e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-31775
(Exact name of registrant as specified in its charter)
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Maryland
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86-1062192 |
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(State or other jurisdiction of incorporation or organization)
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(IRS employer identification number) |
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14185 Dallas Parkway, Suite 1100 |
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Dallas, Texas
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75254 |
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(Address of principal executive offices)
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(Zip code) |
(972) 490-9600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Common Stock, $0.01 par value per share
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119,723,972 |
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(Class)
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Outstanding at May 5, 2008 |
ASHFORD HOSPITALITY TRUST, INC
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Investments in hotel properties, net |
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$ |
3,824,097 |
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$ |
3,885,737 |
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Cash and cash equivalents |
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94,424 |
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92,271 |
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Restricted cash |
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46,735 |
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52,872 |
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Accounts receivable, net of allowance of $1,105 and $1,458, respectively |
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63,968 |
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51,314 |
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Inventories |
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4,107 |
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4,100 |
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Notes receivable |
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112,462 |
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94,225 |
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Investment in unconsolidated joint venture |
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23,557 |
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¯ |
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Assets held for sale |
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68,647 |
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75,739 |
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Deferred costs, net |
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23,597 |
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25,714 |
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Prepaid expenses |
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18,655 |
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20,223 |
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Other assets |
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14,281 |
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6,027 |
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Intangible assets, net |
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3,144 |
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13,889 |
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Due from third-party hotel managers |
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59,454 |
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58,300 |
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Total assets |
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$ |
4,357,128 |
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$ |
4,380,411 |
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Liabilities and Stockholders Equity |
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Liabilities: |
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Indebtedness |
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$ |
2,664,850 |
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$ |
2,639,546 |
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Indebtedness related to assets held for sale |
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47,450 |
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61,229 |
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Capital leases payable |
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426 |
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498 |
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Accounts payable and accrued expenses |
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119,022 |
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124,696 |
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Dividends payable |
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35,115 |
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35,031 |
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Unfavorable management contract liabilities |
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22,832 |
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23,396 |
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Due to related parties |
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3,356 |
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2,732 |
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Due to third-party hotel managers |
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7,648 |
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4,699 |
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Other liabilities |
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8,458 |
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8,514 |
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Total liabilities |
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2,909,157 |
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2,900,341 |
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Commitments and contingencies (Note 13) |
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Minority interests in consolidated joint ventures |
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18,333 |
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19,036 |
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Minority interests in operating partnership |
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98,804 |
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101,031 |
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Preferred stock, $0.01 par value, Series B Cumulative Convertible
Redeemable Preferred Stock, 7,447,865 shares issued and outstanding |
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75,000 |
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75,000 |
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Shareholders equity: |
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Preferred stock, $0.01 par value, 50,000,000 shares authorized - |
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Series A Cumulative Preferred Stock, 2,300,000 issued and outstanding |
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23 |
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23 |
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Series D Cumulative Preferred Stock, 8,000,000 issued and outstanding |
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80 |
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80 |
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Common stock, $0.01 par value, 200,000,000 shares authorized,
122,754,192 shares issued and 119,723,972 shares outstanding at March
31, 2008 and 122,765,691 shares issued and 120,376,055 shares
outstanding at December 31, 2007 |
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1,228 |
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1,228 |
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Additional paid-in capital |
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1,456,886 |
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1,455,917 |
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Accumulated other comprehensive loss |
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(252 |
) |
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(115 |
) |
Accumulated deficit |
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(179,639 |
) |
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(153,664 |
) |
Treasury stock, at cost, 3,030,220 and 2,389,636 shares, respectively |
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(22,492 |
) |
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(18,466 |
) |
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Total shareholders equity |
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1,255,834 |
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1,285,003 |
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Total liabilities and shareholders equity |
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$ |
4,357,128 |
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$ |
4,380,411 |
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See Notes to Consolidated Financial Statements.
3
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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(Unaudited) |
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Revenue |
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Rooms |
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$ |
225,602 |
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$ |
110,000 |
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Food and beverage |
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69,511 |
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30,136 |
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Rental income from operating leases |
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1,347 |
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Other |
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14,253 |
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4,923 |
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Total hotel revenue |
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310,713 |
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145,059 |
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Interest income from notes receivable |
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3,255 |
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3,355 |
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Asset management fees and other |
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522 |
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331 |
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Total revenue |
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314,490 |
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148,745 |
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Expenses |
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Hotel operating expenses: |
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Rooms |
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50,488 |
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24,306 |
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Food and beverage |
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49,186 |
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21,828 |
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Other expenses |
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94,223 |
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44,387 |
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Management fees |
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12,093 |
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5,337 |
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Total hotel operating expenses |
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205,990 |
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95,858 |
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Property taxes, insurance and other |
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16,227 |
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7,769 |
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Depreciation and amortization |
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45,570 |
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16,237 |
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Corporate general and administrative |
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7,704 |
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4,594 |
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Total expenses |
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275,491 |
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124,458 |
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Operating Income |
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38,999 |
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24,287 |
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Equity in earnings of unconsolidated joint venture |
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526 |
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Interest income |
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546 |
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498 |
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Other income |
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296 |
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Interest expense and amortization of loan costs |
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(39,621 |
) |
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(15,775 |
) |
Write-off of loan costs and exit fees |
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(491 |
) |
Unrealized gains (losses) on derivatives |
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4,049 |
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(35 |
) |
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Income before Income Taxes, Minority Interests and Discontinued Operations |
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4,795 |
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8,484 |
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Income tax (expense) benefit |
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(410 |
) |
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|
1,148 |
|
Minority interests in earnings of consolidated joint ventures |
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(67 |
) |
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Minority interests in earnings of operating partnership |
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(400 |
) |
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(1,442 |
) |
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Income from Continuing Operations |
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3,918 |
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8,190 |
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Income from discontinued operations before income taxes |
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2,267 |
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3,940 |
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Income tax expense |
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(639 |
) |
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Income from Discontinued Operations |
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2,267 |
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3,301 |
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Net Income |
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6,185 |
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|
11,491 |
|
Preferred dividends |
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(7,018 |
) |
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(2,793 |
) |
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|
Net (Loss) Income Available to Common Shareholders |
|
$ |
(833 |
) |
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$ |
8,698 |
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Income (Loss) Available to Common Shareholders Per Share: |
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|
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Basic - |
|
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Loss (income) from continuing operations available to common shareholders |
|
$ |
(0.03 |
) |
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$ |
0.07 |
|
Income from discontinued operations available to common shareholders |
|
|
0.02 |
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|
0.05 |
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|
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|
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Net loss (income) available to common shareholders |
|
$ |
(0.01 |
) |
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$ |
0.12 |
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Diluted - |
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|
(Loss) income from continuing operations available to common shareholders |
|
$ |
(0.03 |
) |
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$ |
0.07 |
|
Income from discontinued operations available to common shareholders |
|
|
0.02 |
|
|
|
0.05 |
|
|
|
|
|
|
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|
Net (loss) income available to common shareholders |
|
$ |
(0.01 |
) |
|
$ |
0.12 |
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|
Weighted average common shares outstanding - |
|
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|
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|
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Basic |
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|
118,855 |
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|
72,042 |
|
Diluted |
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|
118,855 |
|
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|
72,449 |
|
See Notes to Consolidated Financial Statements.
4
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands)
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Three Months Ended March 31, |
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2008 |
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2007 |
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Shares |
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Amounts |
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Shares |
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Amounts |
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(Unaudited) |
Preferred Stocks |
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|
|
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|
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Series A, $0.01 par value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Balance at end of period |
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|
2,300 |
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|
$ |
23 |
|
|
|
2,300 |
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|
$ |
23 |
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|
|
|
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|
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|
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|
Series D, $0.01 par value |
|
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|
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|
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|
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|
Balance at end of period |
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|
8,000 |
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|
80 |
|
|
|
|
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Common Stock |
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|
Balance at beginning of year |
|
|
122,766 |
|
|
|
1,228 |
|
|
|
72,943 |
|
|
|
729 |
|
Issuance of restricted shares under stock-based compensation plan |
|
|
65 |
|
|
|
|
|
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|
839 |
|
|
|
8 |
|
Restricted shares issued from treasury stock |
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|
(65 |
) |
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|
|
|
|
|
(21 |
) |
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|
Forfeitures of restricted shares under stock-based compensation plan |
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|
(12 |
) |
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(6 |
) |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Balance at end of period |
|
|
122,754 |
|
|
|
1,228 |
|
|
|
73,755 |
|
|
|
737 |
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
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|
|
|
|
|
|
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|
|
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Additional Paid-in Capital |
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|
|
|
|
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|
Balance at beginning of year |
|
|
|
|
|
|
1,455,917 |
|
|
|
|
|
|
|
708,420 |
|
Issuance of restricted shares under stock-based compensation plan |
|
|
|
|
|
|
(596 |
) |
|
|
|
|
|
|
(268 |
) |
Stock-based compensation |
|
|
|
|
|
|
1,565 |
|
|
|
|
|
|
|
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
1,456,886 |
|
|
|
|
|
|
|
709,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
(153,664 |
) |
|
|
|
|
|
|
(67,574 |
) |
Net income |
|
|
|
|
|
|
6,185 |
|
|
|
|
|
|
|
11,491 |
|
Dividends declared common shares and units |
|
|
|
|
|
|
(25,142 |
) |
|
|
|
|
|
|
(15,484 |
) |
Dividends declared Series A preferred stock |
|
|
|
|
|
|
(1,229 |
) |
|
|
|
|
|
|
(1,229 |
) |
Dividends declared Series B preferred stock |
|
|
|
|
|
|
(1,564 |
) |
|
|
|
|
|
|
(1,564 |
) |
Dividends declared Series D preferred stock |
|
|
|
|
|
|
(4,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
(179,639 |
) |
|
|
|
|
|
|
(74,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
(115 |
) |
|
|
|
|
|
|
111 |
|
Reclassified to interest expense |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
(151 |
) |
Change in unrealized loss on derivative instruments |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
(80 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
(252 |
) |
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
2,390 |
|
|
|
(18,466 |
) |
|
|
|
|
|
|
|
|
Purchases of treasury shares |
|
|
705 |
|
|
|
(4,622 |
) |
|
|
(58 |
) |
|
|
(700 |
) |
Reissuance of treasury shares |
|
|
(65 |
) |
|
|
596 |
|
|
|
21 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
3,030 |
|
|
|
(22,492 |
) |
|
|
(37 |
) |
|
|
(440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
|
|
|
$ |
1,255,834 |
|
|
|
|
|
|
$ |
635,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Net Income |
|
$ |
6,185 |
|
|
$ |
11,491 |
|
|
|
|
|
|
|
|
Other Comprehensive Income (loss) |
|
|
|
|
|
|
|
|
Reclassification to interest expense |
|
|
(7 |
) |
|
|
(151 |
) |
Net unrealized gains (losses) on derivative instruments |
|
|
6 |
|
|
|
(80 |
) |
Foreign currency translation loss |
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(137 |
) |
|
|
(231 |
) |
|
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
6,048 |
|
|
$ |
11,260 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
5
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,185 |
|
|
$ |
11,491 |
|
Adjustments to reconcile net income to net cash flow provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
46,326 |
|
|
|
17,196 |
|
Equity in earnings of unconsolidated joint venture |
|
|
(526 |
) |
|
|
|
|
Gains on sales of properties |
|
|
(889 |
) |
|
|
(1,388 |
) |
Amortization of loan costs |
|
|
1,815 |
|
|
|
659 |
|
Write-off of loan costs, premiums and exit fees |
|
|
(1,862 |
) |
|
|
703 |
|
Unrealized (gains) losses on derivatives |
|
|
(4,049 |
) |
|
|
35 |
|
Amortization of other comprehensive income |
|
|
(7 |
) |
|
|
(151 |
) |
Stock-based compensation |
|
|
1,609 |
|
|
|
1,059 |
|
Minority interests in consolidated joint ventures and operating partnership |
|
|
698 |
|
|
|
1,827 |
|
Changes in operating assets and liabilities - |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
6,137 |
|
|
|
(7,276 |
) |
Accounts receivable and inventories |
|
|
(12,075 |
) |
|
|
(8,499 |
) |
Prepaid expenses and other assets |
|
|
1,938 |
|
|
|
(5,331 |
) |
Accounts payable and accrued expenses |
|
|
(11,092 |
) |
|
|
9,020 |
|
Other liabilities |
|
|
(6,893 |
) |
|
|
(1,920 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
27,315 |
|
|
|
17,425 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Acquisitions/originations of notes receivable |
|
|
(39,530 |
) |
|
|
|
|
Proceeds from payments of notes receivable |
|
|
16,165 |
|
|
|
8,019 |
|
Investment in unconsolidated joint venture |
|
|
(17,801 |
) |
|
|
|
|
Acquisitions of hotel properties |
|
|
|
|
|
|
(119 |
) |
Deposits and costs related to future acquisition of hotel portfolio |
|
|
|
|
|
|
(14,929 |
) |
Improvements and additions to hotel properties |
|
|
(32,645 |
) |
|
|
(19,929 |
) |
Proceeds from sales of discontinued operations |
|
|
79,159 |
|
|
|
30,602 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
5,348 |
|
|
|
3,644 |
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Borrowings on indebtedness and capital leases |
|
|
75,000 |
|
|
|
20,000 |
|
Repayments of indebtedness and capital leases |
|
|
(61,363 |
) |
|
|
(28,583 |
) |
Payments of deferred loan costs |
|
|
|
|
|
|
(70 |
) |
Payments from minority interests |
|
|
137 |
|
|
|
|
|
Payments of dividends |
|
|
(35,031 |
) |
|
|
(19,975 |
) |
Payments for derivatives |
|
|
(4,576 |
) |
|
|
|
|
Repurchases of treasury stock |
|
|
(4,594 |
) |
|
|
(700 |
) |
Other |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(30,374 |
) |
|
|
(29,328 |
) |
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash |
|
|
(136 |
) |
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,289 |
|
|
|
(8,259 |
) |
Cash and cash equivalents at beginning of year |
|
|
92,271 |
|
|
|
73,343 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
94,424 |
|
|
$ |
65,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
44,174 |
|
|
$ |
15,920 |
|
Income taxes (refunded) paid |
|
$ |
(442 |
) |
|
$ |
1,797 |
|
Supplemental Disclosure of Non-Cash Investing Activity |
|
|
|
|
|
|
|
|
Note receivable contributed to unconsolidated joint venture |
|
$ |
5,230 |
|
|
$ |
|
|
See Notes to Consolidated Financial Statements.
