . . . . . . . . 8,500
Repayments under credit facility . . . . . . . . . . (4,000)
Payment of deferred financing costs. . . . . . . . . (427)
Offering costs paid. . . . . . . . . . . . . . . . . (26)
Distributions. . . . . . . . . . . . . . . . . . . . (6,902)
----------
Net cash flow used in
financing activities . . . . . . . . . . . (2,855)
----------
Net change in cash and cash equivalents. . . . . . . . (405)
Cash and cash equivalents at beginning of period . . . 1,570
----------
Cash and cash equivalents at end of period . . . . . . $ 1,165
==========
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
LASALLE HOTEL PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Dollars in thousands, expect per share data)
(Unaudited)
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
LaSalle Hotel Properties (the "Company") was organized in the state of
Maryland on January 15, 1998. The Company is a real estate investment
trust ("REIT") as defined in the Internal Revenue Code. The Company was
formed to own hotel properties and to continue and expand the hotel
investment activities of Jones Lang LaSalle Incorporated and certain of its
affiliates (collectively "JLL"). On April 23, 1998, the Company's
Registration Statement on Form S-11 was declared effective. The Company
had no operations prior to April 29, 1998. On April 29, 1998, the Company
completed an initial public offering (the "Initial Offering") of 14,200,000
common shares of beneficial interest (the "Common Shares"). The offering
price of all shares sold was $18 per common share, resulting in gross
proceeds of $255,600 and net proceeds (less the underwriters' discount and
offering expenses) of approximately $ 234,139. The Company contributed all
of the net proceeds of the Initial Offering to LaSalle Hotel Operating
Partnership, L.P., a limited partnership (the Operating Partnership), in
exchange for an approximate 82.6% general partnership interest in the
Operating Partnership. The Operating Partnership used the net proceeds
from the Company, the issuance of additional Common Shares of the Company
and the issuance of limited partnership interests (the "Units"),
representing approximately 17.4% of the Operating Partnership, to acquire
ten upscale and luxury full service hotels (the "Initial Hotels").
As of March 31, 1999, the Company owned interests in 12 hotels with an
aggregate of 4,110 suites/rooms (the "Hotels") located in nine states. The
Company owns 100% equity interests in 11 of the hotels and a 95.1% interest
in a partnership which owns one hotel. All of the Hotels are leased under
participating leases ("Participating Leases") which provide for rent based
on hotel revenues and are managed by independent hotel operators ("Hotel
Operators"). Eight of the Hotels are leased to unaffiliated lessees
(affiliates of whom also operate these hotels) and four of the Hotels are
leased to LaSalle Hotel Lessee, Inc. (the "Affiliated Lessee").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim consolidated financial statements and related
notes have been prepared in accordance with the financial information and
accounting policies described in the Company's 1998 Form 10-K and should be
read in conjunction with such financial statements and related notes. The
following notes to these interim financial statements highlight significant
changes to the notes included in the December 31, 1998 audited financial
statements included in the Company's 1998 form 10-K and present interim
disclosures as required by the Securities and Exchange Commission.
In the opinion of management, all adjustments consist of normal
recurring adjustments necessary to present fairly the financial position of
the Company as of March 31, 1999 and the results of its operations and its
cash flows for the three months ended March 31, 1999.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company, the Operating Partnership and its consolidated subsidiaries and
partnerships. All significant intercompany balances and transactions have
been eliminated.
<PAGE>
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain
assets and liabilities and disclosure of contingent assets and liabilities
at the balance sheet date and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS
During the second quarter of 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement, effective for fiscal
years beginning after June 15, 1999, establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The statement also requires that the changes in the derivative's fair value
be recognized in earnings unless specific hedge accounting criteria are
met. Currently, the pronouncement has no impact on the Company, as the
Company has not utilized derivative instruments or entered into any hedging
activities.
3. EARNINGS PER SHARE
The Company's basic and diluted earnings per share for the three
months ended March 31, 1999 was $0.16.
Basic and diluted earnings per share are based on the weighted average
number of common shares outstanding during the period. There was no
adjustment to either the weighted average shares outstanding or the
reported amounts of income in computing diluted earnings per share because
the unexercised stock options were anti-dilutive. The weighted average
number of shares used in determining basic and diluted earnings per share
was 15,230,052 for the three months ended March 31, 1999.
The outstanding Units in the Operating Partnership have been excluded
from the diluted earnings per share calculation as there would be no effect
on the amounts since the minority interests' share of income would also be
added back to net income.
4. LONG-TERM DEBT
CREDIT FACILITY
The Company obtained a three-year commitment for a $235 million senior
unsecured revolving credit facility (the "1998 Amended Credit Facility") to
be used for acquisitions, capital improvements, working capital and general
corporate purposes. Borrowings under the 1998 Amended Credit Facility bear
interest at floating rates equal to LIBOR plus an applicable margin or an
"Adjusted Base Rate" plus an applicable margin, at the election of the
Company. For the three months ended March 31, 1999, the weighted average
interest rate was approximately 6.7%. The Company did not have any
Adjusted Base Rate borrowings outstanding at March 31, 1999. Additionally,
the Company is required to pay an unused commitment fee which is variable,
determined from a ratings based pricing matrix, currently set at 25 basis
points. The Company has incurred an unused commitment fee of approximately
$44 for the three months ended March 31, 1999. As of March 31, 1999, the
Company had outstanding borrowings against the 1998 Credit Facility of
$169,200.
<PAGE>
BONDS PAYABLE
At March 31, 1999, the Company had outstanding bonds payable of
$42,514, of which $40,000 million represents the principal balance of the
bonds and the remaining $2,514 million represents unamortized premium. The
bonds bear interest at a fixed rate of 10% per annum. Interest expense,
net of the premium amortization, for the three months ended March 31, 1999
totaled $686.
Pursuant to the bond agreement, certain cash reserves are required to
be held in trust for payments of interest, credit enhancement fees and
ground rent. As of March 31, 1999, these reserves totaled $4,243 and are
included in Restricted Cash Reserves.
5. SHAREHOLDERS' EQUITY
On January 15, 1999, the Company paid its regular fourth quarter
distribution of $0.375 per share on its Common Shares.
On March 4, 1999, pursuant to the advisory agreement, the Company
issued 10,988 Common Shares to the Advisor for the incentive portion of the
1998 advisory fee, in lieu of the $155 which would have otherwise been due
to the Advisor.
6. SHARE OPTION AND INCENTIVE PLAN
On January 19, 1999, the Company granted 305,700 non-qualified stock
options at a strike price of $13.19. These options vest over three years
and have a seven year life. On February 22, 1999, the Company issued 4,995
Common Shares to its Board of Trustees for 1998 compensation. The Common
Shares were issued in lieu of cash, at the trustee's election. These
Common Shares were issued from the 1998 Share Option and Incentive Plan
(the "1998 SIP"). As of March 31, 1999, the Company has authorized 757,000
Common Shares for issuance under the 1998 SIP, of which 365,305 Common
Shares are available for future grants.
