ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Note on Forward-Looking Statements
On one or more occasions, we may make statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements other than statements of historical facts included or incorporated by reference in this Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “targets,” “will,” “will continue,” “will likely result” or other comparable expressions or the negative of these words or phrases identify forward-looking statements. Forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management’s examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved.
Some important factors that could cause actual results or outcomes for us to differ materially from these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q.
Overview
We were incorporated in Maryland in January 2004 to acquire and asset-manage upper upscale and luxury hotels (as defined by Smith Travel Research). Our accounting predecessor, Strategic Hotel Capital, L.L.C. (SHC LLC), was founded in 1997. We made an election to be taxed as a real estate investment trust (REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Tax Code). On June 29, 2004, we completed our initial public offering (IPO) of our common stock. Prior to the IPO, 21 hotel interests were owned by SHC LLC. Concurrent with and as part of the transactions relating to the IPO, a reverse spin-off distribution to shareholders separated SHC LLC into two companies, a new, privately-held SHC LLC, with interests, at that time, in seven hotels and Strategic Hotels & Resorts, Inc. (SHR), a public entity with interests, at that time, in 14 hotels. See “Item 1. Financial Statements -1. General” for the hotel interests owned or leased by us as of
June 30, 2014
.
We operate as a self-administered and self-managed REIT, which means that we are managed by our board of directors and executive officers. A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid federal income taxes at the corporate level. To continue to qualify as a REIT, we cannot operate hotels; instead we employ internationally known hotel management companies to operate our hotels under management contracts. We conduct our operations through our direct and indirect subsidiaries including our operating partnership, Strategic Hotel Funding, L.L.C. (SH Funding), which currently holds substantially all of our assets. We are the managing member of SH Funding and hold approximately 99% of its membership units as of
June 30, 2014
. We manage all business aspects of SH Funding, including the sale and purchase of hotels, the investment in these hotels and the financing of SH Funding and its assets.
Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, references to “we”, “our”, “us”, and “the Company” are references to SHR together, except as the context otherwise requires, with its consolidated subsidiaries, including SH Funding.
When presenting the U.S. dollar equivalent amount for any amounts expressed in a foreign currency, the U.S. dollar equivalent amount has been computed based on the exchange rate on the date of the transaction or the exchange rate prevailing on
June 30, 2014
, as applicable, unless otherwise noted.
Key Indicators of Operating Performance
We evaluate the operating performance of our business using a variety of operating and other information that includes financial information prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) such as total revenues, operating income (loss), net income (loss), and earnings per share, as well as non-GAAP financial information. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels, and/or our
business as a whole. Key indicators that we evaluate include average daily occupancy, average daily rate (ADR), revenue per available room (RevPAR), and Total RevPAR, which are more fully discussed under “—Factors Affecting Our Results of Operations—Revenues.” We also evaluate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), Comparable EBITDA, Funds from Operations (FFO), FFO-Fully Diluted, and Comparable FFO as supplemental non-GAAP measures to GAAP performance measures. We provide a more detailed discussion of the non-GAAP financial measures under “—Non-GAAP Financial Measures.”
Outlook
The lodging industry began its recovery in the first quarter of 2010, after one of the worst downturns in its history. Luxury demand, in which our portfolio has the highest concentration of assets, has experienced positive RevPAR growth since that time. RevPAR gains continued in the second quarter of 2014, driven by improved transient demand and increases in average room rates.
The second quarter of 2014 represented the seventeenth consecutive quarter of RevPAR growth and profit margin expansion for our total United States portfolio of 15 hotels. For the quarter ended June 30, 2014, RevPAR for our total United States portfolio increased 5.3%, driven by a 4.9% increase in ADR and a 0.3 percentage point increase in occupancy, compared to the quarter ended June 30, 2013. Group occupied room nights were flat while transient occupied room nights increased 0.6 percentage points. Transient ADR increased 5.5% compared to the quarter ended June 30, 2013 and group ADR increased 3.9%. The key indicators of operating performance of our United States portfolio, including RevPAR and ADR, differ from the key indicators of operating performance of our Total Portfolio (which is defined within "—Factors Affecting Our Results of Operations -
Total Portfolio and Same Store Assets Definitions
"), which are discussed in the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations." Our United States portfolio includes 100.0% of the results of operations of the Fairmont Scottsdale Princess hotel and the Hotel del Coronado for periods prior to our full ownership, and the Total Portfolio only includes 100.0% of the results of operations of the Fairmont Scottsdale Princess hotel and the Hotel del Coronado during our period of full ownership.
As we assess lodging supply and demand dynamics looking forward, we are optimistic about the long-term prospects for a sustained recovery, particularly in the product niche and markets in which we own assets. Group bookings pace remains our best forward indicator of demand. For our total United States portfolio of hotels, definite group room nights for 2014 as of June 30, 2014 are up 7.2% compared to the same time last year and booked at 3.2% higher rates. New supply in the luxury and upper upscale segments remains very well contained in our markets and the current significant gap between hotel trading values and replacement costs bodes favorably for limited supply growth into the future.
During the lodging downturn we implemented hotel specific contingency plans designed to reduce costs and maximize efficiency at each hotel. These include, but are not limited to, adjusting variable labor, eliminating certain fixed labor, and reducing the hours of room service operations and other food and beverage outlets. We believe the cost structures of our hotels have been fundamentally redesigned to sustain many of the cost reductions, even during periods of rising lodging demand. Therefore, we are optimistic that improving lodging demand will lead to increases in ADR and drive significant profit margin expansion throughout our portfolio.
European Strategy
We previously announced our intention to exit our assets in Europe in an orderly process designed to maximize proceeds. Since that time, we sold the Renaissance Paris Hotel LeParc Trocadero (Renaissance Paris), the InterContinental Prague hotel, our leasehold interest in the Paris Marriott hotel and the Marriott London Grosvenor Square hotel. With the closing of the sale of the Marriott London Grosvenor Square hotel on March 31, 2014, we have effectively completed our exit from Europe as our only remaining European asset is our leasehold interest in the Marriott Hamburg hotel. We continue to opportunistically explore options to exit this investment and still intend to be North American-centric with respect to any new acquisitions.
Factors Affecting Our Results of Operations
Acquisition of Interests in Consolidated Properties.
On May 27, 2014, we entered into an agreement with certain affiliates of Blackstone Real Estate Partners VI L.P. (Blackstone), whereby we agreed to acquire Blackstone’s
63.6%
equity interests in the entity that owns the Hotel del Coronado, BSK Del Partners, L.P. (the Hotel del Coronado Venture) for a cash payment of $210.0 million. We also became fully obligated under the entire $475.0 million mortgage and mezzanine loans outstanding. Effective as of the closing of the transaction on June 11, 2014, we own 100.0% of the Hotel del Coronado Venture.
On March 31, 2014, we entered into an agreement with an affiliate of Walton Street Capital, L.L.C. (Walton Street), whereby we agreed to acquire Walton Street's
50.0%
equity interests in the entities that own the Fairmont Scottsdale Princess hotel, Walton/SHR FPH Holdings, L.L.C. and FMT Scottsdale Holdings, L.L.C. (the Fairmont Scottsdale Princess Venture) for a cash
payment of $90.6 million. We also became fully obligated under the entire $117.0 million mortgage loan outstanding. We now own 100% of the Fairmont Scottsdale Princess Venture.
Sale of Interests in Consolidated Properties.
On March 31, 2014, we sold our interest in the Marriott London Grosvenor Square hotel for proceeds of
$208.3 million
. There was an outstanding balance of £67.3 million ($112.2 million) on the mortgage loan secured by the Marriott London Grosvenor Square hotel, which was repaid at the time of closing. We received net proceeds of $96.2 million. The results of operations for this property have been classified as discontinued operations for all periods presented.
On February 28, 2014, we sold our interest in the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel for proceeds of
$203.2 million
. The results of operations for this property and the adjacent land parcel have been classified as discontinued operations for all periods presented.
Unconsolidated Affiliates
. On June 14, 2013, we entered into an amended and restated venture agreement with an unaffiliated third party, forming the Lot H5 Venture. The Lot H5 Venture owns the Lot H5 land parcel, an undeveloped, oceanfront land parcel in Punta Mita, Nayarit, Mexico. We have a preferred position in the Lot H5 Venture that entitles us to receive the first $12.0 million of distributions generated from the Lot H5 Venture, with any excess distributions split equally between the partners. We jointly control the Lot H5 Venture with our partner and account for our interest in the Lot H5 Venture as an equity method investment.
Total Portfolio and Same Store Assets Definitions.
We define our Total Portfolio as properties that we wholly or partially own or lease and whose operations are included in our consolidated operating results. The Total Portfolio excludes all sold properties and assets held for sale, if any, included in discontinued operations.
We present certain information about our hotel operating results on a comparable hotel basis, which we refer to as our Same Store analysis. We define our Same Store Assets as those hotels (a) that are owned or leased by us, and whose operations are included in our consolidated operating results and (b) for which we reported operating results throughout the entire reporting periods presented.
Our Same Store Assets for purposes of the comparison of the
three and six
months ended
June 30, 2014
and
2013
exclude the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, unconsolidated affiliates, and all sold properties and assets held for sale, if any, included in discontinued operations.
We present these results of Same Store Assets because we believe that doing so provides useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners. In particular, these measures assist in distinguishing whether increases or decreases in revenues and/or expenses are due to operations of the Same Store Assets or from acquisition or disposition activity.
Revenues
.
Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue for the
six
months ended
June 30, 2014
and
2013
consisted of:
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|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio % of Total Revenues
|
|
Same Store Assets % of Total Revenues
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Revenues:
|
|
|
|
|
|
Rooms
|
53.5
|
%
|
|
55.3
|
%
|
|
54.5
|
%
|
|
55.3
|
%
|
Food and beverage
|
36.1
|
%
|
|
34.8
|
%
|
|
35.6
|
%
|
|
34.8
|
%
|
Other hotel operating revenue
|
9.8
|
%
|
|
9.3
|
%
|
|
9.3
|
%
|
|
9.3
|
%
|
Lease revenue
|
0.6
|
%
|
|
0.6
|
%
|
|
0.6
|
%
|
|
0.6
|
%
|
Total revenues
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
•
|
Rooms revenue
.
Occupancy and ADR are the major drivers of rooms revenue.
|
|
|
•
|
Food and beverage revenue
.
Occupancy, local catering and banquet events are the major drivers of food and beverage revenue.
|
|
|
•
|
Other hotel operating revenue
.
Other hotel operating revenue consists primarily of cancellation fees, spa, telephone, parking, golf course, Internet access, space rentals, retail and other guest services and is also driven by occupancy.
|
|
|
•
|
Lease revenue
.
We sublease our interest in the Marriott Hamburg hotel to a third party and earn annual base rent plus additional rent contingent on the hotel meeting performance thresholds.
|
Changes in our revenues are most easily explained by performance indicators that are used in the hotel real estate industry:
|
|
•
|
average daily occupancy;
|
|
|
•
|
ADR, which stands for average daily rate, is equal to rooms revenue divided by the number of occupied rooms;
|
|
|
•
|
RevPAR, which stands for revenue per available room, is equal to rooms revenue divided by the number of rooms available; and
|
|
|
•
|
Total RevPAR, which stands for total revenue per available room, is equal to the sum of rooms revenue, food and beverage revenue and other hotel operating revenue, divided by the number of rooms available.
|
For purposes of calculating our Total Portfolio RevPAR for the
three and six
months ended
June 30, 2014
and
2013
, we exclude unconsolidated affiliates, discontinued operations, if any, and the Marriott Hamburg hotel because we sublease the operations of the hotel and only record lease revenue. Same Store Assets RevPAR is calculated in the same manner as Total Portfolio RevPAR but also excludes the Fairmont Scottsdale Princess hotel and the Hotel del Coronado for the
three and six
months ended
June 30, 2014
and
2013
. These methods for calculating RevPAR each period are consistently applied through the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and should be taken into consideration wherever RevPAR results are disclosed.