6
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Ashford Hospitality Trust, Inc. and subsidiaries (the Company) is a self-advised real estate
investment trust (REIT) which commenced operations on August 29, 2003 when it completed its
initial public offering (IPO) and concurrently consummated certain other formation transactions,
including the acquisition of six hotels (initial properties). The Company owns its lodging
investments and conducts its business through Ashford Hospitality Limited Partnership, its
operating partnership. Ashford OP General Partner LLC, its wholly-owned subsidiary, serves as the
sole general partner of the Companys operating partnership.
In April 2007, the Company acquired a 51-property hotel portfolio (CNL Portfolio) from CNL
Hotels and Resorts, Inc. (CNL). Pursuant to the purchase agreement, the Company acquired 100% of
33 properties and interests ranging from 70% to 89% in 18 properties through existing joint
ventures. In connection with the CNL transaction, the Company acquired the 15% remaining joint
venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007
two other hotel properties previously owned by CNL (collectively, the CNL Acquisition). In
December 2007, the Company completed an asset swap with Hilton Hotels Corporation (Hilton),
whereby the Company surrendered its majority ownership interest in two hotel properties in exchange
for Hiltons minority ownership interest in nine hotel properties. Net of subsequent sales and
asset swap, 45 of these hotels were included in the Companys hotel property portfolio at March 31,
2008.
As of March 31, 2008, the Company owned 104 hotel properties directly and six hotel properties
through equity investments with joint venture partners, which represents 25,825 total rooms, or
25,483 net rooms excluding those attributable to joint venture partners. Of the total 110 hotel
properties, 109 are located in the United states and one in Canada. As of March 31, 2008, the
Company also wholly owned $112.5 million of mezzanine or first-mortgage loans receivable. In
addition, the Company owns $23.0 million of mezzanine loans held in a joint venture. See Notes 3
and 6.
For federal income tax purposes, the Company elected to be treated as a real estate investment
trust (REIT), which imposes limitations related to operating hotels. As of March 31, 2008, 109
of the Companys hotel properties were leased or owned by wholly-owned subsidiaries of the Company
that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these
subsidiaries are referred to as Ashford TRS). Ashford TRS then engages third-party or affiliated
hotel management companies to operate the hotels under management contracts. Hotel operating
results related to these properties are included in the consolidated results of operations. As of
March 31, 2008, the remaining hotel property was leased on a triple-net lease basis to a
third-party tenant who operates the hotel. Rental income from this operating lease is included in
the consolidated results of operations.
Remington Lodging & Hospitality, L.P. and Remington Management, L.P. (collectively, Remington
Lodging), both primary property managers for the Company, are beneficially wholly owned by Mr.
Archie Bennett, Jr., the Companys Chairman, and Mr. Montgomery J. Bennett, the Companys Chief
Executive Officer. As of March 31, 2008, Remington Lodging managed 43 of the Companys 110 hotel
properties while third-party management companies managed the remaining 67 hotel properties.
2. Significant Accounting Policies
Basis of Presentation - The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2008.
These consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries and its majority-owned joint ventures in which it has a
controlling interest. All significant intercompany accounts and transactions between
consolidated entities have been eliminated in these consolidated financial statements.
These financial statements and related notes should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys 2007 Annual Report on
Form 10-K to Shareholders.
7
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certain amounts in the consolidated financial statements for the three months ended March 31,
2007 have been reclassified to conform to the presentation format adopted in 2008. These
reclassifications have no effect on the net income or financial position previously reported.
The following items affect the Companys reporting comparability related to its consolidated
financial statements:
|
|
|
The operations of the Companys hotels have historically been seasonal. This
seasonality pattern causes fluctuations in the Companys operating results. Consequently,
operating results for the three months ended March 31, 2008 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2008. |
|
|
|
|
Marriott International, Inc. (Marriott) manages 41 of the Companys properties. For
these 41 Marriott-managed hotels, the fiscal year reflects twelve weeks of operations for
the first three quarters of the year and sixteen weeks for the fourth quarter of the year.
Therefore, in any given quarterly period, period-over-period results will have different
ending dates. For Marriott-managed hotels, the first quarters of 2008 and 2007 ended
March 28 and March 23, respectively. |
Use of Estimates The preparation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition Hotel revenues, including room, food, beverage, and ancillary
revenues such as long-distance telephone service, laundry, and space rentals, are recognized when
services have been rendered. Rental income, representing income from leasing hotel properties to
third-party tenants on triple-net operating leases, is recognized on a straight-line basis over the
lease terms. Interest income, representing interest on the mezzanine and first mortgage loan
portfolio, is recognized when earned. Asset management fees, representing primarily asset
management services performed on behalf of a related party (including services such as risk
management and insurance procurement, tax assistance, franchise agreements and equipment leases
negotiations, monitoring loan covenants compliance, capital and operating budgets preparation, and
property litigation management), are recognized when services are rendered.
Investments in Hotel Properties Hotel properties are generally stated at cost.
However, the initial properties contributed upon the Companys formation are stated at the
predecessors historical cost, net of any impairment charges, if any, plus a minority interest
partial step-up related to the acquisition of minority interest from third parties associated with
four of the initial properties. In addition, in connection with the acquisition of the 51-hotel
property portfolio from CNL Hotels and Resorts, Inc. (the CNL Portfolio) on April 11, 2007, and
subsequent asset swap completed on December 15, 2007, the Company owns between 75% to 89% ownership
interest in certain hotel properties owned by joint ventures. For these hotel properties, the
carrying basis attributable to the joint venture partners minority ownership is recorded at the
predecessors historical cost, net of any impairment charges, while the carrying basis attributable
to the Companys majority ownership is recorded based on the allocated purchase price of the
Companys ownership interest in the joint ventures. All improvements and additions which extend
the useful life of the hotel properties are capitalized.
Investment
in Unconsolidated Joint Venture Investment in a
joint venture in which the Company has a 25% ownership is accounted
for under the equity method of accounting by recording the
Companys initial investment and the Companys percentage
of interest in the joint ventures net income. The equity
accounting method is employed due to the fact that the Company does
not control the joint venture pursuant to the guidance provided by
Emerging Issue Task Force (EITF) Abstract No. 04-5.
Notes Receivable The Company provides mezzanine and first-mortgage financing in the
form of notes receivable, which are recorded at cost, adjusted for net origination fees and costs.
Loans acquired are recorded at costs, net of any impairment charges, if any. Premiums, discounts,
and net origination fees are amortized or accreted as an adjustment to
8
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest income using the
effective interest method over the life of the loan. Loans receivable are reviewed for potential
impairment at each balance sheet date. A loan receivable is considered impaired when it becomes
probable, based on current information, that the Company will be unable to collect all amounts due
according to the loans contractual terms. The amount of impairment, if any, is measured by
comparing the recorded amount of the loan to the present value of the expected future cash flows or
the fair value of the collateral. If a loan was deemed to be impaired, the Company would record a
reserve for loan losses through a charge to income for any shortfall. To date, no such impairment
charges have been recognized.
Assets Held for Sale and Discontinued Operations The Company reclassifies assets as
held for sale when management has committed to a plan to sell the assets, actively seeks a buyer
for the assets, and the consummation of the sale is considered probable and expected within one
year. The related operations of assets held for sale are reported as discontinued if a) such
operations and cash flows can be clearly distinguished, both operationally and financially, from
the ongoing operations of the Company, b) such operations and cash flows will be eliminated from
ongoing operations once the disposal occurs, and c) the Company will not have any significant
continuing involvement subsequent to the disposal.
Derivative Financial Instruments and Hedges The Company enters into interest rate
swap, floor and cap agreements to increase stability related to interest expense and to manage its
exposure to interest rate movements or other identified risks. To accomplish this objective, the
Company primarily uses interest rate swaps and caps within its cash flow hedging strategy. The
Company also uses non-hedge derivatives to capitalize on the historical correlation between changes
in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room) and to enhance
dividend coverage. Interest rate swaps designated as cash flow hedges involve the exchange of
fixed-rate payments for variable-rate payments over the life of the agreements without exchange of
the underlying principal amount. Interest rate caps designated as cash flow hedges provide the
Company with interest rate protection above the strike rate on the cap and result in the Company
receiving interest payments when actual rates exceed the cap strike. For derivatives designated as
fair value hedges, changes in the fair value of the derivative and the hedged item related to the
hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the
effective portion of changes in the fair value of the derivative is initially reported in other
comprehensive income (outside of earnings) and subsequently reclassified to earnings when the
hedged transaction affects earnings, while the ineffective portion of changes in the fair value of
the derivative is recognized directly in earnings. The Company assesses the effectiveness of each
hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging
instrument with the changes in fair value or cash flows of the designated hedged item or
transaction. For derivatives not designated as hedges, changes in the fair value are recognized in
earnings. The Company records all derivatives on the balance sheet at fair value.