7. AFFILIATED LESSEE
A significant portion of the Company's participating lease revenue is
derived from the Participating Leases with the Affiliated Lessee. The
Affiliated Lessee is owned as follows: 9.0% by the Company 45.5% by JLL
and 45.5% by LPI Charities, a charitable organization organized under the
laws of the state of Illinois. Certain condensed financial information,
related to the Affiliated Lessee's income statement, is as follows:
For the three
months ended
March 31, 1999
--------------
Statement of Operations Information:
Total revenues . . . . . . . . . . . . . . . . . . . $ 18,124
Participating lease expense. . . . . . . . . . . . . 4,599
Net (loss) . . . . . . . . . . . . . . . . . . . . . (1,271)
On March 26, 1999, the Company executed lease amendments for its
leases with the Affiliated Lessee. The amendments were effective as of
January 1, 1999, and amended the participating rent thresholds of the
leases. Also, in conjunction with the lease amendments, the Affiliated
Lessee executed a promissory note in the amount of $2,400, for working
capital previously advanced to the Affiliated Lessee. The promissory note
bears interest at a rate of 6.0% per annum. The promissory note matures on
the earlier of April 30, 2009 or the date upon which any Affiliated Lessee
lease terminates. The effective date of the promissory note was also
January 1, 1999.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
The Company is obligated to make funds available to the Hotels for
capital expenditures (the "Reserve Funds"), as determined in accordance
with the Participating Leases. The Reserve Funds have not been recorded on
the books and records of the Company as such amounts will be capitalized as
incurred. The amounts obligated under the Reserve Funds are subject to
increases ranging from 4.0% to 5.5% of the individual Hotel's total
revenues. The total amount obligated by the Company under the Reserve
Funds is approximately $9,710 at March 31, 1999, of which $3,797 is
available in restricted cash reserves for future capital expenditures.
Purchase orders and letters of commitment totaling approximately $13,934
million have been issued for renovations at the Hotels.
The nature of the operations of the Hotels expose them to the risk of
claims and litigation in the normal course of their business. Although the
outcome of these matters cannot be determined, management does not expect
that the ultimate resolution of these matters to have a material adverse
effect on the financial position, operations or liquidity of the Hotels.
On behalf of the Company, the Advisor seeks opportunities for the
purchase of additional full service hotel properties located primarily in
convention, resort, urban and major business markets. From time to time,
the Company may enter into purchase contracts for the acquisition of hotel
properties. The consummation of each acquisition will be subject to
satisfactory completion of due diligence.
9. RELATED PARTY TRANSACTIONS
At March 31, 1999, the Company had a payable to JLL of $754, primarily
for the first quarter advisory fee.
10. SUBSEQUENT EVENTS
On April 15, 1999, the Company declared its regular first quarter
distribution of $0.375 per share on its Common Shares. The distribution is
payable on May 14, 1999 to the shareholders of record at the close of
business on April 30, 1999.
On April 29, 1999, the Company filed a registration statement on Form
S-3 under the Securities Act of 1933, as amended, (the "Securities Act") to
register $200,000 of Common Shares, Common Share Warrants, Preferred Shares
of Beneficial Interest (the "Preferred Shares") and Depositary Shares
representing Preferred Shares.
11. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information set forth below is presented as if
(i) the Initial Offering and the related formation transactions and (ii)
the subsequent acquisitions of the San Diego Paradise Point Resort and the
Harborside Hyatt Conference Center and Hotel (the "Subsequent Acquisi-
tions") had been consummated and leased as of January 1, 1998. The pro
forma financial information is not necessarily indicative of what actual
results of operations of the Company would have been assuming the Initial
Offering and the related formation transactions and the Subsequent
Acquisitions had been consummated and all the Hotels had been leased as of
January 1, 1998, nor does it purport to represent the results of operations
for future periods.
<PAGE>
For the three
months ended
March 31, 1998
--------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . $ 16,764
----------
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 5,495
Real estate and personal property taxes and insurance. . . 1,755
Ground rent. . . . . . . . . . . . . . . . . . . . . . . . 773
General and administrative . . . . . . . . . . . . . . . . 175
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 3,593
Amortization of deferred financing costs . . . . . . . . . 180
Advisory fee . . . . . . . . . . . . . . . . . . . . . . . 843
----------
Income before minority interest. . . . . . . . . . . . . . 3,950
Minority interest in Operating Partnership . . . . . . . . 687
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 3,263
==========
Net income per weighted average common share
outstanding - basic and diluted. . . . . . . . . . . . . $ 0.21
==========
Weighted average number of common shares
outstanding - basic and diluted. . . . . . . . . . . . . 15,224,580
==========
12. PREDECESSOR INFORMATION
Pursuant to SEC regulations which require the presentation of
predecessor financial information for corresponding periods of the
preceding year, the following information represents condensed statements
of operations and cash flows information of LRP Bloomington Limited
Partnership, which is considered to be the predecessor of the Company, for
the three months ended March 31, 1998.
<PAGE>
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
STATEMENT OF OPERATIONS
(Unaudited, Dollar Amounts in Thousands)
For the Three Months
Ended March 31, 1998
--------------------
Revenues:
Rooms. . . . . . . . . . . . . . . . . . . . . $ 2,976
Food and beverage. . . . . . . . . . . . . . . 2,443
Telephone. . . . . . . . . . . . . . . . . . . 84
Other. . . . . . . . . . . . . . . . . . . . . 386
--------
Total revenue. . . . . . . . . . . . . 5,889
--------
Expenses:
Departmental expenses:
Rooms. . . . . . . . . . . . . . . . . . . . 768
Food and beverage. . . . . . . . . . . . . . 1,712
Telephone. . . . . . . . . . . . . . . . . . 60
Other operating departments. . . . . . . . . 226
General and administration . . . . . . . . . 386
Sales and marketing. . . . . . . . . . . . . 315
Real estate and personal property taxes. . . 320
Property operations and management . . . . . 296
Management fees. . . . . . . . . . . . . . . 248
Energy . . . . . . . . . . . . . . . . . . . 179
Insurance. . . . . . . . . . . . . . . . . . 53
Other fixed expenses . . . . . . . . . . . . 54
Interest expense . . . . . . . . . . . . . . 634
Depreciation and amortization. . . . . . . . 899
Advisory fees. . . . . . . . . . . . . . . . 40
--------
Total expenses . . . . . . . . . . . . 6,190
--------
Net loss . . . . . . . . . . . . . . . . . . . . $ (301)
========
<PAGE>
LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)
STATEMENT OF CASH FLOWS
(Unaudited, Dollar Amounts in Thousands)
For the Three Months
Ended March 31, 1998
--------------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . $ (301)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . 899
Changes in assets and liabilities:
Guest and trade receivables,
net. . . . . . . . . . . . . . . . . . . (634)
Inventories. . . . . . . . . . . . . . . . 5
Prepaid expenses and other
current assets . . . . . . . . . . . . . (319)
Accounts payable . . . . . . . . . . . . . 314
Accrued expenses and other
liabilities. . . . . . . . . . . . . . . 267
--------
Net cash provided by
operating activities . . . . . . . . 231
--------
Cash flows from investing activities:
Proceeds from restricted cash
reserves . . . . . . . . . . . . . . . . . . (143)
Capital improvement expenditures . . . . . . . (218)
--------
Net cash used in
investing activities . . . . . . . . (361)
--------
Cash flows from financing activities:
Distributions. . . . . . . . . . . . . . . . . 1
Principal payments on long-term
debt . . . . . . . . . . . . . . . . . . . . (213)
--------
Net cash used in
financing activities . . . . . . . . (212)
--------
Decrease in cash and cash equivalents. . . . . . (342)
Cash and cash equivalents,
beginning of period. . . . . . . . . . . . . . 1,744
--------
Cash and cash equivalents,
end of period. . . . . . . . . . . . . . . . . $ 1,402
========
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL BACKGROUND
The following discusses: (i) the Company's actual results of
operations for the three months ended March 31, 1999, and (ii) the
Company's pro forma results of operations for the three months ended
March 31, 1998. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in
this Form 10-Q. The Company has not included a discussion of LRP
Bloomington Limited Partnership (the "Predecessor") as its financial
information would not be deemed comparable to the Company. However, the
Predecessor's financial information has been included in the notes to the
consolidated financial statements.