We generate a significant portion of our revenue from two broad categories of customers, transient and group.
Our transient customers include individual or group business and leisure travelers that occupy fewer than 10 rooms per night. Transient customers for our Total Portfolio accounted for approximately 57.3% and 59.5% of the rooms sold during the
six
months ended
June 30, 2014
and
2013
, respectively. The percentage of transient customers for our Total Portfolio has been impacted by our consolidation of the Fairmont Scottsdale Princess hotel and the Hotel del Coronado in March 2014 and June 2014, respectively, both of which have a higher percentage of group occupancy as compared to transient occupancy. We divide our transient customers into the following subcategories:
|
|
•
|
Transient Leisure – This category generates the highest room rates and includes travelers that receive published rates offered to the general public that do not have access to negotiated or discounted rates.
|
|
|
•
|
Transient Negotiated – This category includes travelers, who are typically associated with companies and organizations that generate high volumes of business, that receive negotiated rates that are lower than the published rates offered to the general public.
|
Our group customers include groups of 10 or more individuals that occupy 10 or more rooms per night. Group customers for our Total Portfolio accounted for approximately 42.7% and 40.5% of the rooms sold during the
six
months ended
June 30, 2014
and
2013
, respectively. The percentage of group customers for our Total Portfolio has been impacted by our consolidation of the Fairmont Scottsdale Princess hotel and the Hotel del Coronado in March 2014 and June 2014, respectively, both of which have a higher percentage of group occupancy as compared to transient occupancy. We divide our group customers into the following subcategories:
|
|
•
|
Group Association – This category includes group bookings related to national and regional association meetings and conventions.
|
|
|
•
|
Group Corporate – This category includes group bookings related to corporate business.
|
|
|
•
|
Group Other – This category generally includes group bookings related to social, military, education, religious, fraternal and youth and amateur sports teams.
|
Fluctuations in revenues, which, for our domestic hotels, historically have been correlated with changes in the United States gross domestic product (U.S. GDP), are driven largely by general economic and local market conditions, which in turn affect levels of business and leisure travel. Guest demographics also affect our revenues. During
2013
and through the second quarter of 2014, demand at our hotels increased, despite tepid U.S. GDP growth, which we believe reflects the relative strength of our primary customer demographics, particularly U.S. based corporations and affluent transient travelers.
In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases unless the supply growth is offset by an equal or greater increase in demand. One reason we target upper upscale and luxury hotels in select urban and resort markets, including major business centers and leisure destinations, is
because they tend to be in locations that have greater supply constraints such as lack of available land, high development costs, long development and entitlement lead times, and brand trade area restrictions that prevent the addition of a certain brand or brands in close proximity. Nevertheless, our hotels are not insulated from competitive pressures and our hotel operators may lower room rates to compete more aggressively for guests in periods when occupancy declines.
Hotel Operating Expenses.
Our hotel operating expenses for the
six
months ended
June 30, 2014
and
2013
consisted of the costs and expenses to provide hotel services, including:
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|
|
|
|
|
|
|
|
|
Total Portfolio % of Total Hotel Operating Expenses
|
|
Same Store Assets % of Total Hotel
Operating Expenses
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Hotel Operating Expenses:
|
|
|
|
|
|
|
|
Rooms
|
20.7
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
|
21.1
|
%
|
Food and beverage
|
33.5
|
%
|
|
33.8
|
%
|
|
33.8
|
%
|
|
33.8
|
%
|
Other departmental expenses
|
33.0
|
%
|
|
32.4
|
%
|
|
32.4
|
%
|
|
32.5
|
%
|
Management fees
|
4.2
|
%
|
|
3.5
|
%
|
|
4.1
|
%
|
|
3.6
|
%
|
Other hotel expenses
|
8.6
|
%
|
|
9.3
|
%
|
|
8.7
|
%
|
|
9.0
|
%
|
Total hotel operating expenses
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
•
|
Rooms expense.
Occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.
|
|
|
•
|
Food and beverage expense.
Occupancy, local catering and banquet events are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.
|
|
|
•
|
Other departmental expenses
. Other departmental expenses consist of general and administrative, marketing, repairs and maintenance, utilities and expenses related to earning other operating revenue.
|
|
|
•
|
Management fees.
We pay base and incentive management fees to our hotel operators. Base management fees are computed as a percentage of revenue. Incentive management fees are incurred when operating profits exceed levels prescribed in our management agreements.
|
|
|
•
|
Other hotel expenses
. Other hotel expenses consist primarily of insurance costs and property taxes.
|
Salaries, wages and related benefits are included within the categories of hotel operating expenses described above and represented approximately 55.5% and 51.7% of the Total Portfolio total hotel operating expenses for the
six
months ended
June 30, 2014
and
2013
, respectively.
Most categories of variable operating expenses, such as utilities and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses while increases in RevPAR attributable to increases in ADR typically only result in increases in limited categories of operating costs and expenses, such as management fees charged by our operators, which are based on hotel revenues. Therefore, changes in ADR have a more significant impact on operating margins.
Lease Expense.
As a result of the sale-leaseback transaction of the Marriott Hamburg hotel, we record lease expense in our condensed consolidated statements of operations. In conjunction with the sale-leaseback transaction, we also recorded a deferred gain, which is amortized as an offset to lease expense.
Corporate Expenses.
Corporate expenses include payroll and related costs, professional fees, travel expenses, office rent and transaction costs.
Recent Events
. In addition to the changes to the consolidated hotel properties and unconsolidated affiliates noted above, we expect that the following events will cause our future results of operations to differ from our historical performance:
Bank Credit Facility.
On April 25, 2014, we entered into a new $300.0 million secured, bank credit facility, which also includes a $100.0 million accordion feature. This new facility replaced the $300.0 million secured bank credit facility that was set to expire in June 2015 (assuming all extension options were exercised). The facility's interest rate is based upon a leverage-based pricing grid ranging from London Interbank Offered Rate (LIBOR) plus 175 basis points to LIBOR plus 250 basis points. The facility expires on April 25, 2018, with a one-year extension available, subject to certain conditions. See "—Liquidity and Capital Resources—
Bank Credit Facility."
Interest Rate Swap Terminations.
On April 21, 2014, we paid $22.7 million, including accrued and unpaid interest, to terminate all of our remaining interest rate swaps with a combined notional amount of $400.0 million.
Preferred Stock Redemptions
.
On July 3, 2014, we redeemed all of the outstanding 3,827,727 shares of our 8.25% Series C Cumulative Redeemable Preferred Stock (Series C Preferred Stock). The shares of the Series C Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends from July 1, 2014 up to and including July 3, 2014 in the amount of $0.01719 per share, for a total redemption cost of $95.8 million. Following the redemption, dividends on the Series C Preferred Stock ceased to accrue.
On April 3, 2014, we redeemed all of the outstanding 4,181,141 shares of our 8.50% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock). The shares of the Series A Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to and including April 3, 2014 in the amount of $0.54896 per share, for a total redemption cost of $106.0 million. Following the redemption, dividends on the Series A Preferred Stock ceased to accrue.
Mortgage Loan Agreements.
On July 7, 2014 we paid off the outstanding balance on the mortgage loan secured by the InterContinental Miami hotel. We are currently evaluating financing alternatives.
On June 30, 2014, we refinanced the loan secured by the Four Seasons Washington, D.C. hotel. The principal was reduced to $120.0 million and the interest rate was reduced to one-month LIBOR plus 2.25% from one-month LIBOR plus 3.15%. The loan has an initial maturity date of June 30, 2017 with two, one-year extension options, subject to certain conditions.
On May 29, 2014, we refinanced the loan secured by the Loews Santa Monica Beach Hotel. The principal was increased to $120.0 million and the interest rate was reduced to one-month LIBOR plus 2.55% from one-month LIBOR plus 3.85%. The loan has an initial maturity date of May 29, 2017 with four, one-year extension options, subject to certain conditions.
On September 9, 2013, we amended the mortgage agreements secured by the Fairmont Chicago and Westin St. Francis hotels. The amendment eliminates future principal amortization payments subject to meeting certain financial and other requirements.
Ground Lease Amendment.
In February 2013, we amended the ground lease agreement at the Marriott Lincolnshire Resort. The amendment extended the term of the lease through December 31, 2112 and changed the annual rent payments to a fixed amount, subject to indexation.
Comparison of Three Months Ended
June 30, 2014
to Three Months Ended
June 30, 2013
Operating Results
The following table presents the operating results for the three months ended
June 30, 2014
and
2013
, including the amount and percentage change in these results between the two periods of our Total Portfolio and Same Store Assets (in thousands, except operating data).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
Same Store Assets
|
|
2014
|
|
2013
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
|
2014
|
|
2013
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
$
|
148,874
|
|
|
$
|
127,484
|
|
|
$
|
21,390
|
|
|
16.8
|
%
|
|
$
|
132,690
|
|
|
$
|
127,484
|
|
|
$
|
5,206
|
|
|
4.1
|
%
|
Food and beverage
|
100,028
|
|
|
79,966
|
|
|
20,062
|
|
|
25.1
|
%
|
|
84,159
|
|
|
79,966
|
|
|
4,193
|
|
|
5.2
|
%
|
Other hotel operating revenue
|
25,942
|
|
|
18,491
|
|
|
7,451
|
|
|
40.3
|
%
|
|
19,985
|
|
|
18,486
|
|
|
1,499
|
|
|
8.1
|
%
|
Lease revenue
|
1,319
|
|
|
1,160
|
|
|
159
|
|
|
13.7
|
%
|
|
1,319
|
|
|
1,160
|
|
|
159
|
|
|
13.7
|
%
|
Total revenues
|
276,163
|
|
|
227,101
|
|
|
49,062
|
|
|
21.6
|
%
|
|
238,153
|
|
|
227,096
|
|
|
11,057
|
|
|
4.9
|
%
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
199,396
|
|
|
168,342
|
|
|
(31,054
|
)
|
|
(18.4
|
)%
|
|
172,313
|
|
|
167,536
|
|
|
(4,777
|
)
|
|
(2.9
|
)%
|
Lease expense
|
1,260
|
|
|
1,206
|
|
|
(54
|
)
|
|
(4.5
|
)%
|
|
1,260
|
|
|
1,206
|
|
|
(54
|
)
|
|
(4.5
|
)%
|
Depreciation and amortization
|
28,058
|
|
|
24,691
|
|
|
(3,367
|
)
|
|
(13.6
|
)%
|
|
22,505
|
|
|
24,563
|
|
|
2,058
|
|
|
8.4
|
%
|
Corporate expenses
|
7,198
|
|
|
7,209
|
|
|
11
|
|
|
0.2
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total operating costs and expenses
|
235,912
|
|
|
201,448
|
|
|
(34,464
|
)
|
|
(17.1
|
)%
|
|
196,078
|
|
|
193,305
|
|
|
(2,773
|
)
|
|
(1.4
|
)%
|
Operating income
|
40,251
|
|
|
25,653
|
|
|
14,598
|
|
|
56.9
|
%
|
|
$
|
42,075
|
|
|
$
|
33,791
|
|
|
$
|
8,284
|
|
|
24.5
|
%
|
Interest expense, net
|
(19,537
|
)
|
|
(19,440
|
)
|
|
(97
|
)
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
826
|
|
|
1,456
|
|
|
(630
|
)
|
|
(43.3
|
)%
|
|
|
|
|
|
|
|
|
Foreign currency exchange (loss) gain
|
(8
|
)
|
|
84
|
|
|
(92
|
)
|
|
(109.5
|
)%
|
|
|
|
|
|
|
|
|
Gain on consolidation of affiliates
|
65,349
|
|
|
—
|
|
|
65,349
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Other income, net
|
795
|
|
|
745
|
|
|
50
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
Income before income taxes and discontinued operations
|
87,676
|
|
|
8,498
|
|
|
79,178
|
|
|
931.7
|
%
|
|
|
|
|
|
|
|
|
Income tax expense
|
(207
|
)
|
|
(72
|
)
|
|
(135
|
)
|
|
(187.5
|
)%
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
87,469
|
|
|
8,426
|
|
|
79,043
|
|
|
938.1
|
%
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
604
|
|
|
329
|
|
|
275
|
|
|
83.6
|
%
|
|
|
|
|
|
|
|
|
Net income
|
88,073
|
|
|
8,755
|
|
|
79,318
|
|
|
906.0
|
%
|
|
|
|
|
|
|
|
|
Net income attributable to the noncontrolling interests in SHR’s operating partnership
|
(281
|
)
|
|
(36
|
)
|
|
(245
|
)
|
|
(680.6
|
)%
|
|
|
|
|
|
|
|
|
Net loss attributable to the noncontrolling interests in consolidated affiliates
|
217
|
|
|
597
|
|
|
(380
|
)
|
|
(63.7
|
)%
|
|
|
|
|
|
|
|
|
Net income attributable to SHR
|
$
|
88,009
|
|
|
$
|
9,316
|
|
|
$
|
78,693
|
|
|
844.7
|
%
|
|
|
|
|
|
|
|
|
Reconciliation of Same Store Assets Operating Income to Total Portfolio Operating Income:
|
Same Store Assets operating income
|
|
|
|
|
|
$
|
42,075
|
|
|
$
|
33,791
|
|
|
$
|
8,284
|
|
|
24.5
|
%
|
Corporate expenses
|
|
|
|
|
|
|
(7,198
|
)
|
|
(7,209
|
)
|
|
11
|
|
|
0.2
|
%
|
Corporate depreciation and amortization
|
|
|
|
|
|
(123
|
)
|
|
(127
|
)
|
|
4
|
|
|
3.1
|
%
|
Non-Same Store Assets operating income (loss)
|
|
|
|
5,497
|
|
|
(802
|
)
|
|
6,299
|
|
|
785.4
|
%
|
Total Portfolio operating income
|
|
|
|
|
|
$
|
40,251
|
|
|
$
|
25,653
|
|
|
$
|
14,598
|
|
|
56.9
|
%
|
Operating Data (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hotels
|
16
|
|
|
14
|
|
|
|
|
14
|
|
|
14
|
|
|
|
|
|
Number of rooms
|
7,865
|
|
|
6,456
|
|
|
|
|
6,459
|
|
|
6,456
|
|
|
|
|
|
|
|
(1)
|
Operating data includes the leasehold interest in the Marriott Hamburg hotel and excludes properties included in discontinued operations. The Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which were unconsolidated affiliates until we acquired 100% ownership on March 31, 2014 and June 11, 2014, respectively, are
|
included in our 2014 Total Portfolio data but are excluded from our 2013 Total Portfolio data and our Same Store Assets data.