Recently
Adopted Accounting Standards - In September 2006,
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which provides enhanced
guidance for using fair value to measure assets and liabilities. SFAS No. 157 establishes a common
definition of fair value, provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements about fair value
measurements. In February 2008, FASB issued FASB Staff Position No. FAS 157-2 to delay the
effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, for non-financial
assets and non-financial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. This standard permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 must be applied prospectively, and
the effect of the first remeasurement to fair value, if any, should be reported as a cumulative -
effect adjustment to the opening balance of retained earnings.
The Company adopted these statements as of January 1, 2008 and the adoption did not have a
material impact on the Companys financial position and results of operations. Additional
disclosures in accordance the SFAS No. 157
have been included in Note 15. The Company did not elect to measure additional items at fair
value under SFAS No. 159.
9
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Standards In December 2007, the FASB issued SFAS No. 141
(revised 2007) (SFAS 141R), Business Combinations. SFAS 141R establishes principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combinations.
SFAS 141R is effective for financial statements issued for fiscal years beginning after December
15, 2008. Accordingly, any business combinations the Company engages in will be recorded and
disclosed following existing accounting principles until January 1, 2009. The Company expects SFAS
141R will affect the Companys consolidated financial statements when effective, but the nature and
magnitude of the specific effects will depend upon the nature, term and size of the acquisitions,
if any, the Company consummates after the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, effective for financial statements issued for fiscal years beginning after
December 15, 2008. SFAS No. 160 states that accounting and reporting for minority interests will
be re-characterized as non-controlling interests and classified as a component of equity. SFAS No.
160 applies to all entities that prepare consolidated financial statements, except not-for-profit
organizations, and will impact the recording of minority interest. The Company is currently
evaluating the effects the adoption of SFAS No. 160 will have on its financial position and results
of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. SFAS No. 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. The Company is currently evaluating the effects the adoption of SFAS
No. 160 will have on its financial position and results of operations.
3. Summary of Significant Transactions
Investing in Mezzanine Loans On January 22, 2008, the Company formed a joint venture
(the PREI JV) with Prudential Real Estate Investors (PREI) to invest in structured debt and
equity hotel investments in the United States. PREI JV, which will be funded over the next two
years, will ultimately be capitalized with $300 million from investors in a fund managed by PREI
and $100 million from the Company. The Company and PREI contribute the capital required for each
mezzanine investment on a 25%/75% basis, respectively. The Company is entitled to annual
management and sourcing fees, reimbursement of expenses, and a promoted yield equal to a current
1.3x the venture yield subject to maximum threshold limitations, but further enhanced by an
additional promote based upon a total net return to PREI. PREIs equity is in a senior position on
each investment. With limited exceptions, the joint venture is the primary vehicle for the
Companys hotel lending efforts. The joint venture has the right of first refusal on all mezzanine
investment opportunities presented by the Company, provided the investment meets certain criteria.
On February 6, 2008, PREI acquired a 75% interest in the Companys $21.5 million mezzanine loan
receivable, which the Company originated December 5, 2007, and is secured by two hotels maturing
January 2018. Simultaneously, the Company and PREI capitalized the joint venture by contributing
this $21.5 million mezzanine loan receivable to the joint venture. The Company is not the primary
beneficiary of PREI JV and does not control the joint venture, therefore, PREI JV is not
consolidated in the Companys financial statements. See Note 6.
10
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, during the three months ended March 31, 2008, the Company completed the following
mezzanine loans transactions including the loans acquired through PREI JV ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original |
|
Discounted |
|
Percentage of |
|
Amount |
Source |
|
Interest Rate |
|
Maturity |
|
Collateral |
|
Principal |
|
Price |
|
Ownership |
|
Recorded |
Company originated |
|
LIBOR+9% |
|
|
2011 |
|
|
1 hotel |
|
$ |
7,056 |
|
|
$ |
|
|
|
|
100 |
% |
|
$ |
7,056 |
|
Company acquired |
|
|
9.66 |
% |
|
|
2017 |
|
|
1 hotel |
|
|
38,000 |
|
|
|
32,956 |
|
|
|
100 |
% |
|
|
32,956 |
|
PREI JV acquired (1) |
|
LIBOR+2.75% |
|
|
2010 |
* |
|
29 hotels |
|
|
84,032 |
|
|
|
69,904 |
|
|
|
25 |
% |
|
|
17,476 |
|
|
|
|
(1) |
|
Reported as Investment in unconsolidated joint venture in the accompanying financial statements. |
|
* |
|
With two one-year extensions from the original maturity of August 9, 2010. |
|
Sales of Properties During the three months ended March 31, 2008, the Company sold
two hotel properties and an office building that were designated as held for sale at December 31,
2007, for net proceeds (net of related closing costs) of $79.2 million and repaid related debt
totaling $59.2 million. The Company recorded a net gain of $889,000 on the sales of these
properties. In Addition, the Company wrote off premiums and unamortized loan costs of $1.9 million
on the repaid debt, as a result, it increased net income by the same amount.
Interest Rate Swap Transactions During the three months ended March 31, 2008, the
Company changed its debt strategy to capitalize on the historical correlation between changes in
LIBOR and RevPAR and to enhance dividend coverage. In connection with this strategy, the Company
executed a five-year interest rate swap on $1.8 billion of fixed-rate debt at a weighted average
interest rate of 5.84% for a floating interest rate of LIBOR plus 2.64%. In conjunction with the
swap execution, the Company sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25%
and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the first three years. The
upfront cost of the swap, LIBOR cap, and floor transactions was $4.6 million. See Note 11.
4. Investments in Hotel Properties
Investments in hotel properties consisted of the following at March 31, 2008 and 2007 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Land |
|
$ |
560,685 |
|
|
$ |
567,438 |
|
Buildings and improvements |
|
|
3,215,971 |
|
|
|
3,226,708 |
|
Furniture, fixtures and equipment |
|
|
328,671 |
|
|
|
278,598 |
|
Construction in progress |
|
|
13,535 |
|
|
|
68,569 |
|
|
|
|
|
|
|
|
Total cost |
|
|
4,118,862 |
|
|
|
4,141,313 |
|
Accumulated depreciation |
|
|
(294,765 |
) |
|
|
(255,576 |
) |
|
|
|
|
|
|
|
Investment in hotel properties, net |
|
$ |
3,824,097 |
|
|
$ |
3,885,737 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008, intangible assets of $10.7 million relating to
advance bookings in connection with the CNL Acquisition were reclassified to buildings as a result
of a third-party valuation.
11
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Notes Receivable
Notes receivable consisted of the following at March 31, 2008 and December 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Mezzanine loan secured by various
mortgage-backed securities sponsored
by government agencies, matures
September 2011, at an interest rate
of 14% (12% pay rate with deferred
interest through the first two
years), with interest-only payments
through maturity |
|
$ |
11,000 |
|
|
$ |
11,000 |
|
Mezzanine loan secured by one hotel
property, matures July 2010, at an
interest rate of 14%, with
interest-only payments through
maturity |
|
|
4,000 |
|
|
|
4,000 |
|
Mezzanine loan secured by one hotel
property, matures September 2008, at
an interest rate of LIBOR plus
11.15%, with interest-only payments
through maturity |
|
|
3,000 |
|
|
|
3,000 |
|
First mortgage loan secured by one
hotel property, matures October
2008, at an interest rate of LIBOR
plus 9%, with interest-only payments
through maturity |
|
|
18,200 |
|
|
|
18,200 |
|
Mezzanine loan secured by 105 hotel
properties, matures April 2009, at
an interest rate of LIBOR plus 5%,
with interest-only payments through
maturity |
|
|
25,694 |
|
|
|
25,694 |
|
Mezzanine loan secured by one hotel
property, matures December 2009, at
an interest rate of LIBOR plus 6.5%,
with interest-only payments through
maturity |
|
|
7,000 |
|
|
|
7,000 |
|
Mezzanine loan secured by one hotel
property, matures December 2009, at
an interest rate of LIBOR plus
5.75%, with interest-only payments
through maturity |
|
|
4,000 |
|
|
|
4,000 |
|
Mezzanine loan secured by two hotel
properties, matures January 2018, at
an interest rate of 14%, with
interest-only payments through
maturity (1) |
|
|
|
|
|
|
21,500 |
|
Mezzanine loan secured by one hotel
property, matures January 2011, at
an interest rate of LIBOR plus 9%,
with interest-only payments through
maturity |
|
|
7,056 |
|
|
|
|
|
Mezzanine loan secured by one hotel
property, matures June 2017, at an
interest rate of 9.66%,
with interest-only payments through
maturity |
|
|
33,037 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross notes receivable |
|
|
112,987 |
|
|
|
94,394 |
|
Deferred income, net |
|
|
(525 |
) |
|
|
(169 |
) |
|
|
|
|
|
|
|
Net notes receivable |
|
$ |
112,462 |
(2) |
|
$ |
94,225 |
|
|
|
|
|
|
|
|
Weighted average interest rate |
|
|
11.4 |
% |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
This note was contributed to PREI JV at its formation. The Company owns a 25% interest in the joint
venture and the investment is reported as Investment in unconsolidated joint venture at March 31, 2008. |
|
(2) |
|
Does not include the notes receivable held by PREI JV in which the Company has a 25% ownership. |
In general, the Companys notes receivable have extension options, prohibit prepayment through
a certain period, and require decreasing prepayment penalties through maturities. At March 31,
2008, all notes receivable were current and no reserves for loan losses were recorded.
12
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Investment in Unconsolidated Joint Venture
Investment in unconsolidated joint venture (see Note 3) at March 31, 2008 consisted of the
following (in thousands):
|
|
|
|
|
25% of mezzanine loan at par value secured by two hotel
properties, matures January 2018, at an interest rate of 14%,
with interest-only payments through maturity |
|
$ |
5,388 |
|
25% mezzanine loan acquired at discounted price (face value
of $84,032), secured by 29 hotel properties, matures August
2010 with two one-year extension options, at an interest rate
of LIBOR plus 2.75%, and with interest-only payments through
maturity |
|
|
17,625 |
|
Other assets |
|
|
18 |
|
Equity earnings in joint venture |
|
|
526 |
|
|
|
|
|
Total |
|
$ |
23,557 |
|
|
|
|
|
At March 31, 2008, the Company had a payable to the joint venture of $3.2 million that is
included in Due to related parties on the consolidated balance sheet.
7. Assets Held for Sale and Discontinued Operations
The following table summarizes the operating results of the discontinued operations for the
three months ended March 31, 2008 and 2007 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
2008 |
|
|
2007 |
|
Number of properties: |
|
|
|
|
|
|
|
|
Properties designated as held for sale at end of period |
|
|
1 |
|
|
|
16 |
|
Properties sold during the period |
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total properties included in discontinued operations |
|
|
4 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Results of operations: |
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
7,101 |
|
|
$ |
20,619 |
|
Operating expenses |
|
|
(5,629 |
) |
|
|
(15,549 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
1,472 |
|
|
|
5,070 |
|
Gain on sales of properties |
|
|
889 |
|
|
|
1,388 |
|
Depreciation and amortization |
|
|
(755 |
) |
|
|
(958 |
) |
Interest expense and amortization of loan costs |
|
|
(969 |
) |
|
|
(963 |
) |
Write-off of loan costs, premiums and exit fees |
|
|
1,862 |
|
|
|
(212 |
) |
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
2,499 |
|
|
|
4,325 |
|
Provision for income taxes |
|
|
|
|
|
|
(639 |
) |
Minority interest in earnings of operating partnership |
|
|
(232 |
) |
|
|
(385 |
) |
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
2,267 |
|
|
$ |
3,301 |
|
|
|
|
|
|
|
|
In March 2008, the Company entered into a contract to sell the hotel property that was
designated as held for sale at March 31, 2008, the Hyatt Dulles Airport in Herndon, Virginia, for a
sales price of $78 million. This transaction is expected to close in June 2008.