The pro forma financial information of the Company is presented as if
(i) the Initial Offering and the related formation transactions and (ii)
the Subsequent Acquisitions had been consummated as of January 1, 1998.
The pro forma financial information is not necessarily indicative of what
actual results of operations of the Company would have been assuming the
Initial Offering and the related formation transactions and the Subsequent
Acquisitions had been consummated and all the Hotels had been leased as of
January 1, 1998, nor does it purport to represent the results of operations
for future periods.
RESULTS OF OPERATIONS
ACTUAL RESULTS OF OPERATIONS FOR THE COMPANY FOR THE THREE MONTHS
ENDED MARCH 31, 1999 COMPARED TO THE PRO FORMA THREE MONTHS ENDED MARCH 31,
1998
For the three months ended March 31, 1999, the Company's total
revenues were $16.2 million, representing a $0.6 million, or 3.3%, decrease
from pro forma total revenues for the three months ended March 31, 1998 of
$16.8 million. The decrease is primarily attributable to a 3.8% decrease
in occupancy for the Hotels. The decrease in occupancy was due to
significant renovations which were taking place at the Marriott Seaview
Resort, the Radisson Convention Hotel and the San Diego Paradise Point
Resort. Excluding the hotels under renovation, occupancy was up 1.4%.
Expenses before minority interest, consisting principally of
depreciation, property taxes, insurance, advisory fees, general and
administrative expenses and interest expense were $13.2 million for the
three months ended March 31, 1999, representing a $0.3 million, or 2.6%
increase over the pro forma three months ended March 31, 1998 expenses of
$12.8 million. This increase is principally attributable to increases in
property taxes, insurance, general and administrative expense and
depreciation.
Minority interest was $0.6 million and pro forma minority interest
would have been $0.7 million for the three months ended March 31, 1999 and
1998, respectively.
As a result of the above, net income of the Company was $2.5 million
and pro forma net income would have been $3.3 million for the three months
ended March 31, 1999 and 1998, respectively. As a percentage of total
revenues, net income was 15.5% and 19.5% for the three months ended
March 31, 1999 and 1998, respectively.
<PAGE>
FUNDS FROM OPERATIONS (FFO)
The Company believes that FFO is helpful to investors as a measure of
the performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company to
incur and service debt, to make capital expenditures and to fund other cash
needs. The White Paper on FFO approved by the Board of Governors of the
National Association of Real Estate Investment Trusts ("NAREIT") in March
1995 defines FFO as net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and
after comparable adjustments for the Company's portion of these items
related to unconsolidated entities and joint ventures. The Company
computes FFO in accordance with standards established by NAREIT which may
not be comparable to FFO reported by other REITs that do not define the
term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. FFO does not
represent cash generated from operating activities determined by GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial
performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. FFO may include funds that may not
be available for management's discretionary use due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties. The following is a
reconciliation between net income and FFO for the three months ended
March 31, 1999 and pro forma net income and pro forma FFO for the three
months ended March 31, 1998 (in thousands, except share data):
For the three
months ended
March 31 1999
-------------
Net income applicable to common shareholders . . . . . $ 2,508
Depreciation . . . . . . . . . . . . . . . . . . . . . 5,741
Minority interest. . . . . . . . . . . . . . . . . . . 552
-----------
FFO. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,801
===========
FFO per common share and unit. . . . . . . . . . . . . $ 0.48
===========
Weighted average common shares and
units outstanding. . . . . . . . . . . . . . . . . . 18,411,775
===========
Pro Forma
three months
ended
March 31, 1998
--------------
Pro forma net income applicable to
common shareholders. . . . . . . . . . . . . . . . $ 3,263
Pro forma depreciation . . . . . . . . . . . . . . . 5,495
Pro forma minority interest. . . . . . . . . . . . . 687
----------
Pro forma FFO. . . . . . . . . . . . . . . . . . . . $ 9,445
==========
Pro forma FFO per common share
and unit . . . . . . . . . . . . . . . . . . . . . $ 0.51
==========
Pro forma weighted average common shares
and units outstanding. . . . . . . . . . . . . . . 18,406,303
==========
<PAGE>
FFO for the three months ended March 31, 1999 decreased $0.6 million,
or 6.8%, to $8.8 million compared to $9.4 million for the pro forma three
months ended March 31, 1998.
THE HOTELS
The following table sets forth historical comparative information with
respect to occupancy, average daily rate (ADR) and room revenue per
available room (RevPAR) for the comparable Hotels, the non-comparable
Hotels and the total Hotel portfolio, regardless of ownership, for the
three month periods ended March 31, 1999 and 1998. This information is
useful in understanding the underlying changes in the pro forma
participating lease revenue for the Company during the pro forma periods
presented.
For the Three Months Ended March 31,
-------------------------------------
1999 1998 Variance
-------- -------- --------
COMPARABLE HOTELS (a)
Occupancy. . . . . . . . . . . . 75.2% 74.1% 1.4%
ADR. . . . . . . . . . . . . . . $136.32 $132.72 2.7%
REVPAR . . . . . . . . . . . . . $102.46 $98.38 4.1%
NON-COMPARABLE
HOTELS (b)
Occupancy. . . . . . . . . . . . 54.3% 64.6% (16.0%)
ADR. . . . . . . . . . . . . . . $118.65 $112.77 5.2%
REVPAR . . . . . . . . . . . . . $64.42 $72.88 (11.6%)
TOTAL PORTFOLIO
Occupancy. . . . . . . . . . . . 68.4% 71.1% (3.8%)
ADR. . . . . . . . . . . . . . . $131.77 $126.92 3.8%
REVPAR . . . . . . . . . . . . . $90.13 $90.23 (0.1%)
(a) Comparable Hotels include all Hotels excluding those in
Non-Comparable.
(b) Non-Comparable hotels represent Hotels which underwent
significant renovations and include the following:
Marriott Seaview Resort, Radisson Convention Hotel and San Diego
Paradise Point Resort.
