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2Q 2Q Six Six
Mos. Mos.
2004* 2003* 2004* 2003*
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Net loss $ (12) $ (206) $ (52) $ (276)
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Net loss per share $(0.14) $(4.47) $(0.68) $(5.99)
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Total revenues from continuing
operations $ 223 $ 216 $ 428 $ 417
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Funds from operations (FFO)** $ 16 $ (189) $ 6 $ (234)
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FFO per share $ 0.19 $(3.90) $ 0.08 $(4.86)
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Adjusted FFO** $ 21 $ 21 $ 23 $ 30
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Adjusted FFO per share $ 0.24 $ 0.39 $ 0.30 $ 0.60
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Adjusted EBITDA (earnings before
interest, income taxes, depreciation,
amortization and other items)** $ 52 $ 56 $ 90 $ 103
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* in millions, except per share data
** FFO, Adjusted FFO, and Adjusted EBITDA are non-GAAP financial
measures and should not be considered as alternatives to any
measures of operating results under GAAP. See the discussion
included in the financial information section of this press
release regarding these non-GAAP financial measures.
Second quarter results, excluding charges related to the company's asset disposition program, were within the company's previous guidance range.
"The hotel industry is in the early stages of what we believe will be a sustained recovery," said Paul W. Whetsell, chairman and chief executive officer. "In some of our strongest markets, our hotels experienced exceptional growth, such as the 15 percent growth in RevPAR our Washington, D.C. area hotels achieved in the quarter; however, the industry recovery is not yet uniformly strong throughout the country. The economy continues to strengthen, and we look forward to experiencing the benefits of a broader based recovery throughout our portfolio.
"During the quarter, we accelerated our renovation program at several key locations, which will allow us to maximize operating results during the industry recovery. We also have completed five hotel brand conversions to date in 2004, with an additional five planned for the remainder of 2004. As a result, our second quarter results reflect some short-term impact due to the scope of our renovation program and the number of brand conversions. As these renovations and conversions are completed, we expect our properties to be well positioned to fully participate in the economic recovery," he said.
Adjusting for rooms out of service at hotels experiencing significant renovations (not accounting for the overall impact on hotel operations) and hotels impacted by brand conversions, RevPAR increased 5.6 percent to $82.16, led by a 3.8 percent increase in average daily rate (ADR) to $110.99. Occupancy increased 1.8 percent to 74.0 percent. These operating statistics do not reflect the full effect of the renovation process, as work performed on lobby areas, meeting rooms, and the exterior of some hotels also have impacted the company's second quarter results.
"We expect some short-term disruption from renovations to continue through the balance of the year, but we expect the impact to moderate progressively as we begin to see the benefit from completed work and the positive impact from full implementation of our 'Velocity' rooms renovation program. We expect the long-term benefits of these renovations, however, to be significant, and we expect to generate exceptional returns over the next several years as these upgraded products put more pricing power in the hotels' hands and we are able to raise rates accordingly," Whetsell said.
Year to date, MeriStar has invested approximately $50 million in upgrades at its core hotels and is on track to spend approximately $125 million by year end.
Acquisitions/Conversions/Dispositions
"We completed two major hotel acquisitions in the second quarter in two of the nation's strongest hotel markets," Whetsell added. "We closed on the acquisition of the Ritz-Carlton, Pentagon City, in Arlington, Va., near Washington, D.C. and the Irvine Marriott in Orange County, Calif., for a total investment of $186 million. RevPAR at both of these hotels grew more than 13 percent in the quarter over the prior year, and operating results at these two properties already have exceeded our underwriting expectations. Both of these markets have excellent growth potential going forward."
Whetsell added that the company remains a selective acquirer of larger properties, located in major urban markets or upscale resort destinations with high barriers to new competition, premium brand affiliations, significant meeting space and high growth potential. "To support those efforts, we announced the promotion of Bill Reynolds during the quarter to executive vice president and chief investment officer. Bill has led our asset disposition program and in his new position, he will direct MeriStar's development team and oversee hotel investment and divestment activities. He was instrumental in completing both of the hotel acquisitions we completed during the quarter."
The company also is using brand conversions as another technique to enhance the quality of its hotel portfolio. "One of our five brand conversions in 2004 was the former Radisson hotel at the entrance to Universal Studios Theme Park that was converted to a Doubletree, a Hilton brand," he said. "This hotel has more than 60,000 square feet of meeting space, and the conversion enables the property to benefit from the Hilton reservations system, group meeting sales force and Hilton HHonors guest frequency program. As a result, we expect to be able to attract significantly greater group business there. Even under renovation, the hotel already is experiencing a significant year-over-year sales backlog increase."
During the 2004 second quarter, the company continued its asset disposition program with the sale of four hotels, comprising 896 rooms, for gross proceeds of $31 million. Two additional hotels with 568 rooms have been sold thus far in the third quarter for gross proceeds of $14 million. Since the beginning of 2003, the company has sold 32 non-core assets aggregating 6,809 rooms for $247 million in gross proceeds. The company has five remaining assets planned for disposition (1,555 rooms), which are expected to generate total gross proceeds of approximately $40 million.