13
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Indebtedness
Indebtedness consists of the following at March 31, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Mortgage loan secured by 25 hotel properties,
of which $160.5 million matures July 2015 and
$294.6 million matures February 2016, at a
weighted average fixed interest rate of 5.42%,
with interest-only payments due monthly plus
principal payments based on a 25-year
amortization schedule beginning July 2010 |
|
$ |
455,115 |
|
|
$ |
455,115 |
|
Term loan secured by 16 hotel properties
divided equally into two pools. The first pool
for $110.9 million matures December 2014, at a
fixed interest rate of 5.75%, with
interest-only payments due monthly plus
principal payments based on a 25-year
amortization schedule beginning December 2009.
The second pool for $100.6 million matures
December 2015, at a fixed interest rate of
5.7%, with interest-only payments due monthly
plus principal payments based on a 25-year
amortization schedule beginning December 2010 |
|
|
211,475 |
|
|
|
211,475 |
|
Mortgage loan secured by 28 hotel properties,
matures April 11, 2017, at a weighted average
fixed interest rate of 5.95%, with
interest-only payments due monthly plus
principal payments based on a 30-year
amortization schedule beginning April 2012 |
|
|
928,465 |
|
|
|
928,465 |
|
Loan secured by 13 hotel properties, matures
May 2009, at an interest rate of LIBOR* plus
1.65%, with interest-only payments due
monthly, with three one-year extension options |
|
|
213,889 |
|
|
|
213,889 |
|
Secured credit facility secured by mezzanine
notes receivable, matures April 2010, at an
interest rate of LIBOR* plus a range of 1.55%
to 1.95% depending on the loan-to-value ratio,
with interest-only payments due monthly, with
a commitment fee of 0.125% to 0.2% on the
unused portion of the line payable quarterly
and two one-year extension options |
|
|
140,000 |
|
|
|
65,000 |
|
Term loan secured by one hotel property,
matures October 2008, at an interest rate of
LIBOR* plus 2.0%, with interest-only payments
due monthly and three one-year extension
options |
|
|
47,450 |
|
|
|
47,450 |
|
Mortgage loan secured by one hotel property,
matures December 2017, at interest rates of
7.39% at March 31, 2008 and 7.24% at December
31, 2007, with current principal and interest
payments due monthly, and with a remaining
premium of approximately $1.7 million |
|
|
51,381 |
|
|
|
52,474 |
|
Mortgage loan secured by one hotel property,
matures December 2016, at an interest rate of
5.81% with interest-only payments due monthly
plus principal payments based on a 30-year
amortization schedule beginning December 2011 |
|
|
101,000 |
|
|
|
101,000 |
|
Mortgage loan secured by five hotel
properties, matures December 2009, at an
interest rate of LIBOR* plus 1.72% with
interest-only payments due monthly and two
one-year extension options |
|
|
168,400 |
|
|
|
184,000 |
|
Mortgage loans secured by 15 hotel properties,
mature between 2008 and 2018, at a weighted
average interest rate of 5.85%, with
principal and interest payments due monthly |
|
|
395,125 |
|
|
|
441,907 |
|
|
|
|
|
|
|
|
Total |
|
|
2,712,300 |
|
|
|
2,700,775 |
|
Indebtedness related to assets held for sale |
|
|
(47,450 |
) |
|
|
(61,229 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,664,850 |
|
|
$ |
2,639,546 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
LIBOR rates were 2.7% and 4.6% at March 31, 2008 and December 31, 2007, respectively. |
14
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Minority Interests
Minority Interests in Consolidated Joint Ventures Minority joint venture partners
had ownership ranging from 11% to 25% of six hotel properties at March 31, 2008.
Minority Interests in Operating Partnership During the three months ended March 31,
2008, the Company issued 1,056,000 operating partnership units in the form of long term incentive
partnership units (LTIP) to certain executives at $0.05 per share to the grantee. These units
vest at specified rates between 2008 and 2012. Upon vesting, each LTIP unit can be redeemed for
one unit of the Companys operating partnership which can be settled in the Companys common share
or cash at the Companys discretion. These units had an aggregate value of $6.6 million at the
date of grant and which is being amortized over the vesting period. The Company recognized
compensation expense of $44,000 related to the units granted for the three months ended March 31,
2008. The unamortized value of the LTIP units was $6.5 million with a weighted average remaining
vesting period of approximately 3.1 years.
During the three months ended March 31, 2008, the Company declared cash dividends of $222,000,
or $0.21 per unit, related to the LTIP units that were recorded as a reduction of the minority
interest in operating partnership.
At March 31, 2008 and December 31, 2007, operating partnership unit holders represented
minority ownership of 10.74% and 9.98% in the operating partnership, respectively.
10. Income (Loss) Per Share
Basic income (loss) per common share is calculated by dividing net income (loss) available to
common shareholders by the weighted average common shares outstanding during the period. Diluted
income (loss) per common share reflects the potential dilution that could occur if securities or
other contracts to issue common shares were exercised or converted into common shares, whereby such
exercise or conversion would result in lower income per share. The following table reconciles the
amounts used in calculating basic and diluted income (loss) per share for the three months ended
March 31, 2008 and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
2008 |
|
|
2007 |
|
Income from continuing operations |
|
$ |
3,918 |
|
|
$ |
8,190 |
|
Less: Preferred dividends |
|
|
(7,018 |
) |
|
|
(2,793 |
) |
|
|
|
|
|
|
|
(Loss) income from continuing operations available to common
shareholders |
|
|
(3,100 |
) |
|
|
5,397 |
|
Income from discontinued operations |
|
|
2,267 |
|
|
|
3,301 |
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
$ |
(833 |
) |
|
$ |
8,698 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
118,855 |
|
|
|
72,042 |
|
Incremental diluted shares related to unvested restricted shares |
|
|
|
|
|
|
407 |
|
|
|
|
|
|
|
|
Total weighted average diluted shares |
|
|
118,855 |
|
|
|
72,449 |
|
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
|
|
|
|
Basic - |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(0.03 |
) |
|
$ |
0.07 |
|
Income from discontinued operations |
|
|
0.02 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(0.01 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
Diluted - |
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(0.03 |
) |
|
$ |
0.07 |
|
Income from discontinued operations |
|
|
0.02 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(0.01 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
15
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the anti-dilutive effect, the computation of diluted income per share does not reflect the
adjustments for the following items for the three months ended March 31, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
2008 |
|
|
2007 |
|
Income from continuing operations available to common shareholders: |
|
|
|
|
|
|
|
|
Minority interest in income of operating partnership |
|
$ |
400 |
|
|
$ |
1,442 |
|
Dividends to Preferred B shares |
|
|
1,564 |
|
|
|
1,564 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,964 |
|
|
$ |
3,006 |
|
|
|
|
|
|
|
|
Diluted shares: |
|
|
|
|
|
|
|
|
Number of shares from assumed conversion of Preferred B shares |
|
|
7,448 |
|
|
|
7,448 |
|
Assumed conversion of weighted average outstanding operating
partnership units |
|
|
13,463 |
|
|
|
13,512 |
|
Incremental dilutive shares from restricted stock awards |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,915 |
|
|
|
20,960 |
|
|
|
|
|
|
|
|
11. Derivatives and Hedging Activities
The Company enters into interest rate swaps to manage the impact of interest rate fluctuations
on the results of operations and cash flows. The Company also uses non-hedge derivatives to
capitalize on the historical correlation between changes in LIBOR and RevPAR and to enhance
dividend coverage. During the three months ended March 31, 2008, the Company executed a five-year
interest swap on $1.8 billion of its existing fixed-rate debt at a weighted average interest rate
of 5.84% for floating-rate of LIBOR plus 2.64%. In conjunction with the swap execution, the
Company sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR
cap notional amount of $1.0 billion at 3.75% for the first three years. The Company paid $4.6
million to enter into these transactions. At March 31, 2008, these derivatives had a net fair
value of $8.6 million, which is included in Other assets in the consolidated balance sheet.
Because these derivatives were not designated and did not qualify as cash flow hedges, the gains or
losses from changes in fair value of these derivatives are recognized in earnings. For the three
months ended March 31, 2008, unrealized gains of $4.0 million were recognized for the fair value
changes.
In addition to the above, the Company had seven interest caps with a notional amount totaling
$669.5 million and cap interest rates ranging from 6.0% to 7.0%. Of these agreements, $259.5
million was designated as cash flow hedges and the remaining $410.0 million did not meet the
applicable hedge accounting criteria. At March 31, 2008, these derivatives had a fair value of
$8,000, which is included in Other assets on the consolidated balance sheet. For the three
months ended March 31, 2008 and 2007, unrealized losses of $6,000 and $35,000, respectively, were
recognized for the fair value changes. During the next twelve months, the Company expects $84,000
of accumulated other comprehensive loss will be reclassified to interest expense.
12. Capital Stock and Stock-Based Compensation
Common Stock Repurchases Pursuant to its stock repurchase plan, the Company
repurchased 700,800 shares of its common stock for approximately $4.6 million during the three
months ended March 31, 2008. In addition, the Company acquired 4,854 shares of its common stock as
partial tax payments for shares issued under the stock-based compensation plan.
Stock Related Grants and Stock-Based Compensation During the three months ended
March 31, 2008, the Company granted 65,070 shares of its commons stock to its directors, executive
officers and certain employees under its restricted stock-based compensation plan. These shares
had a weighted average grant date value of $6.26 per share.
During the three months ended March 31, 2008 and 2007, the Company recognized compensation
expense of $1.6 million and $1.1 million, respectively, related to its stock-based compensation
plan. As of March 31, 2008, the unamortized value of the Companys unvested shares of restricted
stock was $10.4 million with an average remaining vesting period of approximately 2.4 years.
16
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends
Common stock and unit dividends. During the three months ended March 31, 2008, the Company
declared cash dividends of $25.1 million, or $0.21 per share, to both common shareholders and
common unit holders. The Company also declared cash dividends of $697,000 to Series B unit
holders.
Series A Cumulative Preferred dividends. During the three months ended March 31, 2008, the
Company declared cash dividends of $1.2 million, or $0.5344 per share, to Series A preferred
stockholders.
Series B Preferred dividends. During the three months ended March 31, 2008, the Company
declared cash dividends of $1.6 million, or $0.21 per share, to Series B preferred stockholders.
Series D Cumulative Preferred dividends. During the three months ended March 31, 2008, the
Company declared cash dividends of $4.2 million, or $0.528125 per share, to Series D preferred
stockholders.
13. Commitments and Contingencies
Restricted Cash Under certain management and debt agreements existing at March 31,
2008, the Company escrows payments required for insurance, real estate taxes, and debt service. In
addition, for certain properties based on the terms of the underlying debt agreement, the Company
escrows 4% to 6% of gross revenue for capital improvements.
Franchise Fees Under franchise agreements existing at March 31, 2008, the Company
pays franchisors royalty fees between 2.5% and 6% of gross room revenue as well as fees for
marketing, reservations, and other related activities aggregating between 1% and 3.75% of gross
room revenue. These franchise agreements expire from 2011 through 2027. When a franchise term
expires, the franchisor has no obligation to renew the franchise. A franchise termination could
have a material adverse effect on the operations or the underlying value of the affected hotel due
to loss of associated name recognition, marketing support, and centralized reservation systems
provided by the franchisor. A franchise termination could also have a material adverse effect on
cash available for distribution to stockholders. In addition, if the Company terminates a franchise
prior to its expiration date, the Company may be liable for up to three times the average annual
franchise fees incurred for that property.