Rooms
.
Our Same Store Assets contributed to a
$5.2 million
, or
4.1%
,
increase
in rooms revenue for the three months ended
June 30, 2014
from the three months ended
June 30, 2013
. The components of RevPAR from our Same Store Assets for the three months ended
June 30, 2014
and
2013
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2014
|
|
2013
|
|
Change (%)
Favorable/
(Unfavorable)
|
Occupancy
|
81.1
|
%
|
|
81.2
|
%
|
|
(0.1
|
)%
|
ADR
|
$
|
290.89
|
|
|
$
|
279.07
|
|
|
4.2
|
%
|
RevPAR
|
$
|
236.04
|
|
|
$
|
226.72
|
|
|
4.1
|
%
|
The increase in RevPAR for the Same Store Assets resulted from a
4.2%
increase in ADR offset by a 0.1 percentage-point decrease in occupancy. Rooms revenue
increase
d primarily due to 4.2% and 3.7% increases in transient and group ADR, respectively, resulting from improving market conditions at many of our Same Store Assets for the three months ended
June 30, 2014
when compared to the three months ended
June 30, 2013
. Our InterContinental Chicago and Fairmont Chicago hotels experienced declines in rooms revenue, which have been impacted by increased supply in the Chicago market and declines in citywide conventions when compared to prior year.
For the Total Portfolio, rooms revenue
increased
$21.4 million
, or
16.8%
, for the three months ended
June 30, 2014
from the three months ended
June 30, 2013
. In addition to the increase in the Same Store Assets, the increase in the Total Portfolio rooms revenue includes $16.2 million of rooms revenue from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
The components of RevPAR from our Total Portfolio for the three months ended
June 30, 2014
and
2013
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2014
|
|
2013
|
|
Change (%)
Favorable/
(Unfavorable)
|
Occupancy
|
80.8
|
%
|
|
81.2
|
%
|
|
(0.5
|
)%
|
ADR
|
$
|
289.97
|
|
|
$
|
279.07
|
|
|
3.9
|
%
|
RevPAR
|
$
|
234.23
|
|
|
$
|
226.72
|
|
|
3.3
|
%
|
Food and Beverage
.
Our Same Store Assets experienced a
$4.2 million
, or
5.2%
,
increase
in food and beverage revenue for the three months ended
June 30, 2014
when compared to the three months ended
June 30, 2013
, primarily due to an increase in banquet and catering revenues from strong group spend at many of our Same Store Assets. Additionally, the InterContinental Miami and the Ritz-Carlton Laguna Niguel hotels had increases in outlet revenue due to strong transient demand. For the Total Portfolio, food and beverage revenue
increased
$20.1 million
, or
25.1%
, when comparing the three months ended
June 30, 2014
to the three months ended
June 30, 2013
. In addition to the increase in the Same Store Assets, the increase in the Total Portfolio food and beverage revenue includes $15.9 million additional food and beverage revenue from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Other Hotel Operating Revenue
. For the Total Portfolio, other hotel operating revenue increased
$7.5 million
, or
40.3%
, when comparing the three months ended
June 30, 2014
to the three months ended
June 30, 2013
, which primarily relates to $5.9 million additional other hotel operating revenue from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Hotel Operating Expenses
.
The following table presents the components of our hotel operating expenses for the three months ended
June 30, 2014
and
2013
, including the amount and percentage changes in these expenses between the two periods of our Total Portfolio and Same Store Assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
Same Store Assets
|
|
2014
|
|
2013
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
|
2014
|
|
2013
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
Hotel operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
$
|
41,268
|
|
|
$
|
36,087
|
|
|
$
|
(5,181
|
)
|
|
(14.4
|
)%
|
|
$
|
36,902
|
|
|
$
|
36,087
|
|
|
$
|
(815
|
)
|
|
(2.3
|
)%
|
Food and beverage
|
67,077
|
|
|
57,289
|
|
|
(9,788
|
)
|
|
(17.1
|
)%
|
|
58,896
|
|
|
57,289
|
|
|
(1,607
|
)
|
|
(2.8
|
)%
|
Other departmental expenses
|
66,238
|
|
|
53,285
|
|
|
(12,953
|
)
|
|
(24.3
|
)%
|
|
55,246
|
|
|
53,285
|
|
|
(1,961
|
)
|
|
(3.7
|
)%
|
Management fees
|
9,241
|
|
|
6,447
|
|
|
(2,794
|
)
|
|
(43.3
|
)%
|
|
7,633
|
|
|
6,447
|
|
|
(1,186
|
)
|
|
(18.4
|
)%
|
Other hotel expenses
|
15,572
|
|
|
15,234
|
|
|
(338
|
)
|
|
(2.2
|
)%
|
|
13,636
|
|
|
14,428
|
|
|
792
|
|
|
5.5
|
%
|
Total hotel operating expenses
|
$
|
199,396
|
|
|
$
|
168,342
|
|
|
$
|
(31,054
|
)
|
|
(18.4
|
)%
|
|
$
|
172,313
|
|
|
$
|
167,536
|
|
|
$
|
(4,777
|
)
|
|
(2.9
|
)%
|
For our Total Portfolio, hotel operating expenses
increased
by
$31.1 million
, or
18.4%
, primarily due to $27.1 million additional operating expenses from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Depreciation and Amortization.
For the Total Portfolio, depreciation and amortization
increased
$3.4 million
, or
13.6%
, for the three months ended
June 30, 2014
when compared to the three months ended
June 30, 2013
, primarily due to $5.4 million additional depreciation and amortization expense from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Interest Expense, Net.
The
$0.1 million
, or
0.5%
,
increase
in interest expense, net for the three months ended
June 30, 2014
when compared to the three months ended
June 30, 2013
, was primarily due to:
|
|
•
|
a $1.8 million decrease in gains related to the mark to market of certain interest rate swaps,
|
|
|
•
|
a $1.5 million increase in the amortization of interest rate swap costs,
|
|
|
•
|
a $1.1 million increase attributable to higher average borrowings, and
|
|
|
•
|
a $0.6 million increase in the amortization of the debt discount, partially offset by
|
|
|
•
|
a $4.9 million decrease due to lower average interest rates, which includes the impact of refinancing certain debt with lower interest rates and the decrease in interest rate swap payments resulting from our interest rate swap terminations in April 2014.
|
The components of interest expense, net for the three months ended
June 30, 2014
and
2013
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2014
|
|
2013
|
Mortgages and other debt
|
$
|
(15,314
|
)
|
|
$
|
(18,213
|
)
|
Bank credit facility
|
(486
|
)
|
|
(1,384
|
)
|
Amortization of deferred financing costs
|
(1,147
|
)
|
|
(1,186
|
)
|
Amortization of debt discount
|
(623
|
)
|
|
—
|
|
Amortization of interest rate swap costs
|
(2,704
|
)
|
|
(1,209
|
)
|
Mark to market of certain interest rate swaps
|
520
|
|
|
2,353
|
|
Interest income
|
50
|
|
|
20
|
|
Capitalized interest
|
167
|
|
|
179
|
|
Total interest expense, net
|
$
|
(19,537
|
)
|
|
$
|
(19,440
|
)
|
The weighted average debt outstanding for the three months ended
June 30, 2014
and
2013
amounted to $1.3 billion and $1.2 billion, respectively. At
June 30, 2014
, approximately
28.3%
of our total debt had fixed interest rates.
Equity in Earnings of Unconsolidated Affiliates.
The following tables present certain components included in the calculation of equity in earnings resulting from our unconsolidated affiliates.
Three months ended
June 30, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairmont
Scottsdale
Princess
Venture (1)
|
|
Hotel del
Coronado
Venture (2)
|
|
Unconsolidated Affiliates in Mexico (3)
|
|
Total
|
Equity in earnings (losses)
|
$
|
—
|
|
|
$
|
880
|
|
|
$
|
(54
|
)
|
|
$
|
826
|
|
Depreciation and amortization
|
—
|
|
|
1,572
|
|
|
—
|
|
|
1,572
|
|
Interest expense
|
—
|
|
|
1,518
|
|
|
—
|
|
|
1,518
|
|
Income tax expense (benefit)
|
—
|
|
|
87
|
|
|
(23
|
)
|
|
64
|
|
Three months ended
June 30, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairmont
Scottsdale
Princess
Venture (1)
|
|
Hotel del
Coronado
Venture (2)
|
|
Unconsolidated Affiliates in Mexico (3)
|
|
Total
|
Equity in earnings
|
$
|
913
|
|
|
$
|
481
|
|
|
$
|
62
|
|
|
$
|
1,456
|
|
Depreciation and amortization
|
1,632
|
|
|
1,886
|
|
|
—
|
|
|
3,518
|
|
Interest expense
|
196
|
|
|
1,944
|
|
|
7
|
|
|
2,147
|
|
Income tax expense
|
—
|
|
|
31
|
|
|
20
|
|
|
51
|
|
|
|
(1)
|
The Fairmont Scottsdale Princess Venture consisted of FMT Scottsdale Holdings, L.L.C. and Walton/SHR FPH Holdings, L.L.C. On March 31, 2014, we acquired the 50.0% interest in the Fairmont Scottsdale Princess hotel that was not previously owned by us and no longer account for the investment using the equity method of accounting.
|
|
|
(2)
|
The Hotel del Coronado Venture is BSK Del Partners, L.P., the owner of the Hotel del Coronado as of February 4, 2011. On June 11, 2014, we acquired the 63.6% interest in the Hotel del Coronado Venture that was not previously owned by us and no longer account for the investment using the equity method of accounting.
|
|
|
(3)
|
These affiliates include the Four Seasons Residence Club Punta Mita (RCPM) and the Lot H5 Venture.
|
We recorded
$0.8 million
of equity in
earnings
during the three months ended
June 30, 2014
, which is a
$0.6 million
decrease from the
$1.5 million
equity in
earnings
recorded during the three months ended
June 30, 2013
, primarily due to the acquisitions of the remaining equity interests in the Fairmont Scottsdale Princess Venture and the Hotel del Coronado Venture. Subsequent to each acquisition, these operating results have been accounted for as consolidated affiliates.