For the first quarter 1999, RevPAR increased 4.1% to $102.46 compared to
$98.38 in the first quarter 1998, excluding the three non-comparable hotels
which underwent significant renovations during the first quarter 1999. On
a comparable hotel basis, occupancy increased 1.4% to 75.2% and ADR
increased 2.7% to $136.32 in the first quarter 1999, as compared to
occupancy of 74.1% and ADR of $132.72 in the first quarter 1998. For the
total portfolio, RevPAR was flat. The total portfolio increase in ADR of
3.8% is attributable to the Company's significant reinvestment in the
Hotels and their locations in high barrier to entry resort, convention and
major business and urban markets. The Company has completed extensive room
renovations at the Marriott Seaview Resort, near Atlantic City and the
Radisson Convention Hotel in Bloomington, Minnesota, as well as Phase One
improvements at the San Diego Paradise Point Resort.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its pro rata share of the
Operating Partnership's cash flow from the Participating Leases. Except for
the security deposits required under the Participating Leases, the Lessees'
obligations under the Participating Leases are unsecured and the Lessees'
abilities to make rent payments to the Operating Partnership, and the
Company's liquidity, including its ability to make distributions to
shareholders, will be dependent on the Lessees' abilities to generate
sufficient cash flow from the operations of the Hotels.
<PAGE>
In 1998, the Company entered into a $235 million senior unsecured
revolving credit facility (the "1998 Amended Credit Facility") to be used
for acquisitions, capital improvements, working capital and general
corporate purposes. Borrowings under the 1998 Amended Credit Facility bear
interest at floating rates equal to LIBOR plus an applicable margin or an
"Adjusted Base Rate" plus an applicable margin, at the election of the
Company. For the quarter ended March 31, 1999, the weighted average
interest rate was approximately 6.7%. The Company did not have any
Adjusted Base Rate borrowings outstanding at March 31, 1999. Additionally,
the Company is required to pay an unused commitment fee which is variable,
determined from a ratings or leverage based pricing matrix, currently set
at 25 basis points. The Company incurred an unused commitment fee of
approximately $44 for the three months ended March 31, 1999. The 1998
Credit Facility matures on April 30, 2001 and contains certain financial
covenants relating to debt service coverage, market value net worth and
total funded indebtedness.
In June 1998, the Company acquired the Harborside Hyatt Conference
Center and Hotel subject to $40,000 principal amount of special project
revenue bonds ("Massport Bonds") previously issued under the loan and trust
agreement with the Massachusetts Port Authority ("Massport"), as amended
("Massport Bond Agreement"). In conjunction with the Massport Bonds, the
Company recorded a premium of $3,480, of which $2,514 remains unamortized
at March 31, 1999. The Massport Bonds are collateralized by the leasehold
improvements and bear interest at 10% per annum through the date of
maturity, March 1, 2026. Interest payments are due semiannually on March 1
and September 1. Interest expense, net of the premium amortization, for
the three months ended March 31, 1999 totaled $686. The Massport Bonds
shall be redeemed in part commencing March 1, 2001 and annually until
March 1, 2026, at which time the remaining principal and any accrued
interest thereon is due in full. The Company has the option to prepay the
Massport Bonds in full beginning March 1, 2001 subject to a prepayment
penalty which varies depending on the date of prepayment.
On March 31, 1999, the Company had $1,165 of cash and cash equivalents
and had utilized $169.2 million outstanding under its 1998 Amended Credit
Facility.
Net cash provided by operating activities was approximately $8.5
million for the three months ended March 31, 1999 primarily due to the
collections of Participating Lease revenues prior to March 31, 1999, which
was offset by payments for real estate taxes, personal property taxes,
insurance, ground rent and the fourth quarter 1998 base advisory fee.
Net cash used in investing activities was approximately $6.1 million
for the three months ended March 31, 1999 primarily due to improvements and
additions at the Hotels.
Net cash used in financing activities was approximately $2.9 million
for the three months ended March 31, 1999 primarily attributable to the
fourth quarter distribution paid in January 1999 and repayments on the 1998
Amended Credit Facility. These outflows were offset by proceeds from
borrowings under the 1998 Amended Credit Facility during the first quarter.
During the three months ended March 31, 1999, the Company granted
305,700 stock options at a strike price of $13.19 from the 1998 SIP. These
stock options vest over a period of three years and have a seven year life.
The Company is obligated to make funds available to the Hotels for
capital expenditures (the Reserve Funds), as determined in accordance with
the Participating Leases. The Reserve Funds have not been recorded on the
books and records of the Company as such amounts will be capitalized as
incurred. The amounts obligated under the Reserve Funds are subject to
increases ranging from 4.0% to 5.5% of the individual Hotel's total
revenues. The total amount obligated by the Company under the Reserve
Funds is approximately $9.7 million at March 31, 1999, of which $3.8
million is available in restricted cash reserves for future capital
expenditures. Purchase orders and letters of commitment totaling
approximately $13.9 million have been issued for renovations at the Hotels.
<PAGE>
The Company's debt policy is to incur debt only if upon such
incurrence the Company's total funded indebtedness would not exceed 50% of
"Aggregate Asset Value." For purposes of this policy, Aggregate Asset Value
is defined as the sum of (a) for all the Company's properties owned for
more than four quarters ("Seasoned Properties"), the EBITDA (reduced by the
aggregate FF&E reserves for the relevant period in respect of the Seasoned
Properties) of the Seasoned Properties for the proceeding four quarters
times 10, and (b) for all Properties owned for less than four quarters
("New Properties"), the investment amount (which shall include the purchase
price, including assumed indebtedness, and all acquisition costs) of the
New Properties and 95% of all the capital expenditures with respect to the
New Properties. The Board of Trustees can change this policy at any time
without the approval of the shareholders.
The Company has considered its short-term (one year or less) liquidity
needs and the adequacy of its estimated cash flow from operations and other
expected liquidity sources to meet these needs. The Company believes that
its principal short-term liquidity needs are to fund normal recurring
expenses, debt service requirements and the minimum distribution required
to maintain the Company's REIT qualification under the Code. The Company
anticipates that these needs will be met with cash flows provided by
operating activities. The Company has also considered capital improvements
and property acquisitions as short-term needs that will be funded either
with cash flows provided by operating activities, under the 1998 Amended
Credit Facility or other indebtedness, or the issuance of additional equity
securities.
The Company expects to meet long-term (greater than one year)
liquidity requirements such as property acquisitions, scheduled debt
maturities, major renovations, expansions and other nonrecurring capital
improvements through long-term unsecured and secured indebtedness and the
issuance of additional equity securities. The Company will acquire or
develop additional hotel properties only as suitable opportunities arise,
and the Company will not undertake acquisition or development of properties
unless stringent acquisition criteria have been achieved.
INFLATION
The Company's revenues come primarily from the Participating Leases,
which will result in changes in the Company's revenues based on changes in
the underlying Hotels' revenues. Therefore, the Company relies entirely on
the performance of the Hotels and the lessees' abilities to increase
revenues to keep pace with inflation. Hotel Operators can change room
rates quickly, but competitive pressures may limit the Lessees' and the
Hotel Operators abilities to raise rates faster than inflation or even at
the same rate.
The Company's expenses are subject to inflation. These expenses (real
estate and personal property taxes, property and casualty insurance and
ground rent) are expected to grow with the general rate of inflation,
except for instances in which the properties are subject to periodic real
estate tax reassessments.