Management Fees Under management agreements existing at March 31, 2008, the Company
pays a) monthly property management fees equal to the greater of $10,000 (CPI adjusted) or 3% of
gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management
fees, if applicable, b) market service fees on approved capital improvements, including project
management fees of up to 4% of project costs, for certain hotels, and c) other general fees at
current market rates as approved by the Companys independent directors, if required. These
management agreements expire from 2008 through 2027, with renewal options. If the Company
terminates a management agreement prior to its expiration, it may be liable for estimated
management fees through the remaining term, liquidated damages or, in certain circumstances, it may
substitute a new management agreement.
Litigation The Company is currently subject to litigation arising in the normal
course of its business. In the opinion of management, none of these lawsuits or claims against the
Company, either individually or in the aggregate, is likely to have a material adverse effect on
the Companys business, results of operations, or financial condition. In addition, management
believes the Company has adequate insurance in place to cover any such significant litigation.
14. Segment Reporting
The Company presently operates in two business segments within the hotel lodging industry:
direct hotel investing and hotel financing. Direct hotel investing refers to owning hotels through
either acquisition or new development. Management reports operating results of direct hotel
investments on an aggregate basis as substantially all of the Companys hotel investments have
similar economic characteristics and exhibit similar long-term financial performance. Hotel
financing refers to owning subordinate hotel-related mortgages through acquisition or origination.
The Company does not allocate corporate-level accounts to its operating segments, including
corporate general and administrative expenses, non-operating interest income, interest expense,
income taxes, and minority interest.
17
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three months ended March 31, 2008 and 2007, financial information related to the
Companys reportable segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Hotel |
|
|
Hotel |
|
|
|
|
|
|
|
|
|
Investing |
|
|
Financing |
|
|
Corporate |
|
|
Consolidated |
|
Three Months Ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
311,235 |
|
|
$ |
3,255 |
|
|
$ |
|
|
|
$ |
314,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
222,217 |
|
|
|
|
|
|
|
|
|
|
|
222,217 |
|
Depreciation and amortization |
|
|
45,570 |
|
|
|
|
|
|
|
|
|
|
|
45,570 |
|
Corporate general and administrative |
|
|
|
|
|
|
|
|
|
|
7,704 |
|
|
|
7,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
267,787 |
|
|
|
|
|
|
|
7,704 |
|
|
|
275,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
43,448 |
|
|
|
3,255 |
|
|
|
(7,704 |
) |
|
|
38,999 |
|
Equity in earnings of
unconsolidated joint venture |
|
|
|
|
|
|
526 |
|
|
|
|
|
|
|
526 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
546 |
|
|
|
546 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
296 |
|
|
|
296 |
|
Interest expense and amortization
of loan costs |
|
|
|
|
|
|
|
|
|
|
(39,621 |
) |
|
|
(39,621 |
) |
Unrealized gains on derivatives |
|
|
|
|
|
|
|
|
|
|
4,049 |
|
|
|
4,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interest and income tax benefit |
|
|
43,448 |
|
|
|
3,781 |
|
|
|
(42,434 |
) |
|
|
4,795 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
(410 |
) |
|
|
(410 |
) |
Minority interest in earnings of
consolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
(67 |
) |
Minority interest in earnings of
operating partnership |
|
|
|
|
|
|
|
|
|
|
(400 |
) |
|
|
(400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
$ |
43,448 |
|
|
$ |
3,781 |
|
|
$ |
(43,311 |
) |
|
$ |
3,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
145,390 |
|
|
$ |
3,355 |
|
|
$ |
|
|
|
$ |
148,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
103,627 |
|
|
|
|
|
|
|
|
|
|
|
103,627 |
|
Depreciation and amortization |
|
|
16,237 |
|
|
|
|
|
|
|
|
|
|
|
16,237 |
|
Corporate general and administrative |
|
|
|
|
|
|
|
|
|
|
4,594 |
|
|
|
4,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
119,864 |
|
|
|
|
|
|
|
4,594 |
|
|
|
124,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
25,526 |
|
|
|
3,355 |
|
|
|
(4,594 |
) |
|
|
24,287 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
498 |
|
|
|
498 |
|
Interest expense and amortization
of loan costs |
|
|
|
|
|
|
|
|
|
|
(15,775 |
) |
|
|
(15,775 |
) |
Write-off of loan costs |
|
|
|
|
|
|
|
|
|
|
(491 |
) |
|
|
(491 |
) |
Unrealized losses on derivatives |
|
|
|
|
|
|
|
|
|
|
(35 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interest and income tax benefit |
|
|
25,526 |
|
|
|
3,355 |
|
|
|
(20,397 |
) |
|
|
8,484 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
1,148 |
|
|
|
1,148 |
|
Minority interest in earnings of
operating partnership |
|
|
|
|
|
|
|
|
|
|
(1,442 |
) |
|
|
(1,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
$ |
25,526 |
|
|
$ |
3,355 |
|
|
$ |
(20,691 |
) |
|
$ |
8,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Fair Value Measurements
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted
to be measured at fair value under existing
18
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accounting pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on the assumptions
that market participants would use in pricing the asset or liability. As a basis for considering
market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are classified within
Levels 1 and 2 of the hierarchy) and the reporting entitys own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for asset or liability, either directly or
indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that are observable at
commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset and liability,
which are typically based on an entitys own assumptions, as there is little, if any, related
market activity. In instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability.
Currently, the Company uses interest rate swaps, interest rate floors and interest rate caps
(collectively, the interest rate derivatives) to manage its interest rate risk. The valuation of
these instruments is determined using widely accepted valuation techniques including discounted
cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses observable
market-based inputs, including interest rate curves, and implied volatilities. The fair values of
interest rate derivatives are determined using the market standard methodology of netting the
discounted future fixed cash receipts/payments and the discounted expected variable cash
payments/receipts. The variable cash payments/receipts are based on an expectation of future
interest rates (forward curves) derived from observable market interest rate curves. The fair
values of interest rate options are determined using the market standard methodology of discounting
the future expected cash receipts that would occur if variable interest rates fell below the strike
rate of the floors or rise above the strike rate of the caps. The variable interest rates used in
the calculation of projected receipts on the floor (cap) are based on an expectation of future
interest rates derived from observable market interest rate curves and volatilities. To comply
with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to
appropriately reflect both its own non-performance risk and the respective counterpartys
non-performance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of non-performance risk, the Company has considered the impact of netting
and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
The Company has determined that when majority of the inputs used to value its derivatives fall
within Level 2 of their value hierarchy, the derivative valuations in their entirety are classified
in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with
its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by itself and its counterparties, are significant to the overall valuation of
its derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair
value hierarchy.
19
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the Companys assets and liabilities measured at fair value on a
recurring basis as of March 31, 2008, aggregated by the level in the fair value hierarchy within
whose measurements fall (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted Price |
|
|
|
|
|
|
|
|
|
|
|
|
In Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Market for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
March 31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
|
|
|
$ |
|
|
|
$ |
11,921 |
|
|
$ |
11,921 |
|
Interest rate cap |
|
|
|
|
|
|
5,920 |
|
|
|
|
|
|
|
5,920 |
|
Other interest rate derivatives |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
5,928 |
|
|
$ |
11,921 |
|
|
$ |
17,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate floor |
|
$ |
|
|
|
$ |
(9,211 |
) |
|
$ |
|
|
|
$ |
(9,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the beginning and ending balances of the derivatives that were measured
using significant unobservable inputs is as follows (in thousands):
|
|
|
|
|
|
|
Fair Value Measurements using Significant |
|
|
|
Unobservable Inputs |
|
|
|
Interest Rate Swap |
|
Beginning balance, January 1, 2008 |
|
$ |
|
|
Total gains included in earnings |
|
|
7,245 |
|
Purchases |
|
|
4,676 |
|
|
|
|
|
Ending balance, March 31, 2008 |
|
$ |
11,921 |
|
|
|
|
|
16. Pro Forma Financial Information
In April 2007, the Company acquired a 51-property hotel portfolio (CNL Portfolio) from CNL
Hotels and Resorts, Inc. (CNL). Pursuant to the purchase agreement, the Company acquired 100% of
33 properties and interests ranging from 70% to 89% in 18 properties through existing joint
ventures. In connection with the CNL transaction, the Company acquired the 15% remaining joint
venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007
two other hotel properties previously owned by CNL (collectively, the CNL Acquisition). In
December 2007, the Company completed an asset swap with Hilton Hotels Corporation (Hilton),
whereby the Company surrendered its majority ownership interest in two hotel properties in exchange
for Hiltons minority ownership interest in nine hotel properties. Net of subsequent sales and
asset swap, 45 of these hotels were included in the Companys hotel property portfolio at March 31,
2008. As of March 31, 2008, the purchase price allocation related to the CNL Acquisition was on a
preliminary basis and the Company expects to finalize the allocation in the quarter ended June 30,
2008.
20
ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited pro forma financial information reflects the consolidated results of
operations of the Company for the three months ended March 31, 2007 as if the above-mentioned
acquisitions that were included in continuing operations had occurred on January 1, 2007. The
unaudited pro forma financial information has been prepared for informational purposes only and
does not purport to be indicative of what would have resulted had the acquisition transaction
occurred on the date indicated or what may result in the future (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
As |
|
|
Pro Forma(1) |
|
|
|
Reported |
|
|
Adjusted |
|
Total revenues |
|
$ |
148,745 |
|
|
$ |
308,789 |
|
Operating expenses |
|
|
124,458 |
|
|
|
268,278 |
|
|
|
|
|
|
|
|
Operating income |
|
|
24,287 |
|
|
|
40,511 |
|
Interest and other income |
|
|
463 |
|
|
|
463 |
|
Interest expense, amortization of loan costs and write-off of loan costs |
|
|
(16,266 |
) |
|
|
(52,044 |
) |
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes |
|
|
8,484 |
|
|
|
(11,070 |
) |
Income tax benefit |
|
|
1,148 |
|
|
|
306 |
|
Minority interest in loss of consolidated joint ventures |
|
|
|
|
|
|
167 |
|
Minority interest in (income) loss of operating partnership |
|
|
(1,442 |
) |
|
|
1,257 |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
8,190 |
|
|
|
(9,340 |
) |
Preferred dividends |
|
|
(2,793 |
) |
|
|
(6,703 |
) |
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common
shareholders |
|
$ |
5,397 |
|
|
$ |
(16,043 |
) |
|
|
|
|
|
|
|
Income (loss) per diluted share: |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.07 |
|
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
Weighted average diluted number of shares outstanding |
|
|
72,449 |
|
|
|
72,366 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pro forma adjustments reflect: |
|
(a) |
|
the inclusion of the operating results of the 45 hotel properties for the three months ended March 31, 2007; |
|
|
(b) |
|
the additional depreciation expense of the 45 hotel properties for the three months ended March 31, 2007; |
|
|
(c) |
|
the additional interest expense and amortization of loan costs on debt incurred for the CNL Acquisitions; |
|
|
(d) |
|
the incremental corporate general and administrative expenses resulting from the CNL Acquisition; |
|
|
(e) |
|
minority interests in consolidated joint ventures and operating partnership as a result of CNL Acquisition; and |
|
|
(f) |
|
additional preferred dividends resulting from issuance of preferred stocks in connection with CNL Acquisition for the computation of pro forma loss per
share. |
21
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the unaudited financial statements
and notes thereto appearing elsewhere herein. This report contains forward-looking statements
within the meaning of the federal securities laws. Ashford Hospitality Trust, Inc. (the Company
or we or our or us) cautions investors that any forward-looking statements presented herein,
or which management may express orally or in writing from time to time, are based on managements
beliefs and assumptions at that time. Throughout this report, words such as anticipate,
believe, expect, intend, may, might, plan, estimate, project, should, will,
result, and other similar expressions, which do not relate solely to historical matters, are
intended to identify forward-looking statements. Such statements are subject to risks,
uncertainties, and assumptions and are not guarantees of future performance, which may be affected
by known and unknown risks, trends, uncertainties, and factors beyond our control. Should one or
more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or projected. We caution
investors that while forward-looking statements reflect our good-faith beliefs at the time such
statements are made, said statements are not guarantees of future performance and are affected by
actual events that occur after such statements are made. We expressly disclaim any responsibility
to update forward-looking statements, whether as a result of new information, future events, or
otherwise. Accordingly, investors should use caution in relying on past forward-looking statements,
which were based on results and trends at the time those statements were made, to anticipate future
results or trends.