Gain on Consolidation of Affiliates.
On June 11, 2014, we acquired the 63.6% interest in the Hotel del Coronado Venture that was not previously owned by us and recorded a gain on consolidation of affiliate of $65.3 million for the three months ended
June 30, 2014
, which represents the difference between the fair value and carrying value of our preexisting equity interest in the Hotel del Coronado, offset by acquisition costs.
Comparison of
Six Months Ended
June 30, 2014
to
Six Months Ended
June 30, 2013
Operating Results
The following table presents the operating results for the
six
months ended
June 30, 2014
and
2013
, including the amount and percentage change in these results between the two periods of our Total Portfolio and Same Store Assets (in thousands, except operating data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
Same Store Assets
|
|
2014
|
|
2013
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
|
2014
|
|
2013
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
$
|
251,974
|
|
|
$
|
225,748
|
|
|
$
|
26,226
|
|
|
11.6
|
%
|
|
$
|
235,790
|
|
|
$
|
225,748
|
|
|
$
|
10,042
|
|
|
4.4
|
%
|
Food and beverage
|
170,045
|
|
|
142,023
|
|
|
28,022
|
|
|
19.7
|
%
|
|
154,176
|
|
|
142,023
|
|
|
12,153
|
|
|
8.6
|
%
|
Other hotel operating revenue
|
46,181
|
|
|
38,150
|
|
|
8,031
|
|
|
21.1
|
%
|
|
40,223
|
|
|
38,141
|
|
|
2,082
|
|
|
5.5
|
%
|
Lease revenue
|
2,618
|
|
|
2,360
|
|
|
258
|
|
|
10.9
|
%
|
|
2,618
|
|
|
2,360
|
|
|
258
|
|
|
10.9
|
%
|
Total revenues
|
470,818
|
|
|
408,281
|
|
|
62,537
|
|
|
15.3
|
%
|
|
432,807
|
|
|
408,272
|
|
|
24,535
|
|
|
6.0
|
%
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
362,741
|
|
|
322,735
|
|
|
(40,006
|
)
|
|
(12.4
|
)%
|
|
335,608
|
|
|
321,609
|
|
|
(13,999
|
)
|
|
(4.4
|
)%
|
Lease expense
|
2,518
|
|
|
2,382
|
|
|
(136
|
)
|
|
(5.7
|
)%
|
|
2,518
|
|
|
2,382
|
|
|
(136
|
)
|
|
(5.7
|
)%
|
Depreciation and amortization
|
50,263
|
|
|
49,599
|
|
|
(664
|
)
|
|
(1.3
|
)%
|
|
44,586
|
|
|
49,340
|
|
|
4,754
|
|
|
9.6
|
%
|
Corporate expenses
|
14,391
|
|
|
12,972
|
|
|
(1,419
|
)
|
|
(10.9
|
)%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Total operating costs and expenses
|
429,913
|
|
|
387,688
|
|
|
(42,225
|
)
|
|
(10.9
|
)%
|
|
382,712
|
|
|
373,331
|
|
|
(9,381
|
)
|
|
(2.5
|
)%
|
Operating income
|
40,905
|
|
|
20,593
|
|
|
20,312
|
|
|
98.6
|
%
|
|
50,095
|
|
|
34,941
|
|
|
$
|
15,154
|
|
|
43.4
|
%
|
Interest expense, net
|
(37,784
|
)
|
|
(39,093
|
)
|
|
1,309
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
5,271
|
|
|
2,801
|
|
|
2,470
|
|
|
88.2
|
%
|
|
|
|
|
|
|
|
|
Foreign currency exchange loss
|
(6
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(200.0
|
)%
|
|
|
|
|
|
|
|
|
Gain on consolidation of affiliates
|
143,466
|
|
|
—
|
|
|
143,466
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Other income, net
|
1,218
|
|
|
877
|
|
|
341
|
|
|
38.9
|
%
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and discontinued operations
|
153,070
|
|
|
(14,824
|
)
|
|
167,894
|
|
|
1,132.6
|
%
|
|
|
|
|
|
|
|
|
Income tax expense
|
(246
|
)
|
|
(85
|
)
|
|
(161
|
)
|
|
(189.4
|
)%
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
152,824
|
|
|
(14,909
|
)
|
|
167,733
|
|
|
1,125.0
|
%
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
159,039
|
|
|
2,318
|
|
|
156,721
|
|
|
6,761.0
|
%
|
|
|
|
|
|
|
|
|
Net income (loss)
|
311,863
|
|
|
(12,591
|
)
|
|
324,454
|
|
|
2,576.9
|
%
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to the noncontrolling interests in SHR’s operating partnership
|
(1,130
|
)
|
|
51
|
|
|
(1,181
|
)
|
|
(2,315.7
|
)%
|
|
|
|
|
|
|
|
|
Net loss attributable to the noncontrolling interests in consolidated affiliates
|
4,258
|
|
|
4,449
|
|
|
(191
|
)
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to SHR
|
$
|
314,991
|
|
|
$
|
(8,091
|
)
|
|
$
|
323,082
|
|
|
3,993.1
|
%
|
|
|
|
|
|
|
|
|
Reconciliation of Same Store Assets Operating Income to Total Portfolio Operating Income:
|
Same Store Assets operating income
|
|
|
|
|
|
|
$
|
50,095
|
|
|
$
|
34,941
|
|
|
$
|
15,154
|
|
|
43.4
|
%
|
Corporate expenses
|
|
|
|
|
|
|
(14,391
|
)
|
|
(12,972
|
)
|
|
(1,419
|
)
|
|
(10.9
|
)%
|
Corporate depreciation and amortization
|
|
|
|
|
|
(246
|
)
|
|
(258
|
)
|
|
12
|
|
|
4.7
|
%
|
Non-Same Store Assets operating income (loss)
|
|
|
|
|
|
5,447
|
|
|
(1,118
|
)
|
|
6,565
|
|
|
587.2
|
%
|
Total Portfolio operating income
|
|
|
|
|
|
$
|
40,905
|
|
|
$
|
20,593
|
|
|
$
|
20,312
|
|
|
98.6
|
%
|
Operating Data (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hotels
|
16
|
|
|
14
|
|
|
|
|
14
|
|
|
14
|
|
|
|
|
|
Number of rooms
|
7,865
|
|
|
6,456
|
|
|
|
|
6,459
|
|
|
6,456
|
|
|
|
|
|
(1) Operating data includes the leasehold interest in the Marriott Hamburg hotel and excludes properties included in discontinued operations. The Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which were unconsolidated affiliates until we acquired 100% ownership on March 31, 2014 and June 11, 2014, respectively, are included in our 2014 Total Portfolio data but are excluded from our 2013 Total Portfolio data and our Same Store Assets data.
Rooms
.
Our Same Store Assets contributed to a
$10.0 million
, or
4.4%
,
increase
in rooms revenue for the
six
months ended
June 30, 2014
from the
six
months ended
June 30, 2013
. The components of RevPAR from our Same Store Assets for the
six
months ended
June 30, 2014
and
2013
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
Change (%)
Favorable/
(Unfavorable)
|
Occupancy
|
74.7
|
%
|
|
74.3
|
%
|
|
0.5
|
%
|
ADR
|
$
|
282.28
|
|
|
$
|
270.92
|
|
|
4.2
|
%
|
RevPAR
|
$
|
210.86
|
|
|
$
|
201.37
|
|
|
4.7
|
%
|
The increase in RevPAR for the Same Store Assets resulted from the combination of a
4.2%
increase in ADR and a 0.4 percentage-point increase in occupancy. Rooms revenue
increase
d primarily due to a 5.2% and 3.0% increase in transient and group ADR, respectively, resulting from improving market conditions at most of our Same Store Assets for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
. Several of our Same Store Assets experienced declines in rooms revenue, including the Fairmont Chicago hotel, which was impacted by bad weather early in the year and an increase in supply in the Chicago market, and at the Hyatt Regency La Jolla hotel, which was impacted by rooms displacement due to a rooms renovation.
For the Total Portfolio, rooms revenue
increased
$26.2 million
, or
11.6%
, for the
six
months ended
June 30, 2014
from the
six
months ended
June 30, 2013
. In addition to the increase in the Same Store Assets, the increase in the Total Portfolio rooms revenue includes $16.2 million additional rooms revenue from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
The components of RevPAR from our Total Portfolio for the
six
months ended
June 30, 2014
and
2013
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
Change (%)
Favorable/
(Unfavorable)
|
Occupancy
|
74.9
|
%
|
|
74.3
|
%
|
|
0.8
|
%
|
ADR
|
$
|
282.31
|
|
|
$
|
270.92
|
|
|
4.2
|
%
|
RevPAR
|
$
|
211.44
|
|
|
$
|
201.37
|
|
|
5.0
|
%
|
Food and Beverage
.
Our Same Store Assets experienced a
$12.2 million
, or
8.6%
,
increase
in food and beverage revenue for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
primarily due to an increase in banquet and catering revenues from strong group spend at many of our Same Store Assets. Additionally, the InterContinental Miami and the Ritz-Carlton Laguna Niguel hotels had increases in outlet revenue due to strong transient demand. For the Total Portfolio, food and beverage revenue
increased
$28.0 million
, or
19.7%
, when comparing the
six
months ended
June 30, 2014
to the
six
months ended
June 30, 2013
. In addition to the increase in the Same Store Assets, the increase in the Total Portfolio food and beverage revenue includes $15.9 million additional food and beverage revenue from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Other Hotel Operating Revenue
. For the Total Portfolio, other hotel operating revenue increased
$8.0 million
, or
21.1%
, for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
primarily due to an additional $5.9 million of other hotel operating revenue from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Hotel Operating Expenses
.