SEASONALITY
The Hotels' operations historically have been seasonal. Eight of the
Hotels maintain higher occupancy rates during the second and third
quarters. The Marriott Seaview Resort generates a large portion of its
revenue from golf related business and, as a result, revenues fluctuate
according to the season and the weather. Key West Beachside Resort,
Radisson Hotel Tampa and Le Meridien New Orleans experience their highest
occupancies in the first quarter. This seasonality pattern can be expected
to cause fluctuations in the Company's quarterly lease revenue under the
Participating Leases.
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" is the result of computer programs and systems
having been designed and developed to use two digits, rather than four, to
define the applicable year. As a result, these computer programs and
systems may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, pay invoices or engage in similar normal
business activities.
Under the guidance of a Year 2000 program team, whose strategy is
supported by senior management, the Company has a heightened sense of
awareness to the Year 2000 Issue. The Company has grouped its systems and
technology into three categories for purposes of Year 2000 readiness: (i)
commercial software purchased from third-party vendors; (ii) information
resource applications and technology (Operator IT Applications) - systems
supported by the hotel operators; and (iii) building systems -- non IT
equipment at hotels that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. In conducting its system
assessment, the Company's Hotel Operators reviewed the Year 2000 readiness
of these systems in addition to creating an inventory of all other
applications, systems software and hardware including the related impact of
the Year 2000 Issue. The Company, working with its Hotel Operators, then
prioritized each of the hotel systems in terms of the degree of impact on
the operations of the hotel.
Based upon the results of the assessment, the Company's Hotel
Operators are determining the appropriate levels of renovation that will be
required and the process for validating the effect of the renovations. The
order in which this process is occurring is based on a system priority
rating. The renovation process of converting, replacing or eliminating
selected platforms, applications, databases and utilities, as well as the
validation process of testing and verifying, is anticipated to be completed
by the end of September 1999. The implementation phase, which involves
returning the tested systems to operational status, ongoing maintenance
procedures to insure continued readiness and development of contingency
plans for critical business systems, is also anticipated to be completed by
September 1999.
The Company's business is heavily dependent upon the efforts of the
Company's Hotel Operators. The Company has assisted its Hotel Operators in
developing guidelines for determining the status of Year 2000 readiness for
the Hotels, planning for the remediation and testing of Year 2000 affected
systems, and the preparation for potential unanticipated issues through the
creation of contingency plans. The Company's Hotel Operators are
addressing Year 2000 issues in a predetermined sequence based on a
priority schedule which places life safety and mission critical issues as
immediate concerns and so-called "amenity" or non-operationally critical
systems as less immediate. The Company continues to rely on its Hotel
Operators to identify and enact appropriate measures to assure that any
adverse impact of the arrival of the Year 2000 will be minimized. The
Company's involvement in terms of issue prioritization, scheduled review
and on-going feedback will ensure that adequate focus by the Hotel
Operators is maintained. The Company's senior management is, in addition
to reviewing Year 2000 status reports submitted by the Hotel Operators,
visiting all of the hotels to meet with hotel management regarding their
specific Year 2000 issues, reviewing first hand the situation, and
reiterating the importance of their efforts towards Year 2000 readiness.
<PAGE>
The Company is reasonably optimistic that its portfolio will have made
prudent efforts towards the goal of Year 2000 readiness, and will be
adequately prepared for most foreseen problems before the end of 1999. At
this time, the majority of the Company's Hotel Operators have taken prudent
measures to prevent any foreseeable Year 2000 impact on systems classified
as either life safety related or mission critical for the on-going
operation of the hotels, with the remaining open issues expected to be
addressed in the near future. As such, the Company believes that it has
significantly reduced its exposure to life safety related liability and has
protected a significant portion of its revenue and earnings streams. In
addition, the majority of the Company's Hotel Operators have also taken
prudent measures to prevent any foreseeable impact on systems related to
the efficient production of revenues and control of expenses. With the
exception of the relatively few outstanding issues referred to above, the
only remaining currently identified systems to be addressed are those
systems which have limited impact on revenue generation or expense control.
It is expected that all systems will be ready to the fullest extent
possible as of the end of the third quarter 1999. There can be no
guarantee that the Company's Hotel Operators have identified every system
in any of the above described categories, nor can there be any assurance
that the steps taken to prepare for the Year 2000 will have addressed all
potential impact of Year 2000, especially those issues yet to be
identified.
The Company and its Hotel Operators are currently developing
contingency plans for each of the Hotels' systems. The majority of these
contingency plans are expected to be in place by the end of the second
quarter 1999, with the remainder in place by the end of the third quarter.
Additionally, there can be no guarantee that the systems of other
companies, including some of the Hotel Operator's parent companies, on
which the operators rely for certain data and services will be Year 2000
ready on a timely basis and that any such lack of readiness will not have a
material adverse effect on the Company.
The Company's hotels rely on a variety of third party suppliers to
provide critical operating services, including but not limited to utility
providers. These suppliers may utilize systems and embedded technologies
to control the operation of building systems such as utilities, lighting,
security, elevators, heating, ventilating and air conditioning systems.
The Company has been and will continue to obtain assurances from suppliers
as to their Year 2000 compliance and will continue to prepare contingency
plans, including the identification of alternative suppliers. The Company
does not control these third party suppliers, and for some suppliers, such
as utility companies, there may be no feasible alternative suppliers
available. The failure of these suppliers' systems could have a material
adverse effect on the operations of the affected hotel, and failures could
have a material adverse effect on the Company.
The actual costs to be incurred by the Company will depend on a number
of factors, many of which cannot currently be accurately predicted,
including the extent and difficulty of the remediation and other work to be
done, the appearance of unforeseen issues, the availability and cost of
consultants, the extent of testing required to demonstrate Year 2000
readiness, and the reliance on contingency planning to mitigate any non-
compliant situations. At this point in time, the Company is relying on the
estimates of its Hotel Operators who have projected the total costs related
to Year 2000 issues for the Company's hotels to be approximately $0.3
million. To date, approximately $0.1 million has been incurred in
connection with costs related to Year 2000 issues.
The ability of third parties with whom the Company transacts business
to adequately address their Year 2000 issues is outside the Company's
control. At this time, the Company is in the process of reviewing the Year
2000 compliance of its major suppliers. There can be no assurance that
their failure to adequately address Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition,
results of operations, or liquidity.
<PAGE>
Although the Company is not aware of any threatened claims related to
the Year 2000, the Company may become subject to litigation arising from
such claims and, depending on the outcome, such litigation could have a
material adverse effect on the Company. It is not clear whether the
Company's insurance coverage would be adequate to offset these and other
business risks related to the Year 2000.
Finally, the Company also cannot predict the potential impact on its
business of the failure of other third parties to achieve Year 2000
compliance. For example, failure by third parties to achieve Year 2000
compliance could cause short-term disruptions in travel patterns,
potentially caused by actual or perceived problems with travel system (such
as the air traffic control system), and potential temporary disruptions in
the supply of utility, telecommunications and financial services, which may
be local or regional in scope. These events could lead travelers to
accelerate travel to late 1999, postpone travel to later in 2000 or cancel
travel plans, which could in turn affect lodging patterns and occupancy.
These potential issues are out of the control of the Company and may have
material impact on the financial performance of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates.
The Company's policy is to manage interest rates through the use of a
combination of fixed and variable rate debt. The Company's interest rate
risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to lower its overall borrowing costs. To
achieve these objectives, the Company borrows at a combination of fixed and
variable rates.