Some risks and uncertainties that may cause our actual results, performance, or achievements
to differ materially from those expressed or implied by forward-looking statements include, among
others, those discussed in our Form 10-K as filed with the Securities and Exchange Commission on
February 29, 2008. These risks and uncertainties continue to be relevant to our performance and
financial condition. Moreover, we operate in a very competitive and rapidly changing environment
where new risk factors emerge from time to time. It is not possible for management to predict all
such risk factors, nor can management assess the impact of all such risk factors on our business or
the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as
indicators of actual results.
EXECUTIVE OVERVIEW
We are a real estate investment trust (REIT) that commenced operations upon completion of
our initial public offering and related formation transactions on August 29, 2003. As of March 31,
2008, we owned interests in 110 hotel properties, which included direct ownership in 104 hotel
properties and between 75-89% interests in six hotel properties through equity investments with
joint venture partners. Of these hotels, 45 were acquired in 2007. As of March 31, 2008, 109 of the
110 hotels were classified as continuing operations. In addition, as of March 31, 2008, we owned
$112.5 million of mezzanine or first-mortgage loans receivable and a 25% interest in a joint
venture with Prudential Real Estate Investors (PREI) formed in January 2008 (the PREI JV). The
joint venture owned $92.3 million of mezzanine loans as of March 31, 2008. See Notes 3 and 6 of
Notes to Consolidated Financial Statements.
The 45 hotel properties acquired since December 31, 2006 that are included in continuing
operations contributed $165.0 million and $20.2 million to our total revenue and operating income,
respectively, for the three months ended March 31, 2008.
Based on our primary business objectives and forecasted operating conditions, our key
priorities and financial strategies include, among other things:
|
|
|
acquiring hotels with a favorable current yield with an opportunity for appreciation, |
|
|
|
|
implementing selective capital improvements designed to increase profitability, |
|
|
|
|
directing our hotel managers to minimize operating costs and increase revenues, |
|
|
|
|
originating or acquiring mezzanine loans, and |
|
|
|
|
other investing activities that our Board of Directors deems appropriate. |
22
During the three months ended March 31, 2008, the Company changed its debt strategy to
capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate)
and RevPAR (Revenue Per Available Room) and to enhance dividend coverage. In connection with this
strategy, the Company executed a five-year interest rate swap on $1.8 billion of fixed-rate debt at
a weighted average interest rate of 5.84% for a floating interest rate of LIBOR plus 2.64%. In
conjunction with the swap execution, the Company sold a five-year LIBOR floor notional amount of
$1.8 billion at 1.25% and purchased a LIBOR cap notional amount of $1.0 billion at 3.75% for the
first three years. With the Federal Reserves cut in the Fed Funds rate by 0.75% in March 2008 and
another 0.25% in April 2008, the Company is expecting to pay approximately $18.0 million less in
interest expense than it would otherwise have over the next 12 months. In connection with these
transactions, the Company recorded other income of $296,000 for interest savings and recorded net
unrealized gains of $4.0 million for the accrued interest on interest rate swap and change in the
market value of these derivatives for the 2008 quarter, respectively.
CRITICAL ACCOUNTING POLICIES
The Company formed the PREI joint venture and entered into interest rate swap, cap and floor
transactions during the three months ended March 31, 2008. The accounting policies related to
these transactions are as follows. There have been no other significant accounting policies
employed or modified during the three months ended March 31, 2008.
Investment in Unconsolidated Joint Venture Investment in a joint venture in which the
Company has a 25% ownership is accounted for under the equity method of accounting by recording the
Companys initial investment and the Companys percentage of interest in the joint ventures net
income. The equity accounting method is employed due to the fact that the Company does not control
the joint venture pursuant to the guidance provided by Emerging Issue Task Force (EITF) Abstract
No. 04-5.
Derivative Financial Instruments and Hedges. The Company enters into interest rate swap agreements
to increase stability related to interest expense and to manage its exposure to interest rate
movements or other identified risks. To accomplish this objective, the Company primarily uses
interest rate swaps and caps within its cash flow hedging strategy. The Company also uses
non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR (London
Interbank Offered Rate) and RevPAR (Revenue per Available Room) and to enhance dividend coverage.
Interest rate swaps designated as cash flow hedges involve the exchange of fixed-rate payments for
variable-rate payments over the life of the agreements without exchange of the underlying principal
amount. Interest rate caps designated as cash flow hedges provide the Company with interest rate
protection above the strike rate on the cap and result in the Company receiving interest payments
when actual rates exceed the cap strike. For derivatives designated as fair value hedges, changes
in the fair value of the derivative and the hedged item related to the hedged risk are recognized
in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in
the fair value of the derivative is initially reported in other comprehensive income (outside of
earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings,
while the ineffective portion of changes in the fair value of the derivative is recognized directly
in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the
changes in fair value or cash flows of the derivative hedging instrument with the changes in fair
value or cash flows of the designated hedged item or transaction. For derivatives not designated as
hedges, changes in the fair value are recognized in earnings. The Company records all derivatives
on the balance sheet at fair value.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R), Business
Combinations. SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combinations. SFAS 141R is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following existing accounting
principles until January 1, 2009. The Company expects SFAS 141R will affect the Companys
consolidated financial statements when effective, but the nature and magnitude of the specific
effects will depend upon the nature, term and size of the acquisitions, if any, the Company
consummates after the effective date.
23
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements", effective for financial statements issued for fiscal years beginning after
December 15, 2008. SFAS No. 160 states that accounting and reporting for minority interests will
be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No.
160 applies to all entities that prepare consolidated financial statements, except not-for-profit
organizations, and will impact the recording of minority interest. The Company is currently
evaluating the effects the adoption of SFAS No. 160 will have on its financial position and results
of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities", effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. SFAS No. 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. The Company is currently evaluating the effects the adoption of SFAS
No. 160 will have on its financial position and results of operations.
RESULTS OF OPERATIONS
The following table summarizes the changes in key line items from our consolidated statements
of operations for the three months ended March 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Favorable/ |
|
|
March 31, |
|
(Unfavorable) |
|
|
2008 |
|
2007 |
|
$Change |
|
%Change |
Total revenue |
|
$ |
314,490 |
|
|
$ |
148,745 |
|
|
$ |
165,745 |
|
|
|
111.4 |
% |
Total hotel expenses |
|
|
205,990 |
|
|
|
95,858 |
|
|
|
110,132 |
|
|
|
114.9 |
% |
Property taxes, insurance and other |
|
|
16,227 |
|
|
|
7,769 |
|
|
|
(8,458 |
) |
|
|
(108.9 |
)% |
Depreciation and amortization |
|
|
45,570 |
|
|
|
16,237 |
|
|
|
(29,333 |
) |
|
|
(180.7 |
)% |
Corporate general and administrative |
|
|
7,704 |
|
|
|
4,594 |
|
|
|
(3,110 |
) |
|
|
(67.7 |
)% |
Operating income |
|
|
38,999 |
|
|
|
24,287 |
|
|
|
14,712 |
|
|
|
60.6 |
% |
Equity earnings in unconsolidated joint
venture |
|
|
526 |
|
|
|
|
|
|
|
526 |
|
|
|
|
|
Interest income |
|
|
546 |
|
|
|
498 |
|
|
|
48 |
|
|
|
9.6 |
% |
Interest expense and amortization of
loan costs |
|
|
(39,621 |
) |
|
|
(15,775 |
) |
|
|
(23,846 |
) |
|
|
(151.2 |
)% |
Write-off of loan costs, loan premiums
and exit fees |
|
|
|
|
|
|
(491 |
) |
|
|
491 |
|
|
|
|
|
Unrealized gains (losses) on derivatives |
|
|
4,049 |
|
|
|
(35 |
) |
|
|
4,084 |
|
|
|
|
|
Income tax (expense) benefit |
|
|
(410 |
) |
|
|
1,148 |
|
|
|
(1,558 |
) |
|
|
(135.7 |
)% |
Minority interest in income of
consolidated joint ventures |
|
|
(67 |
) |
|
|
|
|
|
|
(67 |
) |
|
|
|
|
Minority interest in income of
operating partnership |
|
|
(400 |
) |
|
|
(1,442 |
) |
|
|
1,042 |
|
|
|
72.3 |
% |
Income from continuing operations |
|
|
3,918 |
|
|
|
8,190 |
|
|
|
(4,272 |
) |
|
|
(52.2 |
)% |
Income from discontinued operations, net |
|
|
2,267 |
|
|
|
3,301 |
|
|
|
(1,034 |
) |
|
|
(31.3 |
)% |
Net income |
|
|
6,185 |
|
|
|
11,491 |
|
|
|
(5,306 |
) |
|
|
(46.2 |
)% |
Significant transactions consummated during 2007 are summarized as follows:
In April 2007, the Company acquired a 51-property hotel portfolio (CNL Portfolio) from CNL
Hotels and Resorts, Inc. (CNL). Pursuant to the purchase agreement, the Company acquired 100% of
33 properties and interests ranging from 70% to 89% in 18 properties through existing joint
ventures. In connection with the CNL transaction, the Company acquired the 15% remaining joint
venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007
two other hotel properties previously owned by CNL (collectively, the CNL Acquisition). In
December 2007, the Company completed an asset swap with Hilton Hotels Corporation (Hilton),
whereby the Company surrendered its majority ownership interest in two hotel properties in exchange
for Hiltons minority ownership interest in nine hotel properties. Net of subsequent sales and
asset swap, 45 of these hotels were included in the Companys hotel property portfolio at March 31,
2008.
24
Income from continuing operations includes the operating results of 64 hotel properties that
the Company has owned throughout the entirety of both the three months ended March 31, 2008 and
2007 (the comparable hotels). The
following table illustrates the key performance indicators of the comparable hotels for the three
months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
Total revenue (in thousands) |
|
$ |
145,694 |
|
|
$ |
145,061 |
|
Room revenue (in thousands) |
|
$ |
109,382 |
|
|
$ |
110,000 |
|
RevPAR (revenue per available room) |
|
$ |
96.16 |
|
|
$ |
97.55 |
|
Occupancy |
|
|
68.1 |
% |
|
|
72.0 |
% |
ADR (average daily rate) |
|
$ |
141.14 |
|
|
$ |
135.49 |
|
Comparison of the Three Months Ended March 31, 2008 and 2007
Revenue. Total revenue for the three months ended March 31, 2008 (the 2008 quarter)
increased $165.7 million, or 111.4%, to $314.5 million from $148.7 million for the three months
ended March 31, 2007 (the 2007 quarter). The increase was primarily due to $165.0 million in
incremental revenues attributable to the 45 hotel properties acquired since December 31, 2006 and
$633,000 increase in revenues from comparable hotels. The increase also reflects a $131,000
consulting fee pursuant to an asset swap agreement the Company entered into in December 2007 and
$53,000 of other fee income from PREI JV.
Room revenues at comparable hotels for the 2008 quarter decreased $618,000, or 0.6%, compared
to the 2007 quarter, primarily due to a slight decrease in RevPAR from $97.55 to $96.16, which
consisted of a 4.2% increase in ADR and a 390 basis decrease in occupancy principally as a result
of nine hotel properties being under renovation. Excluding the nine hotel properties under
renovation, the 55 comparable hotel properties RevPAR would have a slight increase from $95.08 in
the 2007 quarter to $96.20 in the 2008 quarter consisting of a 4.2% increase in ADR and a 209 basis
decrease in occupancy rate. Due to the uncertain economy and consistent with industry trends, many
hotels experienced lower occupancy, however, it is mostly offset by moderate increases in ADR.