The following table presents the components of our hotel operating expenses for the
six
months ended
June 30, 2014
and
2013
, including the amount and percentage changes in these expenses between the two periods of our Total Portfolio and Same Store Assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio
|
|
Same Store Assets
|
|
2013
|
|
2012
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
|
2013
|
|
2012
|
|
Change ($)
Favorable/
(Unfavorable)
|
|
Change (%)
Favorable/
(Unfavorable)
|
Hotel operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
$
|
74,975
|
|
|
$
|
67,850
|
|
|
$
|
(7,125
|
)
|
|
(10.5
|
)%
|
|
$
|
70,608
|
|
|
$
|
67,850
|
|
|
$
|
(2,758
|
)
|
|
(4.1
|
)%
|
Food and beverage
|
121,680
|
|
|
108,839
|
|
|
(12,841
|
)
|
|
(11.8
|
)%
|
|
113,500
|
|
|
108,839
|
|
|
(4,661
|
)
|
|
(4.3
|
)%
|
Other departmental expenses
|
119,817
|
|
|
104,466
|
|
|
(15,351
|
)
|
|
(14.7
|
)%
|
|
108,825
|
|
|
104,466
|
|
|
(4,359
|
)
|
|
(4.2
|
)%
|
Management fees
|
15,019
|
|
|
11,457
|
|
|
(3,562
|
)
|
|
(31.1
|
)%
|
|
13,410
|
|
|
11,457
|
|
|
(1,953
|
)
|
|
(17.0
|
)%
|
Other hotel expenses
|
31,250
|
|
|
30,123
|
|
|
(1,127
|
)
|
|
(3.7
|
)%
|
|
29,265
|
|
|
28,997
|
|
|
(268
|
)
|
|
(0.9
|
)%
|
Total hotel operating expenses
|
$
|
362,741
|
|
|
$
|
322,735
|
|
|
$
|
(40,006
|
)
|
|
(12.4
|
)%
|
|
$
|
335,608
|
|
|
$
|
321,609
|
|
|
$
|
(13,999
|
)
|
|
(4.4
|
)%
|
The
increase
of
$14.0 million
, or
4.4%
, in hotel operating expenses for our Same Store Assets includes an increase in payroll costs, management fees, food and beverage costs, and travel agent commissions which is consistent with the changes in the associated revenues. For the Total Portfolio, hotel operating expenses
increased
by
$40.0 million
, or
12.4%
, for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
, primarily due to $27.1 million additional hotel operating expenses from the Fairmont Scottsdale Princess hotel and the Hotel del Coronado, which became consolidated properties in March 2014 and June 2014, respectively.
Corporate Expenses.
Corporate expenses
increase
d
$1.4 million
, or
10.9%
, for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
. These expenses consist primarily of payroll and related costs, professional fees, travel expenses, office rent and transaction costs. The
increase
in corporate expenses is primarily due to costs related to an activist shareholder.
Interest Expense, Net.
The
$1.3 million
, or
3.3%
,
decrease
in interest expense, net for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
, was primarily due to:
|
|
•
|
a $4.4 million decrease due to lower average interest rates which includes the impact of refinancing certain debt with lower interest rates and the decrease in interest rate swap payments resulting from our interest rate swap terminations in April 2014,
|
|
|
•
|
a $0.1 million decrease attributable to lower average borrowings, and
|
|
|
•
|
a $0.1 million increase in interest income, partially offset by
|
|
|
•
|
a $1.8 million decrease in gains related to the mark to market of certain interest rate swaps,
|
|
|
•
|
a $0.7 million increase in amortization of interest rate swap costs,
|
|
|
•
|
a $0.6 million increase in the amortization of the debt discount,
|
|
|
•
|
a $0.1 million increase in amortization of deferred financing costs, and
|
|
|
•
|
a $0.1 million decrease in capitalized interest.
|
The components of interest expense, net for the
six
months ended
June 30, 2014
and
2013
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
Mortgages and other debt
|
$
|
(33,307
|
)
|
|
$
|
(36,311
|
)
|
Bank credit facility
|
(1,344
|
)
|
|
(2,815
|
)
|
Amortization of deferred financing costs
|
(2,438
|
)
|
|
(2,392
|
)
|
Amortization of debt discount
|
(623
|
)
|
|
—
|
|
Amortization of interest rate swap costs
|
(3,359
|
)
|
|
(2,696
|
)
|
Mark to market of certain interest rate swaps
|
2,815
|
|
|
4,651
|
|
Interest income
|
77
|
|
|
30
|
|
Capitalized interest
|
395
|
|
|
440
|
|
Total interest expense, net
|
$
|
(37,784
|
)
|
|
$
|
(39,093
|
)
|
The weighted average debt outstanding for each of the
six
months ended
June 30, 2014
and
2013
amounted to $1.2 billion and $1.2 billion, respectively. At
June 30, 2014
approximately
28.3%
of our total debt had fixed interest rates.
Equity in Earnings of Unconsolidated Affiliates.
The following tables present certain components included in the calculation of equity in earnings resulting from our unconsolidated affiliates.
Six
months ended
June 30, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairmont
Scottsdale
Princess
Venture
|
|
Hotel del
Coronado
Venture
|
|
Unconsolidated Affiliates in Mexico
|
|
Total
|
Equity in earnings
|
$
|
4,846
|
|
|
$
|
600
|
|
|
$
|
(175
|
)
|
|
$
|
5,271
|
|
Depreciation and amortization
|
1,551
|
|
|
3,526
|
|
|
—
|
|
|
5,077
|
|
Interest expense
|
168
|
|
|
3,418
|
|
|
1
|
|
|
3,587
|
|
Income tax expense
|
—
|
|
|
(143
|
)
|
|
(78
|
)
|
|
(221
|
)
|
Six
months ended
June 30, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fairmont
Scottsdale
Princess
Venture
|
|
Hotel del
Coronado
Venture
|
|
Unconsolidated Affiliates in Mexico
|
|
Total
|
Equity in earnings (losses)
|
$
|
3,655
|
|
|
$
|
(930
|
)
|
|
$
|
76
|
|
|
$
|
2,801
|
|
Depreciation and amortization
|
3,472
|
|
|
3,751
|
|
|
1
|
|
|
7,224
|
|
Interest expense
|
390
|
|
|
4,434
|
|
|
24
|
|
|
4,848
|
|
Income tax (benefit) expense
|
—
|
|
|
(63
|
)
|
|
23
|
|
|
(40
|
)
|
We recorded
$5.3 million
of equity in
earnings
during the
six
months ended
June 30, 2014
, which is a
$2.5 million
change from the
$2.8 million
equity in
earnings
recorded during the
six
months ended
June 30, 2013
, primarily due to an increase in operating income at the Fairmont Scottsdale Princess hotel and a decrease in interest expense at the Hotel del Coronado during the periods that they were accounted for as unconsolidated affiliates.
Gain on Consolidation of Affiliates.
On March 31, 2014 we acquired the 50.0% interest in the Fairmont Scottsdale Princess hotel that was not previously owned by us and recorded a gain on consolidation of affiliate of $78.1 million for the
six
months ended
June 30, 2014
. On June 11, 2014, we acquired the 63.6% interest in the Hotel del Coronado Venture that was not previously owned by us and recorded a gain on consolidation of affiliate of $65.4 million for the
six
months ended
June 30, 2014
.
Income from Discontinued Operations, Net of Tax
. Income from discontinued operations, net of tax increased
$156.7 million
for the
six
months ended
June 30, 2014
when compared to the
six
months ended
June 30, 2013
. The increase in income from discontinued operations is primarily due to gains recognized on the sale of the Marriott London Grosvenor Square hotel and the Four Seasons Punta Mita Resort during the
six
months ended
June 30, 2014
.
Net (Income) Loss Attributable to the Noncontrolling Interests in SHR's Operating Partnership.
We record net income or loss attributable to the noncontrolling interests in SHR's operating partnership based on the percentage of SH Funding we do not own. Net income attributable to the noncontrolling interests in SHR's partnership for the
six
months ended
June 30, 2014
was
$1.1 million
, a change of
$1.2 million
from net loss attributable to the noncontrolling interests in SHR's partnership of
$0.1 million
in the prior period primarily due to gains recognized during the
six
months ended
June 30, 2014
for sales of assets and consolidation of affiliates.
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures, including:
|
|
•
|
interest expense and scheduled principal payments on outstanding indebtedness;
|
|
|
•
|
future distributions to our preferred stockholders; and
|
|
|
•
|
recurring maintenance and capital expenditures necessary to maintain our properties properly.
|
Capital expenditures for the
six
months ended
June 30, 2014
and
2013
amounted to
$35.6 million
and
$36.5 million
, respectively. Included in the
2014
and
2013
amounts were
$0.4 million
and
$0.4 million
of capitalized interest, respectively. For the remainder of the year ending
December 31, 2014
, we expect to spend approximately $40 million on hotel property and equipment replacement projects in accordance with hotel management or lease agreements and approximately $22 million on owner-funded projects, which includes those required by lenders, subject to adjustments based on continued evaluation.
Historically, we have satisfied our short-term liquidity requirements through our existing working capital, cash provided by operations, and our bank credit facility. As of
June 30, 2014
, we had approximately
$175.7 million
of available corporate level cash, not including restricted cash and cash currently held by the hotels, which was used to redeem the Series C Preferred Stock and to pay off the outstanding balance on the mortgage loan secured by the InterContinental Miami hotel. Additionally, we anticipate our new $300.0 million bank credit facility agreement, which includes a $100.0 million accordion feature, will continue to provide sufficient borrowing capacity to meet our short-term liquidity requirements during the next twelve months (see – “
Bank Credit Facility”
below). As of
June 30, 2014
, we were in compliance with our financial and other restrictive covenants contained in the bank credit facility agreement, and we had
zero
outstanding borrowings and
$8.4 million
in letters of credit outstanding on our $300.0 million bank credit facility .
Our available capacity under the new bank credit facility and compliance with financial covenants in future periods will depend substantially on the financial results of our hotels, and in particular, the operating results and gross asset values of the borrowing base assets, which include the Four Seasons Jackson Hole hotel, the Four Seasons Silicon Valley hotel, the Marriott Lincolnshire Resort, the Ritz-Carlton Half Moon Bay hotel, and the Ritz-Carlton Laguna Niguel hotel. As of
August 5, 2014
, the outstanding borrowings and letters of credit under the new bank credit facility in the aggr
egate were $19.4 million.
We believe that the measures we have taken described below should be sufficient to satisfy our liquidity needs for the next 12 months.
In May and June 2014, we refinanced mortgage loans secured by the Loews Santa Monica Beach Hotel and the Four Seasons Washington, D.C. hotel whereby we reduced the interest rate spreads on both loans and staggered and extended maturities to 2021 and 2019, respectively, assuming extension options are exercised (see – “
Mortgages and other debt payable”
below).
In June 2014, we completed an underwritten public offering of common stock and raised net proceeds of approximately $416.8 million.
We used the proceeds to fund the acquisition of the remaining
63.6% interest in the Hotel del Coronado Venture not previously owned by us, to redeem all of the issued and outstanding
shares of our Series C Preferred Stock, and for general corporate purposes, including, without limitation, reducing our borrowings under our bank credit facility, repaying other debt and funding capital expenditures and working capital.
On February 28, 2014, we sold our interest in the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel for proceeds of approximately
$203.2 million
. We used the proceeds to redeem all of the issued and outstanding shares of our Series A Preferred Stock and repay indebtedness under the bank credit facility. On March 31, 2014, we sold the Marriott London Grosvenor Square hotel for proceeds of approximately
$208.3 million
, which includes amounts used to repay the outstanding mortgage loan balance, and used the proceeds to acquire the remaining
50.0%
equity interest in the Fairmont Scottsdale Princess Venture not previously owned by us.
In September 2013, we amended the mortgage agreements secured by the Fairmont Chicago and Westin St. Francis hotels. The amendment eliminates future principal amortization payments subject to meeting certain financial and other requirements.
In November 2008, our board of directors elected to suspend the quarterly dividend to holders of shares of our common stock beginning in the fourth quarter of 2008. Our board of directors will continue to evaluate the dividend policy in light of the REIT provisions of the Tax Code, restrictions under our bank credit facility, and the overall economic climate.