Capital Structure
The company completed the following capital markets transactions during the 2004 second quarter:
-- Sold 12 million shares of common stock to the public at $6.25 per share, generating net proceeds of approximately $73 million, primarily to fund additional acquisitions.
-- Paid down $28 million of senior notes, for a total repayment of $100 million year to date.
-- Retired $11 million of senior subordinated notes, for a total repayment of $49 million year to date.
-- Placed two mortgages related to the two hotel acquisitions for $111 million.
-- Entered into an interest rate swap on its $307 million CMBS loan due 2009, converting the facility from a fixed rate to a floating rate. The new floating rate is LIBOR plus 444 basis points, or 5.91 percent currently, compared to the fixed rate of 8.01 percent. Total floating rate debt represents 19 percent of the company's total debt outstanding.
"We continued to strengthen our balance sheet in the quarter by lowering our average borrowing cost and reducing our overall leverage with debt repayments and acquisitions that were financed with modest levels of mortgage financing," said Donald D. Olinger, chief financial officer. "We also maintained substantial liquidity, and as of June 30, 2004, we had $221 million of cash, $149 million of which was unrestricted, and $50 million available on our secured revolving credit facility."
Termination of Intercompany Agreement with Interstate Hotels
Following the close of the second quarter, the company reached an agreement with Interstate Hotels & Resorts, Inc., the operator of a majority of its hotels, to terminate the intercompany agreement that had been in place between the two companies since 1998. Although the agreement provided MeriStar with a right to participate in equity investments made by Interstate, it also afforded Interstate the opportunity to manage hotels newly-acquired by MeriStar, unless they were operated by a brand or were encumbered by management agreements.
In exchange for relinquishing its rights under the intercompany agreement, the company obtained an "at-will" termination right permitting it to terminate Interstate management agreements each year covering up to 600 rooms upon the payment of a termination fee. The company also may carry forward as many as 600 rooms for termination in a succeeding year. In addition, termination fees owed to Interstate now will become payable over 48 months, rather than the previously contracted 30 months.
Whetsell pointed out that "the termination of the intercompany agreement eliminates the last vestige of the company's paper clip relationship with Interstate, and will greatly facilitate the company's ability to reposition its portfolio." He also stated that the company intended to maintain its strong relationship with Interstate, the operator of more than 70 of its hotels under long-term management agreements. "Interstate is an outstanding management company that offers economies of scale, management depth, proprietary operating systems and marketing expertise that are unparalleled in the industry," Whetsell said.
Separately, the company reached an agreement with Interstate, which resolved an outstanding dispute between the companies over the calculation of termination fees. The new calculation is applicable to properties disposed of in the future. Although termination fees for the properties that have been sold or were included in MeriStar's previously announced disposition program will be unchanged, the company will receive a $2.5 million credit, which will be applicable to future dispositions.
Outlook
"We feel confident that we are in the midst of a sustained industry-wide recovery," Whetsell said. "For the third quarter, we expect continued strength in the economy to produce solid, rate-driven RevPAR gains, although we will continue to see some short-term impact from our renovation program."
The company provides the following range of estimates for the third quarter and full-year 2004, based on projected third-quarter 2004 RevPAR gains of 5.0 percent to 6.0 percent and a full-year 2004 RevPAR increase of 5.0 percent to 6.0 percent, all of which reflect adjustment for the estimated number of room nights out of service for renovations:
-- Net loss of $(20) million to $(23) million for the third quarter and $(89) million to $(94) million for the full year;
-- Net loss per diluted share of $(0.23) to $(0.26) for the third quarter and $(1.10) to $(1.16) for the full year;
-- FFO per diluted share (a) of $0.00 to $0.04 for the third quarter and $0.14 to $0.19 for the full year;
-- Adjusted FFO per diluted share (a) of $0.00 to $0.04 for the third quarter and $0.36 to $0.42 for the full year;
-- Adjusted EBITDA (a) of $32 million to $35 million for the third quarter and $160 million to $165 million for the full year.
(a) See reconciliations of net loss to FFO per diluted share and Adjusted FFO per diluted share and net loss to Adjusted EBITDA included in the guidance tables of this press release. Forecasted net loss does not include any possible future losses on asset impairments or gains or losses on the sales of assets.
Adjusted EBITDA, Adjusted FFO and FFO are non-GAAP financial measures that should not be considered as alternatives to any measures of operating results under GAAP. See the discussion included in this press release for information regarding these non-GAAP financial measures.
MeriStar will hold a conference call to discuss its second-quarter results today, August 3, at 10 a.m. Eastern time. Interested parties may visit the company's Web site at www.meristar.com and click on Investor Relations and then the webcast link.
Interested parties also may listen to an archived webcast of the conference call on the Web site, or may dial (800) 218-8862, reference number 11002390, to hear a telephone replay. The telephone replay will be available through midnight on Tuesday, August 10, 2004.
Arlington, Va.-based MeriStar Hospitality Corporation owns 77 principally upscale, full-service hotels in major markets and resort locations with 21,619 rooms in 22 states, and the District of Columbia. The company owns hotels under such internationally known brands as Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson.
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