Certain hotels benefited from increasing or garnering more favorable group room-night contracts,
eliminating less favorable contracts, and charging higher rates on transient business. Although
occupancy increased at several hotels, renovations at certain hotels reduced room availability,
which offset these increases.
Food and beverage revenues at comparable hotels for the 2008 quarter increased $1.5 million,
or 4.9% compared to the 2007 quarter, primarily due to better pricing mix and increased banquets
and convention business at certain hotels. The remainder of the increase is primarily due to the
45 hotel properties acquired since December 31, 2006 that are included in continuing operations.
Rental income from operating leases represents rental income recognized on a straight-line
basis associated with a hotel property acquired in April 2007, which is leased to a third-party
tenant on a triple-net basis.
Other revenues for the 2008 quarter increased $9.3 million compared to the 2007 quarter due
primarily to the $9.5 million attributable to the 45 hotel properties acquired since December 31,
2006 that are included in continuing operations. The increase was partially offset by a slight
decline of $211,000 at comparable hotels due to decreased parking and phone revenues at certain
hotels.
Interest income from notes receivable decreased $100,000 for the 2008 quarter compared to the
2007 quarter due to the decline in LIBOR rates during the 2008 quarter which is substantially
offset by an increase in the average mezzanine loans portfolio balance outstanding during the 2008
quarter compared to the 2007 quarter as a result of acquisition and origination of new mezzanine
loans.
Asset management fees and other were $522,000 for the 2008 quarter and $331,000 for the 2007
quarter. The increase is primarily related to a consulting fee of $131,000 from a consulting
agreement the Company entered into in December 2007 in connection with an asset swap transaction.
The increase also reflects $53,000 of other fee income from PREI JV.
25
Hotel Operating Expenses. Hotel operating expenses, which consists of room expense, food and
beverage expense, other direct expenses, indirect expenses, and management fees, increased
$110.1 million, or 114.9%, for the 2008 quarter compared to the 2007 quarter, primarily due to
$108.8 million of expenses associated with the 45 hotel properties acquired since December 31, 2006
that are included in continuing operations. In addition, hotel operating
expenses at comparable hotels experienced an increase of $1.3 million, or 1.4%, for the 2008
quarter compared to the 2007 quarter primarily due to increased expenses in renovation and repairs,
franchise fees and sales and marketing, which is partially offset by the decrease in incentive
management fees.
Property Taxes, Insurance and Other. Property taxes, insurance, and other increased
$8.5 million, or 108.9%, for the 2008 quarter compared to the 2007 quarter due to $9.0 million of
expenses associated with the 45 hotel properties acquired since December 31, 2006 that are included
in continuing operations. Aside from additional costs incurred at these acquired hotels, property
taxes, insurance, and other expense decreased $566,000 in the 2008 quarter compared to the 2007
quarter primarily resulting from decreased property insurance rates incurred under new policies
related to several hotels as a result of the overall soft insurance market.
Depreciation and Amortization. Depreciation and amortization increased $29.3 million, or
180.7%, for the 2008 quarter compared to the 2007 quarter primarily due to $26.9 million of
depreciation associated with the 45 hotel properties acquired since December 31, 2006 that are
included in continuing operations. Aside from these additional hotels acquired, depreciation and
amortization increased $2.4 million in the 2008 quarter compared to the 2007 quarter as a result of
capital improvements made at several comparable hotels since December 31, 2006.
Corporate General and Administrative. Corporate general and administrative expense increased
to $7.7 million for the 2008 quarter compared to $4.6 million for the 2007 quarter. These expenses
include non-cash stock-based compensation expense of $1.6 million and $1.1 million for the 2008
quarter and 2007 quarter, respectively. Excluding the non-cash stock-based compensation, these
expenses increased $2.6 million in the 2008 quarter compared to the 2007 quarter primarily due to
the increase in headcount as a result of the CNL Acquisition.
Equity Earnings in Unconsolidated Joint Venture. Equity earnings in unconsolidated joint
venture of $526,000 represent the 25% of the earnings from PREI JV. The earnings are primarily
generated from the interest earned on the mezzanine notes. As of March 31, 2008, PREI JV owned
$92.3 million of mezzanine notes.
Interest Income. Interest income increased $48,000 for the 2008 quarter compared to the 2007
quarter primarily due to the increase in average cash balances.
Other Income. Other income of $296,000 represents the interest accrued on the non-designated
interest rate swap transaction that the Company entered into in March 2008.
Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan
costs increased $23.8 million to $39.6 million for the 2008 quarter from $15.8 million for the 2007
quarter. The increase is primarily attributable to the higher average debt balance as a result of
the CNL Acquisition, which is partially offset by a slight decrease in interest expense on the
Companys variable rate debt as a result of interest rate cuts by Federal Reserve Bank.
Write-off of Loan Cost and Exit Fees. During the 2007 quarter the Company terminated its then
outstanding $100.0 million credit facility. In connection with this termination, the Company
wrote-off unamortized loan costs of approximately $491,000. No such costs or fees were incurred in
the 2008 quarter.
Unrealized Gains (Losses) on Derivatives. In March 2008, the Company entered into interest
rate swap, floor and cap transactions that were not designated as hedges. As a result, the changes
in market value of these derivatives are included in the earnings. During the 2008 quarter, the
Company recorded unrealized gains of $4.0 million on these derivatives. Unrealized losses were
$6,000 and $35,000 for the 2008 quarter and 2007 quarter, respectively, on other interest rate caps
that the Company entered into previously. See Note 3 and Note 11 of Notes to Consolidated
Financial Statements.
The valuation of these instruments is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and
uses observable market-based inputs, including interest rate curves, and implied volatilities. The
fair values of interest rate derivatives are determined using the market standard
26
methodology of
netting the discounted future fixed cash receipts/payments and the discounted expected variable
cash payments/receipts. The variable cash payments/receipts are based on an expectation of future
interest rates (forward curves) derived from observable market interest rate curves. The fair
values of interest rate options are determined using the market standard methodology of discounting
the future expected cash receipts that would occur if variable interest rates fell below the strike
rate of the floors or rise above the strike rate of the caps. The variable interest rates
used in the calculation of projected receipts on the floor (cap) are based on an expectation of
future interest rates derived from observable market interest rate curves and volatilities. To
comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments
to appropriately reflect both its own non-performance risk and the respective counterpartys
non-performance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of non-performance risk, the Company has considered the impact of netting
and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
Income Tax (Expense) Benefit. Income tax expense was $410,000 for the 2008 quarter. For the
2007 quarter, the Company recorded a $1.1 million income tax benefit in connection with the TRS
loss for the quarter. The 2008 tax expense consisted primarily of the state taxes assessed on the
partnership subsidiaries related to the new Texas margin tax and taxes recorded on a hotel property
in Washington DC.
Minority Interests in Income of Consolidated Joint Ventures. Minority interest in consolidated
joint ventures for the 2008 quarter was $67,000 which represents net income attributable to joint
ventures partners who own between 11% to 25% of six hotel properties. The Company acquired these
joint ventures in connection with the CNL Acquisition in April 2007.
Minority Interest in Operating Partnership. Minority interest in income of operating
partnership represents the limited partners proportionate share of equity in earnings of the
operating partnership which is an allocation of net income available to common shareholders based
on the weighted average ownership percentage of these limited partners common unit holdings
throughout the period plus dividends related to these limited partners Class B unit holdings.
Income from continuing operations allocated to these limited partners was $400,000 and $1.4 million
for the 2008 quarter and the 2007 quarter, respectively. Income from discontinued operations
allocated to these limited partners was $232,000 and $385,000 for the 2008 quarter and the 2007
quarter, respectively.
Income from Discontinued Operations. Income from discontinued operations includes the
operating results of one hotel property designated as held for sale at March 31, 2008, and
operating results of three properties through the dates of sale for the 2008 quarter. For the 2007
quarter it includes 16 properties designated as held for sale at March 31, 2007, and operating
results of two properties through the dates of sale for the 2007 quarter. Included in income from
discontinued operations were gains of $889,000 and $1.4 million from the sales for the 2008 quarter
and the 2007 quarter, respectively. Operating results of discontinued operations also reflected
interest and related debt expense of $969,000 and $963,000 for the 2008 quarter and 2007 quarter,
respectively. In addition, a debt premium of $2.1 million in the 2008 quarter and unamortized loan
costs of $224,000 and $212,000 in the 2008 quarter and 2007 quarter, respectively, were written off
when the related debt was repaid upon the sale of the hotel properties collateralizing that debt.
NON-GAAP FINANCIAL MEASURES
Funds From Operations (FFO), as defined by the White Paper on FFO approved by the Board of
Governors of the National Association of Real Estate Investment Trusts (NAREIT) in April 2002,
represents net income (loss) computed in accordance with generally accepted accounting principles
(GAAP), excluding gains or losses from sales of properties and extraordinary items as defined by
GAAP, plus depreciation and amortization of real estate assets, and net of adjustments for the
portion of these items related to minority interests in consolidated joint ventures. NAREIT
developed FFO as a relative measure of performance of an equity REIT to recognize that
income-producing real estate historically has not depreciated on the basis determined by GAAP.
The Company computes FFO in accordance with our interpretation of standards established by
NAREIT, which may not be comparable to FFO reported by other REITs that either do not define the
term in accordance with the current NAREIT definition or interpret the NAREIT definition
differently than us. FFO does not represent cash generated from operating activities as determined
by GAAP and should not be considered as an alternative to a) GAAP net income (loss) as an
indication of our financial performance or b) GAAP cash flows from operating activities as a
measure of our liquidity, nor is it indicative of funds available to satisfy our cash needs,
including our ability to make cash distributions.
27
However, to facilitate a clear understanding of
our historical operating results, we believe that FFO should be considered along with our net
income (loss) and cash flows reported in the consolidated financial statements.
The following table reconciles net income available to common shareholders to FFO available to
common shareholders (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net (loss) income available to common shareholders |
|
$ |
(833 |
) |
|
$ |
8,698 |
|
Depreciation and amortization |
|
|
45,298 |
|
|
|
17,116 |
|
Minority interest in income of operating partnership |
|
|
631 |
|
|
|
1,827 |
|
Gains on sales of properties |
|
|
(889 |
) |
|
|
(1,388 |
) |
|
|
|
|
|
|
|
FFO available to common shareholders |
|
$ |
44,207 |
|
|
$ |
26,253 |
|
|
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of funds to meet our cash requirements, including distributions to
stockholders, repayments of indebtedness and capital expenditures for property improvements, is our
share of the operating partnerships cash flow. The operating partnerships principal sources of
cash flows include: (i) cash flow from hotel operations, (ii) interest income from and repayments
of our notes receivable portfolio, and (iii) proceeds from sales of hotel properties and other
assets. The Company believes it has adequate means to satisfy all of its short-term cash
obligations through cash flows from hotel operations, potential sales of hotels, availability on
its lines of credit, or potential additional borrowings on its unencumbered assets. The Companys
cash flows of liquidity are summarized as follows:
Net Cash Flows Provided By Operating Activities. Net cash flows provided by operating
activities, pursuant to our Consolidated Statement of Cash Flows which includes quarterly changes
in balance sheet items, were $27.3 million and $17.4 million for the 2008 quarter and 2007 quarter,
respectively.