In 1998, the Company obtained the 1998 Amended Credit Facility, which
provides for a maximum borrowing amount of up to $235 million. Borrowings
under the 1998 Amended Credit Facility bear interest at variable market
rates. At March 31, 1999, the Company's outstanding borrowings under the
1998 Amended Credit Facility were $169.2 million. The weighted average
interest rate under the facility for the three months ended March 31, 1999
was 6.7%.
At March 31, 1999, the Company also had outstanding bonds payable of
$42.5 million, of which $40.0 million represents the principal balance of
the bonds and the remaining $2.5 million represents unamortized premium.
The bonds bear interest at a fixed rate. For fixed rate debt, changes in
interest rates generally affect the fair value of the debt, but not the
earnings or cash flows of the Company. Changes in the fair market value of
fixed rate debt generally will not have a significant impact on the
Company, unless the Company is required to refinance such debt. At
March 31, 1999, the carrying value of the bonds approximated their fair
value.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither the Company nor the Operating Partnership is currently
involved in any litigation the ultimate resolution of which, in the opinion
of the Company, is expected to have a material adverse effect on the
financial position, operations or liquidity of the Company and the
Operating Partnership.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 4, 1999, the Company issued 10,988 Common Shares to the
Advisor for the incentive portion of the 1998 advisory fee, as provided in
the advisory agreement with the Advisor, in lieu of the $155 which would
have otherwise been due to the Advisor. This issuance was not registered
under the Securities Act, in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE.
ITEM 5. OTHER MATTERS.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995: Certain statements in this filing and elsewhere (such as in
other filings by the Company with the Securities and Exchange Commission,
press releases, presentations and communications by the Company or its
management and written and oral statements) constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance, achievements, plans and objectives of the Company to be
materially different from any future results, performance, achievements,
plans and objectives expressed or implied by such forward-looking
statements. Such factors are discussed under "Business", Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Quantitative and Qualitative Disclosure about Market Risk" in the
Company's annual report on Form 10-K for the year ended December 31, 1998,
under "Certain Relationships and Related Transactions" in the Company's
proxy statement with respect to the annual meeting of shareholders to be
held on May 19, 1999, in the Company's Registration Statement (No.
333-45647), under "Risk Factors" and elsewhere; in this Report under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere, and in other reports filed by the Company with
the Securities and Exchange Commission and include, among other things, the
following: (i) dependence upon rental payments from lessees of the
Company's Hotels for all of the Company's income, (ii) dependence upon the
ability of the lessees and operators to manage the Company's Hotels, (iii)
the possibility that the Company may be required to fund distributions to
shareholders from working capital or borrowings or reduce such
distributions, (iv) the lack of appraisals for the Hotels contributed to
the Company in connection with the formation of the Company and the
possibility that the price paid for the interests in those Hotels may have
exceeded their market value, (v) the potential for conflicts of interest
between the Company and (a) the Advisor and its affiliates and (b) certain
<PAGE>
Trustees and officers of the Company who are also officers, directors and
stockholders of the Advisor and its affiliates, (vi) competition for
guests, increases in operating costs due to inflation and other factors,
dependence on business, commercial and leisure travelers, seasonality of
business, potential loss of franchise or brand licenses, the possible need
for expenditures in excess of those budgeted for capital improvements and
replacement of furniture, fixtures and equipment and other risks that may
affect the hotel industry generally or the Company's Hotels specifically,
(vii) the Company's lack of an operating history and employees and its
dependence on the Advisor for its management and administration, (viii) the
use of debt financing, (ix) the potential unavailability of adequate
financing to fund acquisitions and development activities, (x) the
dependence of the Company's performance and value on real estate industry
conditions and the condition of the economy in general, (xi) taxation of
the Company as a corporation if it fails to qualify as a REIT and the
taxation of the Operating Partnership as a corporation if it were deemed
not to be a partnership for income tax purposes, (xii) provisions of the
Company's organizational documents, including restrictions on ownership of
more than 9.8% of the outstanding Common Shares, which may make a change in
control of the Company more difficult to achieve and (xiii) the effect of
market interest rates on the price of the Company's Common Shares. The
Company expressly disclaims any obligation or undertaking to update or
revise any forward-looking statements to reflect any change in events or
circumstances or in the Company's expectations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. A list of exhibits is set forth in the Exhibit
Index which immediately precedes the exhibits and which is incorporated by
reference herein.
(b) Reports of Form 8-K.
No reports on Form 8-K were filed during the first quarter
of 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LASALLE HOTEL PROPERTIES
Dated: May 12, 1999 BY: /s/ HANS WEGER
------------------------------
Hans Weger
Executive Vice President,
Treasurer and Chief
Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Form of First Amendment to Lease with
Affiliated Lessee
10.2 Form of Second Amendment to Lease with
Affiliate Lessee
27 Financial Data Schedule
EXHIBIT 10.1
- ------------
FIRST AMENDMENT TO LEASE
First Amendment (this "Amendment") to Lease (hereinafter defined),
dated as of December __, 1998, by and between LASALLE HOTEL OPERATING
PARTNERSHIP, L.P ("Landlord"), having an address at 1401 Eye Street, N.W.,
Suite 900, Washington, DC 20005 and LASALLE HOTEL LESSEE, INC. ("Tenant"),
having an address at c/o LaSalle Hotel Advisors, 1401 Eye Street, N.W.,
Suite 900, Washington, DC 20005. Capitalized terms not otherwise defined
herein shall have the definitions set forth in the Lease.
WITNESSETH
WHEREAS, Landlord and Tenant entered into that certain Lease (the
"Lease"), dated as of ______, covering the Leased Property (as more fully
described in the Lease);
WHEREAS, the parties desire to amend the Lease as set forth herein;
NOW, THEREFORE, for Ten ($10.00) Dollars and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant hereby amend the Lease as follows:
1. SECTION 3.1.1. Section 3.1.1 shall be deleted in its entirety and
replaced with the following:
3.1.1 MINIMUM RENT. For each Accounting Period or portion thereof
elapsed prior to the last day of the Accounting Period immediately
preceding the month in which a Payment Date occurs, Tenant shall pay
Minimum Rent accrued but unpaid during such period (e.g., for the Payment
Date occurring on March 15, Rent accrued through the end of the month of
February, and for the Payment Date occurring on September 15, Rent accrued
through the end of the month of August), less amounts paid by Tenant or
Manager, on behalf of Landlord, for (i) property insurance, (ii) the
Reserve Payment, (iii) real estate taxes and/or personal property taxes,
and (iv) other costs and expenses paid under the Management Agreement, in
arrears prior to 11:00 a.m. New York time on the next succeeding Payment
Date.
