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Arlington Hospitality, Inc. (Nasdaq/NM: HOST), a hotel development and management company, today announced results for the third quarter ended September 30, 2004.
Third Quarter Results
For the 2004 third quarter, revenues decreased approximately $8.5 million to $14.8 million, compared to the year-earlier period. The timing of hotel sales had a significant impact on revenues and operating income for the third quarter of 2004 compared to the same period in 2003. The company sold two hotels in the 2004 third quarter at a lower aggregate price than the aggregate price of three properties sold in the 2003 third quarter. In addition to the impact of the timing of hotel sales, the company reported lower hotel operating revenues due to a reduction in the number of consolidated AmeriHost Inn hotels as a result of the sale of 11 such hotels over the last 12 months. These decreases were partially offset by an increase in incentive and royalty-sharing fees.
Net income (loss), and its components, is summarized below for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
Net income (loss) from
continuing operations,
before impairment $(106,578) $1,358,708 $ (327,675) $ 712,104
Impairment provision,
net of tax (297,876) (84,496) (559,390) (2,883,008)
Net income (loss)
from continuing
operations (404,454) 1,274,212 (887,065) (2,170,904)
Discontinued
operations (121,679) (191,974) (1,159,629) (1,587,164)
Net income (loss) $(526,133) $1,082,238 $(2,046,694) $(3,758,068)
Net loss per share
- Diluted:
From continuing
operations $ (0.08) $ 0.25 $ (0.18) $ (0.43)
From discontinued
operations (0.02) (0.03) (0.23) (0.31)
$(0.10) $ 0.22 $ (0.41) $ (0.74)
Net loss for the 2004 third quarter was approximately ($526,000), or ($0.10) per share, compared to net income of approximately $1.1 million, or $0.22 per share, in the 2003 third quarter. The decline was due primarily to an approximate $1.6 million decrease in operating income from the sale of consolidated AmeriHost Inn hotels, as a result of the specific hotels sold and the timing of the sale of these hotels, as discussed above. In addition, certain professional fees, reported as corporate general and administrative expenses, were incurred as a result of substantial legal and financial advisory services involving the company's strategic initiatives and business plan, including alternatives relating to the previously announced PMC lease modification consummated on October 4, 2004. These results also include non-cash hotel impairment charges of approximately $435,000 pre-tax ($298,000 after tax) and approximately $143,000 pre-tax ($84,000 after tax) in the third quarter of 2004 and 2003, respectively. Furthermore, the results also include net losses from discontinued operations of approximately ($122,000) and ($192,000), in the third quarter of 2004 and 2003, respectively. The 2003 third quarter includes impairment charges of approximately $31,000 pre-tax ($19,000 after tax), related to the non-AmeriHost hotels classified as discontinued operations.
The non-cash hotel impairment charges have been recorded primarily in connection with the company's previously announced plan to dispose of 25 to 35 hotels. The additional impairment charges recorded subsequent to the initial adoption of this plan in 2003 are the result of the continuous evaluation of current market conditions and other hotel-specific factors.
Discontinued operations relates to the operations of the non-AmeriHost Inn hotels disposed of, or expected to be disposed of within the next 12 months, which have been reclassified from continuing operations, and includes the non-cash impairment charges related to those hotels. Discontinued operations also includes incremental depreciation of approximately $216,000 and $647,000 in the 2004 third quarter and first nine months of 2004, respectively, which was recorded in connection with a lease modification on one non-AmeriHost Inn hotel executed in the first quarter of 2004 that accelerated the termination date of the lease to November 2005, or earlier under certain conditions.
Arlington paid off approximately $8.7 million and $19.1 million of mortgage debt in connection with the sale of hotels during the 2004 third quarter and nine month period, respectively. Total hotel mortgage debt was approximately $41.7 million as of September 30, 2004, compared to $60.1 million on December 31, 2003.
Third quarter 2004 incentive and royalty-sharing revenues improved 42 percent to approximately $376,000, compared to the like period a year earlier. This improvement was a result of the amortization of a greater number of development incentive fees received from Cendant Corporation ("Cendant") (NYSE: CD) in connection with the sale of AmeriHost hotels, and the growing stream of royalty-sharing fees received from Cendant as the number of non-Arlington owned AmeriHost Inn franchisees expands.
PMC Lease Restructured October 4, 2004
Arlington modified its leases on 20 hotels owned by PMC Commercial Trust ("PMC") (AMEX: PCC) shortly after the close of the 2004 third quarter. The new arrangement reduces the monthly cash lease payments and provides for an accelerated exit strategy, consistent with the company's strategic business plan to divest many of its existing hotels and increase focus on development of larger hotels in secondary markets. Key provisions of the modified lease, which became effective October 1, 2004 include:
-- An immediate 19 percent reduction in monthly cash lease payments for the 20 hotels, at an approximate $1.0 million annual savings to Arlington.