Bank credit facility
. On April 25, 2014, we entered into a new $300.0 million secured bank credit facility agreement. This new facility replaced the $300.0 million secured bank credit facility that was set to expire in June 2015 (assuming all extension options were exercised). The agreement contains an accordion feature, which provides the option to increase the borrowing capacity up to $400.0 million, subject to the satisfaction of customary conditions set forth in the agreement. The following summarizes key financial terms and conditions of the new bank credit facility:
|
|
•
|
interest on the facility is payable monthly at LIBOR plus an applicable margin in the case of each LIBOR loan and base-rate plus an applicable margin in the case of each base rate loan whereby the applicable margins are dependent on the ratio of consolidated debt to gross asset value (Leverage Ratio) as follows:
|
|
|
|
|
|
|
|
Leverage Ratio
|
Applicable Margin of
each LIBOR Loan
(% per annum) (a)
|
|
Applicable Margin of
each Base Rate Loan
(% per annum) (a)
|
Greater than or equal to 60%
|
2.50
|
%
|
|
1.50
|
%
|
Greater than or equal to 55% but less than 60%
|
2.25
|
%
|
|
1.25
|
%
|
Greater than or equal to 50% but less than 55%
|
2.10
|
%
|
|
1.10
|
%
|
Greater than or equal to 45% but less than 50%
|
1.95
|
%
|
|
0.95
|
%
|
Less than 45%
|
1.75
|
%
|
|
0.75
|
%
|
(a) The applicable margins are increased, in each case, by 25 basis points for the period from April 25, 2014 through March 31, 2015.
|
|
•
|
an unused commitment fee is payable monthly based on the unused revolver balance at a rate of 0.30% per annum in the event that the bank credit facility usage is less than 50% and a rate of 0.20% per annum in the event that the bank credit facility usage is equal to or greater than 50%;
|
|
|
•
|
maturity date of April 25, 2018, with the right to extend the maturity date for an additional one-year period with an extension fee equal to 25 basis points, subject to certain conditions;
|
|
|
•
|
lenders received collateral in the form of pledges by SH Funding and certain of its subsidiaries of their interests in subsidiaries that directly or indirectly own, lease or operate the borrowing base properties, which currently include the Four Seasons Jackson Hole hotel, the Four Seasons Silicon Valley hotel, the Marriott Lincolnshire Resort, the Ritz-Carlton Half Moon Bay hotel, and the Ritz-Carlton Laguna Niguel hotel, and guarantees of the loan from the Company and such subsidiaries;
|
|
|
•
|
maximum availability is determined by the lesser of 55% advance rate against the gross asset value of the borrowing base properties as determined under the loan (provided at any time the total fixed charge coverage ratio is greater than 1.75 times, the percentage shall be increased to 60%) or a 1.40 times debt service coverage on the borrowing base properties (based on the trailing 12 months net operating income for these assets divided by the greater of the in-place interest rate or 7.0% debt constant on the balance outstanding under the bank credit facility);
|
|
|
•
|
minimum corporate fixed charge coverage of 1.30 times for the remainder of 2014, 1.40 times during 2015, and 1.50 times thereafter;
|
|
|
•
|
maximum corporate leverage of 60%;
|
|
|
•
|
minimum tangible net worth of approximately $1.1 billion, excluding goodwill and currency translation adjustments, plus an amount equal to 75% of the net proceeds of any new issuances of our common stock, which is not used to reduce indebtedness or used in a transaction or series of transactions to redeem outstanding capital stock;
|
|
|
•
|
restrictions on SHR and SH Funding’s ability to pay dividends. Such restrictions include:
|
|
|
•
|
prohibitions on SHR and SH Funding's ability to pay any dividends unless conditions are met; and
|
|
|
•
|
prohibitions on SHR and SH Funding’s ability to issue dividends in cash or in kind at any time an event of default shall have occurred.
|
Notwithstanding the dividend restrictions described above, for so long as the Company qualifies, or has taken all other actions necessary to qualify as a REIT, SH Funding may authorize, declare, and pay quarterly cash dividends to the Company when and to the extent necessary for the Company to distribute cash dividends to its stockholders generally in an aggregate amount not to exceed the minimum amount necessary for the Company to maintain its tax status as a REIT, unless certain events of default exist. In addition, provided no event of default exists, dividends on preferred stock that accrue with regard to the current fiscal quarter may be paid to holders of preferred stock.
Other terms and conditions exist including a prohibition on mortgaging the borrowing base properties, provisions to release assets from the borrowing base and limitations on our ability to incur costs for discretionary capital programs and to redeem, retire or repurchase common stock. Under the agreement, SH Funding has a letter of credit sub-facility of $75.0 million, which is secured by the $300.0 million bank credit facility. Letters of credit reduce the borrowing capacity under the bank credit facility.
Mortgages payable, net of discount
. The following table summarizes our outstanding debt and scheduled maturities, including extension options, related to mortgages payable, net of discount as of
June 30, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2014
|
|
Remainder
of 2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
Thereafter
|
Mortgages payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hyatt Regency La Jolla(1)
|
$
|
89,277
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89,277
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fairmont Scottsdale Princess, LIBOR plus 0.36%
|
117,000
|
|
|
—
|
|
|
117,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Hotel del Coronado, LIBOR plus 3.65%
|
475,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
475,000
|
|
|
—
|
|
Four Seasons Washington, D.C., LIBOR plus 2.25%
|
120,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120,000
|
|
Fairmont Chicago, 6.09%
|
93,124
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
93,124
|
|
|
—
|
|
|
—
|
|
Westin St. Francis, 6.09%
|
209,588
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
209,588
|
|
|
—
|
|
|
—
|
|
Loews Santa Monica Beach Hotel, LIBOR plus 2.55%
|
120,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120,000
|
|
JW Marriott Essex House Hotel, LIBOR plus 4.00%(2)
|
185,826
|
|
|
—
|
|
|
1,200
|
|
|
4,800
|
|
|
179,826
|
|
|
—
|
|
|
—
|
|
InterContinental Miami, LIBOR plus 3.50%(3)
|
85,000
|
|
|
422
|
|
|
889
|
|
|
952
|
|
|
1,021
|
|
|
81,716
|
|
|
—
|
|
InterContinental Chicago, 5.61%
|
143,504
|
|
|
918
|
|
|
1,940
|
|
|
2,031
|
|
|
2,172
|
|
|
2,299
|
|
|
134,144
|
|
Total mortgages payable(4)
|
1,638,319
|
|
|
1,340
|
|
|
121,029
|
|
|
7,783
|
|
|
575,008
|
|
|
559,015
|
|
|
374,144
|
|
Unamortized discount
|
(1,869
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total mortgages and other debt payable, net of discount
|
$
|
1,636,450
|
|
|
$
|
1,340
|
|
|
$
|
121,029
|
|
|
$
|
7,783
|
|
|
$
|
575,008
|
|
|
$
|
559,015
|
|
|
$
|
374,144
|
|
|
|
(1)
|
Interest on $72.0 million of the total principal amount is paid monthly at LIBOR plus 4.00%, subject to a 0.50% LIBOR floor, and interest on
$17.3 million
of the total principal amount is paid monthly at an annual fixed rate of 10.00%.
|
|
|
(2)
|
Subject to a 0.75% LIBOR floor.
|
|
|
(3)
|
On July 7, 2014, we paid off the outstanding balance on the mortgage loan secured by the InterContinental Miami hotel. We are currently evaluating financing alternatives. See "Item 1. Financial Statements - 17. Subsequent Events."
|
|
|
(4)
|
All of these loan agreements require maintenance of financial covenants, all of which we were in compliance with at
June 30, 2014
.
|
Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, debt refinancings, distributions to our preferred stockholders, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions of properties. In addition, we may use cash to buy back outstanding debt or common or preferred securities from time to time when market conditions are favorable through open market purchases, privately negotiated transactions, or a tender offer, although the terms of our bank credit facility may impose certain conditions or restrictions in connection therewith.
Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, sales of properties, long-term property mortgage indebtedness, bank credit facilities, issuance of senior unsecured debt instruments and through the issuance of additional equity securities. Credit markets have improved and access to mortgage and corporate level debt is more readily available. However, the capital markets can be volatile and there are no guarantees our maturing debt will be readily refinanced. Our ability to raise funds through the issuance of equity securities is dependent upon, among other things, general market conditions for both REITs in general and us specifically, including market perceptions regarding the Company. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but equity and debt financing may not be consistently available to us on terms that are attractive or at all.
Equity Securities
As of
June 30, 2014
, we had 3,205,787 RSUs and performance-based RSUs outstanding, of which 1,123,472 were vested. The following table presents the changes in our issued and outstanding shares of common stock and SH Funding operating partnership units (OP Units) from
December 31, 2013
to
June 30, 2014
(excluding RSUs):
|
|
|
|
|
|
|
|
|
|
|
Shares of Common Stock
|
|
OP Units Represented
by Noncontrolling
Interests
|
|
Total
|
Outstanding at December 31, 2013
|
205,582,838
|
|
|
797,238
|
|
|
206,380,076
|
|
RSUs redeemed for shares of our common stock
|
388,548
|
|
|
—
|
|
|
388,548
|
|
Common stock issued
|
41,400,000
|
|
|
—
|
|
|
41,400,000
|
|
Outstanding at June 30, 2014
|
247,371,386
|
|
|
797,238
|
|
|
248,168,624
|
|
Cash Flows
Operating Activities.
Net cash
provided by
operating activities was
$23.6 million
for the
six
months ended
June 30, 2014
compared to net cash
provided by
operating activities of
$24.2 million
for the
six
months ended
June 30, 2013
. Cash flows from operations
decreased
from
2013
to
2014
primarily due to income taxes paid attributable to the sale of the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel during the six months ended June 30, 2014, which offset the impact of increased operating income at the properties and decreases in cash interest paid.
Investing Activities.
Net cash
provided by
investing activities was
$89.4 million
for the
six
months ended
June 30, 2014
and net cash used in investing activities was
$25.6 million
for the
six
months ended
June 30, 2013
. The significant investing activities during these periods are summarized below:
|
|
•
|
We acquired the 50.0% equity interests in the Fairmont Scottsdale Princess Venture and the 63.6% equity interests in the Hotel del Coronado Venture not previously owned by us for aggregate cash payments of
$300.6 million
during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We sold the Four Seasons Punta Mita Resort and the adjacent La Solana land parcel for sales proceeds of
$203.2 million
and we sold the Marriott London Grosvenor Square hotel for sales proceeds of
$208.3 million
, which includes amounts used to repay the outstanding mortgage loan balance, during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We received cash from unconsolidated affiliates of
$2.2 million
and
$17.2 million
during the
six
months ended
June 30, 2014
and
2013
, respectively.
|
|
|
•
|
We sold unrestricted cash of
$15.6 million
through dispositions of the Four Seasons Punta Mita Resort and the Marriott London Grosvenor Square hotel during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We acquired unrestricted cash of
$22.2 million
through our acquisitions of the 50.0% equity interests in the Fairmont Scottsdale Princess Venture and the 63.6% equity interests in the Hotel del Coronado during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We disbursed
$35.6 million
and
$36.5 million
during the
six
months ended
June 30, 2014
and
2013
, respectively, for capital expenditures primarily related to room renovations and food and beverage facilities.
|
|
|
•
|
Restricted cash and cash equivalents decreased by
$5.4 million
during the
six
months ended
June 30, 2014
and increased by
$7.5 million
during the three months ended
June 30, 2013
.
|
Financing Activities.
Net cash
provided by
financing activities was
$49.8 million
for the
six
months ended
June 30, 2014
and net cash used in financing activities was
$3.5 million
for the
six
months ended
June 30, 2013
. The significant financing activities during these periods are summarized below:
|
|
•
|
We received proceeds from an underwritten public offering of common stock , net of offering costs, of approximately
$416.8 million
during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We paid
$103.8 million
to redeem all of the the issued and outstanding shares of our Series A Preferred Stock during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We distributed
$10.0 million
to our preferred shareholders during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We paid
$22.3 million
to terminate interest rate swaps during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We paid
$4.2 million
in financing costs that were deferred during the
six
months ended
June 30, 2014
.
|
|
|
•
|
We made net payments of
$110.0 million
on our bank credit facility during the
six
months ended
June 30, 2014
and we had net borrowings of
$11.0 million
on our bank credit facility during the
six
months ended
June 30, 2013
.
|
|
|
•
|
We made net payments of
$118.1 million
and
$7.3 million
on mortgages and other debt during the
six
months ended
June 30, 2014
and
2013
, respectively.
|
|
|
•
|
We received contributions of
$2.5 million
and
$3.1 million
from holders of noncontrolling interests in consolidated affiliates related to the Essex House Hotel Venture during the
six
months ended
June 30, 2014
and
2013
, respectively.
|
Dividend Policy
We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with GAAP) to our shareholders so as to comply with REIT provisions of the Tax Code. If necessary for REIT qualification purposes, we may need to distribute any taxable income in cash or by a special dividend. Our dividend policy is subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend on our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant.