2. A new SECTION 3.1.5 shall be added as follows:
3.1.5 HOTEL MORTGAGE CASH ACCOUNT. If, pursuant to any Hotel
Mortgage, the sum of (x) all Gross Revenues, less (y) Landlord Operating
Expenses which have been paid by Manager, if any (such sum being defined
herein as, the "Escrow Funds"), is required to be deposited directly into
an account maintained on behalf of Landlord pursuant to the terms of the
Hotel Mortgage, Landlord shall credit, on a monthly basis, the amount of
the Escrow Funds against Rent due from Tenant. If the Escrow Funds exceed
the amount of Rent due from Tenant, Tenant shall be entitled to the
surplus, if any of such Escrow Funds; provided, however, nothing contained
in this SECTION 3.1.5 shall be deemed to relieve Tenant of its obligations
to pay Rent under this Agreement if the amount of the Escrow Funds is less
than the amount of Rent due and owing from Tenant. Any amounts which may
be payable to Tenant under this SECTION 3.1.5 shall be remitted to Tenant
on the applicable Payment Date.
<PAGE>
3. NO OTHER AMENDMENT. Except as expressly modified by this Amendment,
all other terms and conditions of the Lease are hereby ratified and remain
unchanged.
4. FULL FORCE AND EFFECT. The parties hereto certify and acknowledge
that (a) the Lease, as amended by this Amendment, is in full force and
effect; (b) neither party is in default of any of the terms and conditions
set forth in the Lease; and (c) the Lease, as amended hereby, is
enforceable in accordance with its terms.
[SIGNATURES ARE ON THE NEXT PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date and year first above written.
LANDLORD: LASALLE HOTEL OPERATING PARTNERSHIP, L.P.
By: LaSalle Hotel Properties,
its general partner
By: ______________________________
Name:
Title: Authorized Signatory
TENANT: LASALLE HOTEL LESSEE, INC.
By: _______________________________
Name:
Title: Authorized Signatory
EXHIBIT 10.2
- ------------
SECOND AMENDMENT TO LEASE
Second Amendment (this "Amendment") to Lease (hereinafter defined),
dated as of January 1, 1999, by and between LASALLE HOTEL OPERATING
PARTNERSHIP, L.P. ("Landlord"), having an address at 1401 Eye Street, N.W.,
Suite 900, Washington, DC 20005 and LASALLE HOTEL LESSEE, INC. ("Tenant"),
having an address at c/o LaSalle Hotel Advisors, 1401 Eye Street, N.W.,
Suite 900, Washington, DC 20005. Capitalized terms not otherwise defined
herein shall have the definitions set forth in the Lease.
WITNESSETH
WHEREAS, Landlord and Tenant entered into that certain Lease (the
"Lease"), dated as of _______, covering the Leased Property commonly known
as the ______________;
WHEREAS, Landlord and Tenant into that certain First Amendment to
Lease (the "First Amendment") dated as of December 31, 1998, amending
certain terms and provisions at the lease, as more fully set forth in the
First Amendment
WHEREAS, the parties desire to further amend the Lease to: (i)
modify the definition of Beverage Sales, CPI, Food Sales and Gross
Revenues, (ii) modify CPI Adjustments, and (iii) amend Exhibit A to change
certain provisions contained therein.
NOW, THEREFORE, for Ten ($10.00) Dollars and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant hereby amend the Lease as follows:
1. SECTION 1.15, 1.52, 1.58. Sections 1.15, 1.52, and 1.58 shall be
deleted in their entirety and replaced with the following:
1.15 "BEVERAGE SALES" shall mean Gross Revenues from (a) the sale of
wine, beer, liquor or other alcoholic beverages, whether sold in a bar or
lounge, delivered to or available in a guest room, sold at meetings or
banquets or at any other location at the Hotel and (b) non-alcoholic
beverages sold in a bar or lounge. Such revenue shall include sales by
Tenant and its permitted subtenants, licensees and concessionaires if such
permitted subtenant, licensees or concessionaires are Affiliates of Tenant.
Such revenue shall be determined in a manner consistent with GAAP and the
Uniform System of Accounts and shall include (a) the fair market value of
goods or services which have been provided in exchange for beverages under
bartering or trade arrangements, (b) the fair market value of beverages
provided under frequent traveler programs, gift certificate programs or any
other similar programs, and (c) the fair market value of any other
allowances deducted from beverage revenues (items (a)-(c) being allocated
to the respective revenues categories in accordance with the Uniform System
of Accounts). Such revenue shall not include: (a) any gratuity, or
service charge added to a customer's bill or statement in lieu of gratuity;
or (b) sales taxes or taxes of any other kind imposed on the sale of
alcoholic or other beverages; or (c) the value of any beverages provided to
employees of Landlord, Tenant, any franchise or under the Franchise
Agreement or any guest on a complimentary basis. All credits, rebates,
refunds and credit card chargebacks relating to Beverage Sales shall be
deducted from Beverage Sales.
<PAGE>
1.52 "FOOD SALES" shall mean (a) Gross Revenues from the sale of
food and non-alcoholic beverages that are prepared at the Hotel and sold or
delivered on or off the Hotel by Tenant whether for cash or for credit,
including in respect of guest rooms, banquet rooms, meeting rooms and other
similar rooms, and (b) Gross Revenues from the rental of banquet, meeting
and other similar rooms. Such revenue shall include sales by Tenant and
its permitted subtenants, licensees and concessionaires, but as to
subleases, licenses or similar arrangements for food and non-alcoholic
beverage sales which were entered into by Landlord or any prior owner of
the Leased Property with parties who are not Affiliates of Tenant and which
are existing as of the date of this Agreement, such revenue shall only
include rents received under such existing subleases, licenses or similar
arrangements. Such revenue shall be determined in a manner consistent with
GAAP and the Uniform System of Accounts and shall include (a) the fair
market value of goods or services which have been provided in exchange for
food under bartering or trade arrangements, (b) the fair market value of
food provided under frequent traveler programs, gift certificate programs
or any other similar programs, and (c) the fair market value of any other
allowances deducted from food revenues, (items (a)-(c) being allocated to
the respective revenues categories in accordance with the Uniform System of
Accounts). Such revenue shall not include: (a) vending machine sales; (b)
any gratuities, or service charges added to a customer's bill or statement
in lieu of gratuity, (c) non-alcoholic beverages sold from a bar or lounge;
or (d) sales taxes or taxes of any other kind imposed on the sale of food
or non-alcoholic beverages; or (e) the value of food or non-alcoholic
beverages provided to employees of Landlord, Tenant, the franchisor under
the Franchise Agreement or any other guests on a complimentary basis. All
credits, rebates, refunds and credit card chargebacks relating to Food
Sales shall be deducted from Food Sales.
1.58 "GROSS REVENUES" shall mean all revenues, receipts, and income
of any kind derived directly or indirectly by Tenant from or in connection
with the Hotel (including rentals or other payments from their tenants,
lessees, licensees or concessionaires but not including their gross
receipts) whether on a cash basis or credit, paid or collected, determined
in accordance with GAAP and the Uniform System of Accounts, excluding,
however: (a) funds furnished by Landlord, (b) federal, state and municipal
excise, sales, and use taxes collected directly from patrons and guests or
as a part of the sales price of any goods, services or displays, such as
gross receipts, admissions, cabaret or similar or equivalent taxes and paid
over to federal, state or municipal governments, (c) any gratuities, or
service charges added to a customer's bill or statement in lieu of
gratuity, (d) proceeds of insurance and Awards, (e) proceeds from sales of
furnishings, fixtures and equipment which are permitted pursuant to the
terms of this Agreement, (f) all loan
<PAGE>
proceeds from financing or refinancings of the Hotel or
interests therein or components thereof, (g) interest earned on funds
deposited into the Reserve Fund and (h) judgments and awards, except any
portion thereof arising from normal business operations of the Hotel.