Net Cash Flows Used In Investing Activities. For the 2008 quarter, investing activities
provided net cash flows of $5.3 million, which consisted of net proceeds of $79.2 million from
sales of two hotel properties and one office building and a payment of $16.2 million for the 75%
note receivable acquired by PREI JV. These cash inflows were partially offset by a $39.5 million
for acquisitions or originations of notes receivable, a $17.8 million for the net payment for the
acquisition of 25% interest in a mezzanine loan acquired by PREI JV, and $32.6 million of
improvements to various hotel properties. The Company has budgeted total capital expenditures of
$190 million for 2008. For the 2007 quarter, investing activities provided net cash flows of
$3.6 million, which consisted of $30.6 million related to the sales of two hotel properties and
$8.0 million related to payments on notes receivable. These cash inflows were partially offset by
$14.9 million related to the acquisitions of hotel properties and related deposits and
$19.9 million of improvements to various hotel properties.
Net Cash Flows Used In Financing Activities. For the 2008 quarter, net cash flow used in
financing activities was $30.4 million consisting of $61.4 million of payments on indebtedness and
capital leases, $35.0 million of dividends paid, $4.6 million paid for entering into interest rate
swap, floor and cap transactions, and $4.6 million of payments to acquire treasury shares. These
cash outlays were partially offset by a $75.0 million draw on the Companys $150.0 million credit
facility, a $137,000 cash payment from minority interest in consolidated joint ventures and $53,000
buy-ins of the operating partnership units issued to the Companys executives under the Companys
long term incentive partnership units (LTIP) plan. For the 2007 quarter, net cash flow used in
financing activities was $29.3 million consisting of a $20.0 million of dividends paid,
$28.6 million of payments on indebtedness and capital leases, $70,000 of payments of loan costs,
and $700,000 of payments to acquire treasury shares. These cash outlays were partially offset by a
$20.0 million draw on the Companys $150.0 million credit facility.
The Company is required to maintain certain financial ratios under various debt agreements.
If the Company violates covenants in any debt agreements, the Company could be required to repay
all or a portion of its indebtedness before maturity at a time when the Company might be unable to
arrange financing for such repayment on attractive terms, if at all. Violations of certain debt
covenants may result in the Company being unable to borrow unused amounts under a line of credit,
even if repayment of some or all borrowings is not required. In any event, financial covenants
under the Companys current or future debt obligations could impair the Companys planned business
strategies by limiting the Companys ability to borrow (i) beyond certain amounts or (ii) for
certain purposes. Presently, the
28
Companys existing financial debt covenants primarily relate to
maintaining minimum debt coverage ratios at certain properties, maintaining an overall minimum net
worth, maintaining a maximum loan to value, and maintaining an overall minimum total assets. At
March 31, 2008, the Company is in compliance with all covenants or other requirements set forth in
its credit agreements as amended.
During the 2008 quarter, the Company changed its debt strategy to capitalize on the historical
correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue Per
Available Room) and to enhance
dividend coverage. In connection with this strategy, the Company executed a five-year interest
rate swap on $1.8 billion of fixed-rate debt at a weighted average interest rate of 5.84% for a
floating interest rate of LIBOR plus 2.64%. In conjunction with the swap execution, the Company
sold a five-year LIBOR floor notional amount of $1.8 billion at 1.25% and purchased a LIBOR cap
notional amount of $1.0 billion at 3.75% for the first three years. The Company would save
approximately $4.5 million annually in interest expense for every 0.25% reduction in LIBOR.
In general, we are focused exclusively on investing in the hospitality industry across all
segments, including direct hotel investments, first mortgages, mezzanine loans, and eventually
sale-leaseback transactions. We intend to acquire and, in the appropriate market conditions,
develop additional hotels and provide structured financings to owners of lodging properties. We may
incur indebtedness to fund any such acquisitions, developments, or financings. We may also incur
indebtedness to meet distribution requirements imposed on REITs under the Internal Revenue Code to
the extent that working capital and cash flow from our investments are insufficient to fund
required distributions.
However, no assurances can be given that we will obtain additional financings or, if we do,
what the amount and terms will be. Our failure to obtain future financing under favorable terms
could adversely impact our ability to execute our business strategy. In addition, we may
selectively pursue mortgage financing on individual properties and our mortgage investments.
We will acquire or develop additional hotels and invest in structured financings only as
suitable opportunities arise, and we will not undertake such investments unless adequate sources of
financing are available. Funds for future hotel-related investments are expected to be derived, in
whole or in part, from future borrowings under a credit facility or other loan or from proceeds
from additional issuances of common stock, preferred stock, or other securities. However, other
than the aforementioned acquisitions and those mentioned in subsequent events discussion below, we
have no formal commitment or understanding to invest in additional assets, and there can be no
assurance that we will successfully make additional investments.
Our existing hotels are located in developed areas that contain competing hotel properties.
The future occupancy, ADR, and RevPAR of any individual hotel could be materially and adversely
affected by an increase in the number or quality of the competitive hotel properties in its market
area. Competition could also affect the quality and quantity of future investment opportunities.
SEASONALITY
Our properties operations historically have been seasonal as certain properties maintain
higher occupancy rates during the summer months. This seasonality pattern causes fluctuations in
our quarterly lease revenue under our percentage leases. We anticipate that our cash flow from the
operations of the properties will be sufficient to enable us to make quarterly distributions to
maintain our REIT status. To the extent that cash flow from operations is insufficient during any
quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize other cash
on hand or borrowings to fund required distributions. However, we cannot make any assurances that
we will make distributions in the future.
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|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The Companys primary market risk exposure consists of changes in interest rates on borrowings
under our debt instruments and notes receivable that bear interest at variable rates that fluctuate
with market interest rates. The analysis below presents the sensitivity of the market value of our
financial instruments to selected changes in market interest rates.
At March 31, 2008, our $2.7 billion debt portfolio included $569.7 million of variable-rate
debt. The impact on the results of operations of a one percentage change in interest rate on the
outstanding balance of variable-rate debt at March 31, 2008 would be approximately $1.4 million per
quarter. Including the effect of the interest rate swap the
29
Company entered into in March 2008,
the Companys debt portfolio at March 31, 2008 would include $2.4 billion of variable-rate debt.
The impact on the results of operations of a one percentage change in interest rate would be $6.0
million per quarter.
Periodically, we purchase derivatives to increase stability related to interest expense and to
manage our exposure to interest rate movements or other identified risks. To accomplish this
objective, we primarily use interest rate swaps, caps and floors as part of our cash flow hedging
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements without
exchange of the underlying principal amount. Interest rate caps provide us with interest rate
protection above the strike rate on the cap and result in us receiving interest payments when
interest rates exceed the cap strike. In March 2008, the Company entered into interest rate swap,
cap and floor that were not designated as hedges, the changes in the fair market values are
recorded in earnings.
The following summarizes our interest rate swap, caps and floor at March 31, 2008 and the
earnings (losses) recognized for the three months ended March 31, 2008 ($ in thousands):
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|
|
|
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|
Cash Flow |
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|
|
|
|
|
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Unrealized |
|
|
|
|
|
|
|
|
|
Hedge |
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|
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|
Gain/(Loss) |
|
Notional |
|
|
|
|
Interest |
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Designation |
|
|
|
Fair |
|
|
Recognized |
|
Amount |
|
|
Type |
|
Rates |
|
Yes / No |
|
Maturity |
|
Value |
|
|
In Earnings |
|
$ |
212,000 |
|
|
Interest Rate Cap |
|
6.25% |
|
Yes |
|
2009 |
|
$ |
7 |
|
|
$ |
(1 |
) |
|
47,500 |
|
|
Interest Rate Cap |
|
7.00% |
|
Yes |
|
2008 |
|
|
|
|
|
|
|
|
|
35,000 |
|
|
Interest Rate Cap |
|
6.00% |
|
No |
|
2009 |
|
|
1 |
|
|
|
(1 |
) |
|
375,036 |
|
|
Interest Rate Cap |
|
6.00% |
|
No |
|
2009 |
|
|
|
|
|
|
(4 |
) |
|
1,800,000 |
|
|
Interest Rate Swap |
|
Pays LIBOR plus 2.64%, receives fixed 5.84% |
|
No |
|
2013 |
|
|
11,921 |
|
|
|
7,246 |
|
|
1,800,000 |
|
|
Interest Rate Floor |
|
Floor rate 1.25% |
|
No |
|
2013 |
|
|
(9,211 |
) |
|
|
(1,091 |
) |
|
1,000,000 |
|
|
Interest Rate Cap |
|
Cap rate 3.75% |
|
No |
|
2011 |
|
|
5,920 |
|
|
|
(2,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,269,536 |
|
|
|
|
|
|
|
|
|
|
$ |
8,638 |
|
|
$ |
4,049 |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2008, our $112.5 million notes receivable
included $65.0 million of variable-rate
notes. The impact on the results of operations of a one percentage change in interest rate on the
outstanding balance of variable-rate notes at March 31, 2008
would be $162,000 per quarter.
The above amounts were determined based on the impact of hypothetical interest rates on our
borrowings and lending portfolios, and assume no changes in our capital structure. As the
information presented above includes only those exposures that existed at March 31, 2008, it does
not consider exposures or positions which could arise after that date. Hence, the information
presented herein has limited predictive value. As a result, the ultimate realized gain or loss
with respect to interest rate fluctuations will depend on exposures that arise during the period,
the hedging strategies at the time, and the related interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures as of the end of the period
covered by this report have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms. We believe that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of the controls system
are met, and no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected. Management is required to apply
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
30
There have been no changes in our internal controls over financial reporting during our most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to litigation arising in the normal course of our business. In the
opinion of management, none of these lawsuits or claims against us, either individually or in the
aggregate, is likely to have a material adverse effect on our business, results of operations, or
financial condition. In addition, we currently have adequate insurance in place to cover any such
significant litigation.
ITEM 1A. RISK FACTORS
The discussion of our business and operations should be read together with the risk factors
contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007,
filed with the Securities and Exchange Commission, which describe various risks and uncertainties
to which we are or may become subject. These risks and uncertainties have the potential to affect
our business, financial condition, results of operations, cash flows, strategies or prospects in a
material and adverse manner. At March 31, 2008, there have been no material changes to the risk
factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides the information with respect to purchases made by the Company
of shares of its common stock during each of the months in the first three months of 2008:
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|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total Number of |
|
|
Maximum Dollar |
|
|
|
Number |
|
|
Average |
|
|
Shares Purchased as |
|
|
Value of Shares That |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Part of Publicly |
|
|
May Yet Be Purchased |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Announced Plan(1) |
|
|
Under the Plan |
|
January 1 to January 31 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
31,809,000 |
|
February 1 to February 29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,809,000 |
|
March 1 to March 31 |
|
|
705,654 |
(2) |
|
|
6.55 |
|
|
|
700,800 |
|
|
$ |
27,215,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
705,654 |
|
|
$ |
6.55 |
|
|
|
700,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In November 2007, the Company announced that its Board of Directors authorized management to purchase up
to a total of $50 million of its common shares from time to time on the open market. The program does not have a
pre-determined expiration date. |
|
(2) |
|
Includes 4,854 shares received as partial tax payments for shares issued under stock-based compensation
plan. |
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended |
|
|
|
|
|
|
31.2 |
|
|
Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended |
|
|
|
|
|
|
31.3 |
|
|
Certifications of Chief Accounting Officer Pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of Securities Exchange Act of 1934, as amended |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.3 |
|
|
Certification of Chief Accounting Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
31
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.
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|
|
|
Date: May 7, 2008 |
By: |
/s/ Montgomery J. Bennett
|
|
|
|
Montgomery J. Bennett |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: May 7, 2008 |
By: |
/s/ David J. Kimichik
|
|
|
|
David J. Kimichik |
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
Date: May 7, 2008 |
By: |
/s/ Mark L. Nunneley
|
|
|
|
Mark L. Nunneley |
|
|
|
Chief Accounting Officer |
|
|
32