On July 3, 2014, we redeemed all of the outstanding 3,827,727 shares of our Series C Preferred Stock. The shares of Series C Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends from July 1, 2014 up to and including July 3, 2014 in the amount of $0.01719 per share, for a
total redemption cost of approximately $95.8 million. Following the redemption, dividends on the Series C Preferred Stock ceased to accrue. On April 3, 2014, we redeemed all of the outstanding 4,181,141 shares of our Series A Preferred Stock. The shares of Series A Preferred Stock were redeemed at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to and including April 3, 2014 in the amount of $0.54896 per share, for a total redemption cost of approximately $106.0 million. Following the redemption, dividends on the Series A Preferred Stock ceased to accrue.
Our board of directors declared quarterly distributions of $0.51563 per share of Series C Preferred Stock and $0.51563 per share of Series B Preferred Stock for the second quarter of 2014 with distributions paid on June 30, 2014, to holders of record as of the close of business on June 16, 2014.
In addition, our board of directors declared, and we set apart for payment, a dividend on the Series B Preferred Stock for the period from July 1, 2014 up to and including July 3, 2014 at the rate of $0.51563 per share (per quarter). The dividend is expected to be paid as part of the normal quarterly dividend on the Series B Preferred Shares on or about September 30, 2014.
In November 2008, our board of directors elected to suspend the quarterly dividend to holders of shares of our common stock beginning in the fourth quarter of 2008. Our board of directors has continued the suspension of the quarterly dividend to holders of shares of our common stock as a measure to preserve liquidity and due to the bank credit facility covenant restrictions.
Our board of directors will continue to evaluate the dividend policy in light of the REIT provisions of the Tax Code, restrictions under our bank credit facility, and the overall economic climate.
Contractual Obligations
The following table summarizes our future payment obligations and commitments as of
June 30, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Total
|
|
Less than
1 year
(1)
|
|
1 to 3
years
|
|
4 to 5
years
|
|
More than
5 years
|
Long-term debt obligations
(2)
|
$
|
1,638,319
|
|
|
$
|
1,340
|
|
|
$
|
128,812
|
|
|
$
|
1,134,023
|
|
|
$
|
374,144
|
|
Interest on long-term debt obligations
(3)
|
273,144
|
|
|
34,250
|
|
|
135,439
|
|
|
74,294
|
|
|
29,161
|
|
Operating lease obligations—ground leases and office space
|
134,812
|
|
|
1,663
|
|
|
6,689
|
|
|
5,960
|
|
|
120,500
|
|
Operating leases—Marriott Hamburg
|
83,905
|
|
|
2,622
|
|
|
10,488
|
|
|
10,488
|
|
|
60,307
|
|
Purchase commitments
(4)
|
10,315
|
|
|
10,315
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,140,495
|
|
|
$
|
50,190
|
|
|
$
|
281,428
|
|
|
$
|
1,224,765
|
|
|
$
|
584,112
|
|
|
|
(1)
|
These amounts represent obligations that are due within fiscal year
2014
.
|
|
|
(2)
|
Long-term debt obligations include our bank credit facility and mortgages and exclude the unamortized discount. Maturity dates assume all extension options are exercised, including conditional options.
|
|
|
(3)
|
Interest on variable-rate debt obligations is calculated based on the variable rates at
June 30, 2014
.
|
|
|
(4)
|
Amounts include executed construction contracts, obligations under the JW Marriott Essex House Hotel property improvement plan, and other required property improvements and renovations. As of
June 30, 2014
, we have
$1.6 million
included in restricted cash reserves for capital expenditures related to property improvements and renovations required by certain lenders.
|
Reserve Funds for Capital Expenditures
We maintain each of our hotels in excellent condition and in conformity with applicable laws and regulations and in accordance with the agreed upon requirements in our management agreements with our hotel operators.
We are obligated to maintain reserve funds for capital expenditures at the majority of our hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the management agreements with our hotel operators. As of
June 30, 2014
,
$36.0 million
was in restricted cash reserves for future capital expenditures. Generally, our agreements with hotel operators require us to reserve funds at amounts ranging between 4.0% and 5.0% of the individual hotel’s annual revenues and require the funds to be set aside in restricted cash. Expenditures are capitalized as incurred and depreciation begins when the related asset is placed in service. Any unexpended amounts will remain our property upon termination of the management and operating contracts.
Off-Balance Sheet Arrangements
Fairmont Scottsdale Princess Venture
We had agreements with Walton Street, that formed FMT Scottsdale Holdings, L.L.C. and Walton/SHR FPH Holdings, L.L.C. (together, the Fairmont Scottsdale Princess Venture), which owned the Fairmont Scottsdale Princess hotel. We had a 50.0% ownership interest in the Fairmont Scottsdale Princess Venture and accounted for our investment under the equity method of accounting. On March 31, 2014, we acquired the remaining 50.0% interest in the Fairmont Scottsdale Princess Venture that was previously owned by Walton Street.
Our investment in the Fairmont Scottsdale Princess Venture amounted to
$26.8 million
as of
December 31, 2013
. Our equity in earnings of the Fairmont Scottsdale Princess Venture was
$4.8 million
and
$3.7 million
for the
six
months ended
June 30, 2014
and
2013
, respectively.
Hotel del Coronado Venture
On February 4, 2011, we formed a partnership, BSK Del Partners, L.P. (Hotel del Coronado Venture) with an unaffiliated third party, an affiliate of Blackstone Real Estate Partners VI L.P. (Blackstone), to own the Hotel del Coronado. Blackstone was the general partner of the Hotel del Coronado Venture with a 63.6% ownership interest and we were a limited partner with an indirect 36.4% ownership interest. We accounted for our investment under the equity method of accounting. On June 11, 2014, we acquired the remaining 63.6% interest in the Hotel del Coronado Venture that was previously owned by Blackstone.
Our investment in the Hotel del Coronado Venture amounted to
$54.9 million
as of
December 31, 2013
. Our equity in earnings (losses) of the Hotel del Coronado Venture was
$0.6 million
and
$(0.9) million
for the
six
months ended
June 30, 2014
and
2013
, respectively.
RCPM
We own a 31.0% interest in and act as asset manager for a venture with two unaffiliated parties that developed RCPM, a luxury vacation home product sold in fractional and whole ownership interests on the property adjacent to the Four Seasons Punta Mita Resort hotel in Mexico. We account for this investment under the equity method of accounting. At
June 30, 2014
and
December 31, 2013
, our investment in the unconsolidated affiliate amounted to
$3.5 million
and
$3.9 million
, respectively. Our equity in (losses) earnings of the unconsolidated affiliate was
$(0.2) million
and
$0.1 million
for the
six
months ended
June 30, 2014
and
2013
, respectively.
Lot H5 Venture
On June 14, 2013, we entered into an amended and restated venture agreement with an unaffiliated third party, forming the Lot H5 Venture. The Lot H5 Venture owns the Lot H5 land parcel, an undeveloped, oceanfront land parcel in Punta Mita, Nayarit, Mexico. We have a preferred position in the Lot H5 Venture that entitles us to receive the first $12.0 million of distributions generated from the Lot H5 Venture, with any excess distributions split equally between the partners. We jointly control the Lot H5 Venture with our partner and account for our interest in the Lot H5 Venture as an equity method investment. At
June 30, 2014
and
December 31, 2013
, our investment in the unconsolidated affiliate amounted to
$19.4 million
and
$19.4 million
, respectively.
Related Party Transactions
We have in the past engaged in transactions with related parties. See "Item 1. Financial Statements - 12. Related Party Transactions" for a discussion of our transactions with related parties.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our condensed consolidated financial statements.
Investment in Hotel Properties (Long-Lived Assets)
.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. In our analysis of fair value, we use discounted cash flow analysis to estimate the fair value of our properties taking into account each property’s expected cash flow from operations, holding period and proceeds from disposing of the property. In addition to the discounted cash flow analysis, management also considers external independent appraisals to estimate fair value. The analysis and appraisals used by management are consistent with those used by a market participant. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition, terminal capitalization rate and selling price per room. Judgment is required in determining the discount rate applied to estimated cash flows, growth rate of the properties, the need for capital expenditures, as well as specific market and economic conditions. Additionally, the classification of assets as held for sale requires the recording of assets at their net realizable value which can affect the amount of impairment recorded.
There were no indicators of potential impairment during the
six
months ended
June 30, 2014
. However, if deterioration in economic and market conditions occurs, it may present a potential for impairment charges on our hotel properties subsequent to
June 30, 2014
. Any such adjustments could be material, but will be non-cash.
Intangible Assets
. Intangible assets are reviewed for impairment whenever circumstances or events indicate potential impairment, as part of our investment in hotel properties impairment process described above.
There were no indicators of potential impairment during the
six
months ended
June 30, 2014
. However, if deterioration in economic and market conditions occurs, it may present a potential for impairment charges on our intangible assets subsequent to
June 30, 2014
. Any such adjustments could be material, but will be non-cash.
Goodwill
. We review goodwill for impairment at least annually as of December 31 and whenever circumstances or events indicate potential impairment. Goodwill has an indefinite useful life that should not be amortized but should be reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The measurement of impairment of goodwill consists of two steps. In the first step, we compare the fair value of each reporting unit, which in our case is each hotel property, to its carrying value. The assessment of fair values of the hotel properties incorporates unobservable inputs (Level 3), including existing market-based considerations, as well as discounted cash flow analysis of our projections. In the second step of the impairment test, the impairment loss is determined by comparing the implied fair value of goodwill to the recorded amount of goodwill. The activities in the second step include hypothetically allocating the fair value of the reporting unit used in step one to all of the assets and liabilities, including all intangible assets, even if no intangible assets are currently recorded, of that reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. For reporting units with zero or negative carrying values, the second step is only performed if qualitative factors indicate that it is more likely than not that a goodwill impairment exists.
There were no indicators of potential impairment during the
six
months ended
June 30, 2014
. However, if deterioration in economic and market conditions occurs, it may present a potential for impairment charges on our hotel properties with goodwill subsequent to
June 30, 2014
. Any such adjustments could be material, but will be non-cash.
Investment in Unconsolidated Affiliates
. A series of operating losses of an investee or other factors may indicate that a decrease in value of a company’s investment in unconsolidated affiliates has occurred which is other-than-temporary. Accordingly, the investment in each of the unconsolidated affiliates is evaluated periodically for valuation declines that are other-than-temporary. If the investment is other than temporarily impaired, the investment is written down to its estimated fair value. Also taken into consideration when testing for impairment is the value of the underlying real estate investments, the ownership and distribution preferences and limitations and rights to sell and repurchase of its ownership interests. There were no other-than-temporary declines in value of investments in unconsolidated affiliates during the
six
months ended
June 30, 2014
. However, if deterioration in economic and market conditions occurs, it may present a potential for other-than-temporary declines in value subsequent to
June 30, 2014
. Any such adjustments could be material, but will be non-cash.
|
|
•
|
Acquisition Related Assets and Liabilities.
Accounting for the acquisition of a hotel property as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property and equipment and intangible assets. We use all available information to make these fair value determinations and, for hotel acquisitions, engage an independent valuation specialist to assist in the fair value determination of the acquired long-lived assets. Due to inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy. On March 31, 2014, we acquired the remaining 50.0% interest in the Fairmont Scottsdale Princess Venture that was not previously owned by us. On June 11, 2014, we acquired the remaining 63.6% interest in the Hotel del Coronado Venture that was not previously owned us. These acquisitions were accounted for under the provisions of business combination guidance, and
100.0%
of both the Fairmont Scottsdale Princess Venture's and the Hotel del Coronado Venture's assets and liabilities were consolidated in the condensed consolidated balance sheet at the acquisition-date fair values.
|
|
|
•
|
Depreciation and Amortization Expense.
Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including cost and timing of capital expenditures to maintain and refurbish the asset, as well as specific market and economic conditions. While management believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of the assets.
|
|
|
•
|
Disposal of Long-Lived Assets.
We classify assets as held for sale in accordance with GAAP. Assets identified as held for sale are reclassified on our condensed consolidated balance sheet and the related results of operations are reclassified as discontinued operations on our condensed consolidated statement of operations. While these
|
classifications do not have an effect on total assets, net equity or net income, they affect the classifications within each statement. Additionally, a determination to classify an asset as held for sale affects depreciation expense as long-lived assets are not depreciated while classified as held for sale. On February 28, 2014, we sold the Four Seasons Punta Mita Resort and on March 31, 2014, we sold the Marriott London Grosvenor Square hotel. In accordance with new guidance effective in the first quarter of 2015, only disposals that represent a strategic shift that has (or will have) a major effect on our result of operations will be reclassified as discontinued operations.
Seasonality
The lodging business is seasonal in nature, and we experience some seasonality in our business. Revenues for hotels in tourist areas, those with significant group business, and in areas driven by greater climate changes are generally seasonal. Quarterly revenues also may be adversely affected by events beyond our control, such as extreme weather conditions and other acts of nature, terror attacks or alerts, airline strikes, economic factors and other considerations affecting travel.
To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into short-term borrowings to pay operating expenses and make distributions to our stockholders.
New Accounting Guidance
In April 2014, the Financial Accounting Standards Board (FASB) issued new guidance which amends the requirements for reporting discontinued operations. Under the guidance, only disposals that represent a strategic shift that has (or will have) a major effect on the entity's results of operations would qualify as discontinued operations. In addition, the guidance expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components. The provisions are effective in the first quarter of 2015, with early adoption permitted for any annual or interim period for which an entity's financial statements have not yet been made available for issuance. We will apply the guidance prospectively to disposal activity occurring after the effective date of this guidance.
In May 2014, the FASB issued new guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements.
Non-GAAP Financial Measures
We present five non-GAAP financial measures that we believe are useful to management and investors as key measures of our operating performance: FFO; FFO—Fully Diluted; Comparable FFO; EBITDA; and Comparable EBITDA. Amounts presented in accordance with our definitions of FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA should not be considered as an alternative measure of our net income (loss) or operating performance. FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to comparable GAAP measures such as net income (loss) attributable to SHR common shareholders. In addition, adverse economic and market conditions might negatively impact our cash flow. We have provided a quantitative reconciliation of FFO, FFO—Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss) attributable to SHR common shareholders.
EBITDA and Comparable EBITDA
EBITDA represents net income (loss) attributable to SHR common shareholders excluding: (i) interest expense, (ii) income taxes, including deferred income tax benefits and expenses applicable to our foreign subsidiaries and income taxes applicable to sale of assets; (iii) depreciation and amortization; and (iv) preferred stock dividends. EBITDA also excludes interest expense, income taxes and depreciation and amortization of our unconsolidated affiliates. EBITDA is presented on a full participation basis, which means we have assumed conversion of all redeemable noncontrolling interests of our operating partnership into
our common stock. We believe this treatment of noncontrolling interests provides useful information for management and our investors and appropriately considers our current capital structure. We also present Comparable EBITDA, which eliminates the effect of realizing deferred gains on our sale leasebacks, as well as the effect of gains or losses on sales of assets, early extinguishment of debt, impairment losses, foreign currency exchange gains or losses and certain other charges that are highly variable from year to year.
We believe EBITDA and Comparable EBITDA are useful to management and investors in evaluating our operating performance because they provide management and investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe they help management and investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA and Comparable EBITDA as measures in determining the value of acquisitions and dispositions.
The following table provides a reconciliation of net income (loss) attributable to SHR common shareholders to Comparable EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income (loss) attributable to SHR common shareholders
|
$
|
80,840
|
|
|
$
|
3,274
|
|
|
$
|
297,998
|
|
|
$
|
(20,174
|
)
|
Depreciation and amortization—continuing operations
|
28,058
|
|
|
24,691
|
|
|
50,263
|
|
|
49,599
|
|
Depreciation and amortization—discontinued operations
|
—
|
|
|
2,306
|
|
|
1,275
|
|
|
4,616
|
|
Interest expense—continuing operations
|
19,587
|
|
|
19,460
|
|
|
37,861
|
|
|
39,123
|
|
Interest expense—discontinued operations
|
—
|
|
|
1,819
|
|
|
1,326
|
|
|
3,642
|
|
Income taxes—continuing operations
|
207
|
|
|
72
|
|
|
246
|
|
|
85
|
|
Income taxes—discontinued operations
|
—
|
|
|
695
|
|
|
833
|
|
|
1,466
|
|
Income taxes—sale of assets
|
—
|
|
|
—
|
|
|
20,451
|
|
|
—
|
|
Noncontrolling interests
|
281
|
|
|
36
|
|
|
1,130
|
|
|
(51
|
)
|
Adjustments from consolidated affiliates
|
(3,939
|
)
|
|
(3,549
|
)
|
|
(7,614
|
)
|
|
(7,103
|
)
|
Adjustments from unconsolidated affiliates
|
3,153
|
|
|
5,717
|
|
|
8,443
|
|
|
12,033
|
|
Preferred shareholder dividends
|
7,169
|
|
|
6,042
|
|
|
16,993
|
|
|
12,083
|
|
EBITDA
|
135,356
|
|
|
60,563
|
|
|
429,205
|
|
|
95,319
|
|
Realized portion of deferred gain on sale leaseback
|
(54
|
)
|
|
(51
|
)
|
|
(107
|
)
|
|
(102
|
)
|
Gain on sale of assets—continuing operations
|
(767
|
)
|
|
(273
|
)
|
|
(767
|
)
|
|
(273
|
)
|
Gain on sale of assets—adjustments from consolidated affiliates
|
109
|
|
|
—
|
|
|
109
|
|
|
—
|
|
Gain on sale of assets—discontinued operations
|
(604
|
)
|
|
—
|
|
|
(176,880
|
)
|
|
—
|
|
Gain on consolidation of affiliates
|
(65,349
|
)
|
|
—
|
|
|
(143,466
|
)
|
|
—
|
|
Loss on early extinguishment of debt—discontinued operations
|
—
|
|
|
—
|
|
|
272
|
|
|
—
|
|
Foreign currency exchange loss (gain)—continuing operations
|
8
|
|
|
(84
|
)
|
|
6
|
|
|
2
|
|
Foreign currency exchange loss (gain)-–discontinued operations
|
—
|
|
|
138
|
|
|
(32
|
)
|
|
(188
|
)
|
Amortization of below market hotel management agreement
|
108
|
|
|
—
|
|
|
108
|
|
|
—
|
|
Activist shareholder costs
|
104
|
|
|
—
|
|
|
1,637
|
|
|
—
|
|
Comparable EBITDA
|
$
|
68,911
|
|
|
$
|
60,293
|
|
|
$
|
110,085
|
|
|
$
|
94,758
|
|
FFO, FFO-Fully Diluted, and Comparable FFO
We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT adopted a definition of FFO in order to promote an industry-wide standard measure of REIT operating performance. NAREIT defines FFO as net income (loss) (computed in accordance with GAAP) excluding losses or gains from sales of depreciable property, impairment of depreciable real estate, real estate-related depreciation and amortization, and our portion of these items related to unconsolidated affiliates. We also present FFO—Fully Diluted, which is FFO plus income or loss on income attributable to redeemable noncontrolling interests of our operating partnership. We also present Comparable FFO, which is FFO—Fully Diluted excluding the impact of any gains or losses on early extinguishment of debt, impairment
losses on non-depreciable assets, foreign currency exchange gains or losses and certain other charges that are highly variable from year to year.
We believe that the presentation of FFO, FFO—Fully Diluted and Comparable FFO provides useful information to management and investors regarding our results of operations because they are measures of our ability to fund capital expenditures and expand our business. In addition, FFO is widely used in the real estate industry to measure operating performance without regard to items such as depreciation and amortization.
The following table provides a reconciliation of net income (loss) attributable to SHR common shareholders to Comparable FFO (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income (loss) attributable to SHR common shareholders
|
$
|
80,840
|
|
|
$
|
3,274
|
|
|
$
|
297,998
|
|
|
$
|
(20,174
|
)
|
Depreciation and amortization—continuing operations
|
28,058
|
|
|
24,691
|
|
|
50,263
|
|
|
49,599
|
|
Depreciation and amortization—discontinued operations
|
—
|
|
|
2,306
|
|
|
1,275
|
|
|
4,616
|
|
Corporate depreciation
|
(123
|
)
|
|
(127
|
)
|
|
(246
|
)
|
|
(258
|
)
|
Gain on sale of assets—continuing operations
|
(767
|
)
|
|
(273
|
)
|
|
(767
|
)
|
|
(273
|
)
|
Gain on sale of assets, net of tax—discontinued operations
|
(604
|
)
|
|
—
|
|
|
(156,429
|
)
|
|
—
|
|
Gain on consolidation of affiliates
|
(65,349
|
)
|
|
—
|
|
|
(143,466
|
)
|
|
—
|
|
Realized portion of deferred gain on sale leaseback
|
(54
|
)
|
|
(51
|
)
|
|
(107
|
)
|
|
(102
|
)
|
Noncontrolling interests adjustments
|
(95
|
)
|
|
(125
|
)
|
|
(193
|
)
|
|
(252
|
)
|
Adjustments from consolidated affiliates
|
(1,971
|
)
|
|
(1,655
|
)
|
|
(3,806
|
)
|
|
(3,296
|
)
|
Adjustments from unconsolidated affiliates
|
1,571
|
|
|
3,518
|
|
|
5,077
|
|
|
7,224
|
|
FFO
|
41,506
|
|
|
31,558
|
|
|
49,599
|
|
|
37,084
|
|
Redeemable noncontrolling interests
|
376
|
|
|
162
|
|
|
1,323
|
|
|
202
|
|
FFO – Fully Diluted
|
41,882
|
|
|
31,720
|
|
|
50,922
|
|
|
37,286
|
|
Non-cash interest rate swap activity—continuing operations
|
2,184
|
|
|
(2,353
|
)
|
|
(110
|
)
|
|
(4,651
|
)
|
Non-cash interest rate swap activity—discontinued operations
|
—
|
|
|
(747
|
)
|
|
—
|
|
|
(1,493
|
)
|
Loss on early extinguishment of debt—discontinued operations
|
—
|
|
|
—
|
|
|
272
|
|
|
—
|
|
Foreign currency exchange loss (gain)—continuing operations
|
8
|
|
|
(84
|
)
|
|
6
|
|
|
2
|
|
Foreign currency exchange loss (gain)—discontinued operations
|
—
|
|
|
138
|
|
|
(32
|
)
|
|
(188
|
)
|
Amortization of debt discount
|
623
|
|
|
—
|
|
|
623
|
|
|
—
|
|
Amortization of below market hotel management agreement
|
108
|
|
|
—
|
|
|
108
|
|
|
—
|
|
Activist shareholder costs
|
104
|
|
|
—
|
|
|
1,637
|
|
|
—
|
|
Excess of redemption price over carrying amount of redeemed preferred stock
|
3,203
|
|
|
—
|
|
|
6,912
|
|
|
—
|
|
Comparable FFO
|
$
|
48,112
|
|
|
$
|
28,674
|
|
|
$
|
60,338
|
|
|
$
|
30,956
|
|