2. By way of clarification only, it is understood by and between the
parties hereto that for purposes of accounting for the profit and loss
statement for the Hotel, any net gratuities or net service charges not paid
out to employees are recorded as a deduction from the appropriate payroll
accounts, and shall not be utilized in the calculation of Rent.
3. SECTION 3.14 Section 3.1.4 shall be deleted in its entirety and
replaced with the following:
3.1.4 CPI ADJUSTMENTS. For each Lease Year during the Term beginning
with the Lease Year commencing January 2000 the Minimum Rent then in
effect, the Annual Room Revenues First Break Point, the Annual Room
Revenues Second Break Point (each as defined in EXHIBIT A and together, the
"ANNUAL ROOM REVENUES BREAK POINTS"), the Annual Food and Beverage Sales
First Break Point, the Annual Food and Beverage Sales Second Break Point,
(each as defined in EXHIBIT A and together, the "ANNUAL FOOD AND BEVERAGE
SALES BREAK POINTS"), the Annual Telephone Revenues First Break Point, the
Annual Telephone Revenues Second Break Point (each as defined in EXHIBIT A
and together, the "ANNUAL TELEPHONE REVENUES BREAK POINTS"), the Annual
Other Income First Break Point, the Annual Other Income Second Break Point
(each as defined in EXHIBIT A and together, the "ANNUAL OTHER INCOME BREAK
POINTS), then included in the Revenues Computation shall be increased as
follows:
(a) For the Lease Year commencing January 2000, and for each Lease
Year thereafter during the Term, the average CPI for the immediately
preceding twelve (12) months immediately preceding the new Lease Year (the
"MEASUREMENT DATE") shall be divided by the average CPI for the twelve (12)
months in the prior calendar year and such number shall be expressed as a
percentage and such percentage shall be increased by one (1) percent (the
"FACTOR") (for example, if the percentage is 3.2%, then the Factor shall be
4.2%); provided, however, (i) for the Lease Years commencing January 2002
and January 2008 the term "Factor" shall be deemed to be the product of (x)
the Factor and (y) 371/364, and (ii) for the Lease Years commencing January
2003 and January 2009 the term "Factor" shall be deemed to be the product
of (x) the Factor and (y) 364/371;
(b) The new Minimum Rent for the Lease Year commencing January 2000
and for each Lease Year thereafter shall be the product of (x) the Minimum
Rent in effect in the most recently ended Lease Year and (y) the Factor;
<PAGE>
(c) The new Annual Room Revenues Break Points in the Revenues
Computation for the Lease Year commencing January 2000 and for each Lease
Year thereafter shall be the product of (x) the Annual Room Revenues Break
Points in effect in the most recently ended Lease Year and (y) the Factor;
(d) The new Annual Food and Beverage Sales Break Points in the
Revenues Computation for the Lease Year commencing January 2000 and for
each Lease Year thereafter shall be the product of (x) the Annual Food and
Beverage Sales Break Points in effect in the most recently ended Lease Year
and (y) the Factor;
(e) The new Annual Telephone Revenues Break Points in the Revenues
Computation for the Lease Year commencing January 2000 shall be the product
of (x) the Annual Telephone Revenues Break Points in effect for the most
recently ended Lease Year and (y) the Factor;
(f) The new Annual Other Income Break Points in the Revenues
Computation for the Lease Year commencing January 2000 and for each Lease
Year thereafter shall be the product of (x) the Annual Other Income Break
Points in effect in the most recently ended Lease Year and (y) the Factor.
Adjustments calculated as set forth above in the Minimum Rent, the
Annual Room Revenues Break Points, the Annual Food and Beverage Sales Break
Points, the Annual Telephone Revenues Break Points, and the Annual Other
Income Break Points, shall be effective on the first day of each Lease Year
to which such adjusted amounts apply. If Rent is paid prior to the
determination of the amount of any adjustment to Minimum Rent, the Annual
Room Revenues Break Points, the Annual Food and Beverage Sales Break
Points, the Annual Telephone Revenues Break Points, and the Annual Other
Income Break Points applicable for such period, whether because of a delay
in the publication of the CPI for the Measurement Date or because of any
other reason, payment adjustments for any shortfall in or overpayment of
Rent paid shall be made with the first Minimum Rent and Participating Rent
payments due after the amount of the adjustments are determined. If (1) a
significant change is made in the number or nature (or both) of items used
in determining the CPI, or (2) the CPI shall be discontinued for any
reason, the Bureau of Labor Statistics shall be requested to furnish a new
index comparable to the CPI, together with information which will make
possible a conversion to the new index in computing the adjusted Minimum
Rent, the Annual Room Revenues Break Points, the Annual Food and Beverage
Sales Break Points, the Annual Telephone Revenues Break Points, and the
Annual Other Income Break Points hereunder. If for any reason the Bureau
of Labor Statistics does not furnish such an index and such information,
the parties will instead mutually select, accept and use such other index
or comparable statistics on the cost of living in various cities that is
computed and published by an agency of the United States of America or a
responsible financial periodical of recognized authority. In no event
shall the Minimum Rent, the Annual Room Revenues Break Points, the Annual
Food and Beverage Sales Break Points, the Annual Telephone Revenue Break
Points, or the Annual Other Income Break Points be reduced as a result of
any changes in the CPI or changes to the calculation of CPI.
<PAGE>
3. EXHIBIT A. Exhibit A shall be deleted in its entirety and
replaced with Exhibit A annexed hereto and made a part hereof.
4. DEFINED TERMS. Capitalized terms not otherwise defined herein
shall have the definitions set forth in the Lease.
5. NO OTHER AMENDMENT. Except as expressly modified by this
Amendment, all other terms and conditions of the Lease are hereby ratified
and remain unchanged.
6. FULL FORCE AND EFFECT. The parties hereto certify and
acknowledge that (a) the Lease, as amended by this Amendment, is in full
force and effect; (b) neither party is in default of any of the terms and
conditions set forth in the Lease; and (c) the Lease, as amended hereby, is
enforceable in accordance with its terms.
[SIGNATURES ARE ON THE NEXT PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date and year first above written.
LANDLORD: LASALLE HOTEL OPERATING PARTNERSHIP, L.P.
By: LaSalle Hotel Properties,
its general partner
By: ______________________________
Name:
Title: Authorized Signatory
TENANT: LASALLE HOTEL LESSEE, INC.
By: _______________________________
Name:
Title: Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN SUCH
REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,205
<SECURITIES> 0
<RECEIVABLES> 6,496
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,555
<PP&E> 494,939
<DEPRECIATION> 26,652
<TOTAL-ASSETS> 495,435
<CURRENT-LIABILITIES> 4,413
<BONDS> 42,514
<COMMON> 152
0
0
<OTHER-SE> 230,900
<TOTAL-LIABILITY-AND-EQUITY> 495,435
<SALES> 0
<TOTAL-REVENUES> 16,212
<CGS> 0
<TOTAL-COSTS> 13,152
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,505
<INCOME-PRETAX> 2,508
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,508
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
