Lodgian Reports 2004 Third Quarter Results

Third quarter 2004 room revenues from continuing operations increased 3.7 percent to $64.8 million, and total revenues from continuing operations rose 3.4 percent to $84.6 million. During the quarter, 12 hotels were under renovation, causing a displacement of $0.9 million of total revenue, and an additional eight hotels were adversely affected by the four hurricanes that hit the Southeast in the third quarter, causing a displacement of an additional $1.1 million of total revenue.

Earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations for the 2004 third quarter, reconciled to loss from continuing operations in the attached schedules, decreased 5.9 percent to $14.7 million, which included $2.1 million of hurricane damage and reorganization-related charges, from $15.6 million for the same period last year, which included $0.3 million of reorganization-related charges. Adjusted EBITDA, excluding hurricane damage and reorganization-related charges, for the third quarter of 2004 and 2003 was $16.8 million and $15.9 million, respectively.

Loss from continuing operations was $5.8 million, which included $4.5 million of costs related to Lodgian's preferred stock redemption and $0.9 million of preferred stock dividends reported as interest expense, compared to a $3.6 million loss for the third quarter of 2003, which included $4.0 million of preferred stock dividends reported as interest expense. The company expects no further charges associated with the preferred stock redemption.

Also in the quarter, the company reported $2.0 million of casualty losses and repair expenses related to hurricane damage at eight of its hotels in Florida and South Carolina. As a result of property closures resulting from hurricane damage and mandatory evacuations and the resulting displacement of revenues, operating profits at those properties during August and September were negatively impacted by approximately $0.7 million.

Income from discontinued operations was $2.9 million, which included a $2.0 million gain on sale of assets, compared to a $0.05 million loss in the third quarter of 2003. Lodgian's net loss attributable to common stock for the third quarter of 2004 was $2.9 million, or $(0.12) per share. This compares to a net loss attributable to common stock of $3.6 million, or $(1.56) per share for the third quarter of 2003.

"The lodging industry continued its comeback in the third quarter, which was reflected in occupancy and rate gains at our properties resulting from rising business and leisure travel demand," said W. Thomas Parrington, president and chief executive officer. "In addition, our properties that were renovated in 2003 and early 2004 experienced improved occupancy and much stronger average daily rates.

"However, these gains were partially offset by the effects of hurricanes that battered the southeastern U.S. in the third quarter and caused storm-related damage to eight of our hotels in Florida and South Carolina, as well as mandatory evacuations as hurricanes approached. Also, we experienced reduced occupancy due to displacement at hotels that were being renovated and to cancellations at hotels that were damaged or threatened by hurricanes during the quarter. In spite of these challenges, occupancy was up 1.2 percent in our continuing operations hotels, while average daily rate rose 2.8 percent, leading to a 4.2 percent gain in RevPAR for the third quarter. As our hotels complete their renovation programs, we are becoming more aggressive on room rate. We are beginning to see the benefits of our portfolio improvement program at the approximately 35 percent of our hotels where renovations have been completed."

As a percent of total revenues, Adjusted EBITDA, excluding hurricane damage and reorganization-related charges, for the quarter increased to 19.9 percent from 19.5 percent the previous year.

Parrington noted that the company is in the final stages of its renovation program begun in 2002. "The severe weather in the Southeast caused us to temporarily divert some of our resources to deal with more pressing, hurricane-related damages at our affected hotels. Our goal was to complete our renovation program in the first quarter of 2005. However, due to the severity of the hurricane damage, some projects may not be fully completed until the second quarter. At that point, we will have completed our deferred maintenance program and will return to a more normal five-to-seven year cycle of refurbishment. Our total portfolio will soon be in top competitive condition, physically, positioning us to take full advantage of the recovery in the lodging industry."

The company spent $9.4 million on capital expenditures in the 2004 third quarter, bringing to $22.3 million the total amount invested during the first nine months of 2004. "Short-term, the renovations had a negative impact on third quarter earnings as these rooms were taken out of service. We expect to spend approximately $21.4 million in the 2004 fourth quarter, historically our slowest quarter. This stepped-up program will increase displacement in both the 2004 fourth quarter and the 2005 first quarter as the number of rooms under renovation increases. The positive side of the renovation program is the significant long-term improvement in revenues we expect to generate at these hotels, which will be much more competitive in their respective markets."

Lodgian expects to invest a total of $43.7 million in capital improvements in 2004, with an additional $38.4 million that will be spent in the first half of 2005 to complete its deferred maintenance projects.

Disposition/Acquisition Program

The company continued to execute its hotel disposition strategy during the quarter with the July sale of the Holiday Inn Grand Island (Buffalo/Niagara) in upstate New York for $3.35 million. Net proceeds from the sale were used to pay down Lodgian's long-term debt. It was the tenth hotel sold as part of the company's plan to divest 19 non-strategic hotels, an office building, and three parcels of land from its portfolio. The company also sold two of the three land parcels during the quarter for an aggregate sales price of $2.0 million. "Since we announced the program in October 2003, we have reduced debt by approximately $38.7 million with proceeds from the sale of the properties. We continue to aggressively pursue our disposition program. At this time, we believe that the program will continue into 2005, as we are in the early stages of negotiations with prospective buyers on our remaining properties."

Parrington said that once the company completes its renovation and disposition programs, it will become more aggressive in its acquisition plans. "We have $57.3 million in cash on hand as of September 30, 2004 for operations and future growth plans. The acquisition market is extremely competitive at this time, and we intend to be very selective and opportunistic. Our goal is to acquire quality assets with good long-term potential."

The company's acquisition profile remains primarily upscale, premium-branded, limited-service hotels, with 100 to 250 rooms, in strong suburban and urban markets. To a lesser extent, the company will review smaller upper upscale, full-service hotels, as well.

Nine Months Results

For the first nine months, room revenues from continuing operations increased 5.2 percent to $186.7 million, and total revenues from continuing operations rose 4.2 percent to $247.9 million. EBITDA rose to $48.4 million, which included $2.4 million of hurricane damage and reorganization-related charges, up from $38.7 million, which included $5.6 million in reorganization-related charges. Adjusted EBITDA, excluding hurricane damage and reorganization-related charges, increased to $50.8 million from $44.2 million. Loss from continuing operations was $24.0 million, which included $18.2 million of costs related to Lodgian's debt refinancing and preferred stock redemption and $9.4 million of preferred stock dividends reported as interest expense, compared to a loss of $10.0 million for the first nine months of 2003, which included $4.0 million of preferred stock dividends reported as interest expense. During the period, 14 hotels were under renovation, causing a displacement of $1.9 million of total revenues.

Outlook

"We are growing increasingly optimistic about the staying power of this recovery and the likelihood that it will continue for the next few years," Parrington said. "Our primary goal going forward will be to take advantage of firming occupancy rates and the renovations at our properties to more aggressively move room rate and drive internal growth. Last quarter, we successfully completed the restructuring of our balance sheet and substantially reduced our fixed charges. With our stronger balance sheet, we have the flexibility to respond to acquisition and other opportunities that we expect will further drive our external growth."

Guidance

For the 2004 fourth quarter, the company expects RevPAR growth from continuing operations in a range of 5 percent to 7 percent, net of approximately 1 percent of renovation displacement. The two closed hotels will be excluded from the RevPAR calculation for the 2004 fourth quarter. Estimated Adjusted EBITDA from continuing operations for 2004, excluding hurricane damage and reorganization-related charges, is projected in a range of $62 million to $64 million. The impact of the two hotels that will remain closed is estimated to reduce projected 2004 fourth quarter results of operations and EBITDA by approximately $0.7 million, in addition to the approximately $0.7 million reduction in 2004 third quarter results of operations and EBITDA. These amounts are expected to be substantially covered by business interruption insurance, the settlement of which has not been reflected in this EBITDA guidance.



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