-- The early termination of the leases upon the sale of all 20 leased AmeriHost Inns to third parties over the next four years, compared to the original 2013 and 2014 lease termination dates.
"This restructuring is a major milestone for Arlington," said Herman. "It allows us to convert an unfavorable long-term lease to more favorable terms, while creating an orderly exit strategy. We believe these modifications will reduce our former aggregate lease payment obligation through 2014 from approximately $47.2 million to an estimated aggregate of $10.0 million to $12.0 million, plus a shortfall obligation of approximately $8.0 million to $9.5 million, depending on the ultimate timing and pricing of the hotel sales. Our intention is to sell these hotels as AmeriHost Inn hotels, thereby mitigating any shortfall obligation with the incentives received from the Cendant agreement. We expect to receive incentive fees from Cendant of approximately $3.0 to $4.0 million from the sale of the 20 leased hotels, and to utilize these fees to reduce the anticipated shortfall obligation to approximately $4.0 to $6.5 million. This modification was critical in positioning the company for future growth."
Discontinued Operations Losses Reduced Significantly
The company continues to aggressively work to reduce losses from discontinued operations. Exclusive of impairment charges, incremental depreciation, and a franchise termination fee accrual, the company's losses from discontinued operations were reduced significantly from a pretax loss of approximately ($1.9) million in the first nine months of 2003, to a pretax loss of approximately ($243,000) in the first nine months of 2004. "We continue to make solid inroads in reducing losses from the non-strategic, non-AmeriHost Inn hotels, primarily through the sale of these assets," said James B. Dale, chief financial officer. "We sold two wholly owned, non-AmeriHost Inns during the 2004 third quarter and in November 2004, we sold our joint venture ownership interest in one additional non-AmeriHost Inn, reducing our non-AmeriHost Inn properties to three, all of which are for sale."
AmeriHost Inn Operations
Same-room revenue per available room (RevPAR) in the 2004 third quarter, for the company's 48 AmeriHost Inn hotels improved 0.5 percent to $38.13, compared to the same period in 2003. The comparable midscale hotel, without food and beverage, segment in the United States, according to Smith Travel Research, rose 6.6 percent for the 2004 third quarter. RevPAR for the company's AmeriHost Inn hotels began to regain momentum in September 2004, up 5.9 percent.
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30 September 30 September 30
------------ ------------ ------------
Occupancy - 2004 63.7% 57.9% 56.2%
Occupancy - 2003 64.0% 57.2% 55.6%
Increase (decrease) (0.5%) 1.2% 1.1%
Average Daily Rate - 2004 $59.88 $57.73 $57.44
Average Daily Rate - 2003 $59.26 $57.18 $56.94
Increase (decrease) 1.0% 1.0% 0.9%
RevPAR - 2004 $38.13 $33.42 $32.31
RevPAR - 2003 $37.95 $32.72 $31.69
Increase (decrease) 0.5% 2.6% 2.3%
"Most of our hotels are located in the Midwest, which still lags behind the nation as a whole in economic recovery," Herman noted. "The success of our marketing programs is encouraging in this still-difficult operating environment. We closed 2003 with a RevPAR market share index of 97.3, according to Smith Travel Research. For the third consecutive quarter, we have improved our market share--from an index of 99.2 at the end of the first quarter of 2004, to an index of 100.5 as of September 30, 2004. We continue to work hard to increase this index."
Hotel operating margins for the 2004 third quarter continued to be under pressure. "We, at last, are beginning to achieve some pricing power, as the economy begins to slowly rebound in our primary markets, and we were able to increase room rates in the later part of the 2004 third quarter. We are rolling out an energy conservation program that we tested at several properties earlier this year to 35 hotels by year end," Herman said. "At the hotels involved in the test program, we are seeing considerable energy cost savings and expect to receive a payback on our investment within the first 18 to 24 months. Cost containment remains a constant focus, and we continue to expand our marketing efforts through our Operation Heads in Beds initiative. Finally, we expect to see margin improvement as we sell off our older AmeriHost Inn hotels located in tertiary markets, and the non-AmeriHost Inn properties."
Operation Sell Update
In the 2004 third quarter, Arlington sold two wholly owned AmeriHost Inn hotels and two non-AmeriHost Inn hotels for total gross proceeds to the company of approximately $7.3 million. In addition, the company facilitated the sale of one leased AmeriHost Inn hotel in the 2004 third quarter on behalf of PMC, the landlord, resulting in the termination of the lease with Arlington.
For the nine months ended September 30, 2004, the company has sold a total of eight wholly-owned AmeriHost Inn hotels and two wholly-owned, non-AmeriHost Inn hotels. In addition, Arlington facilitated the sale of one non-AmeriHost Inn hotel owned by a joint venture in which it was a partner, and facilitated the sale of one leased AmeriHost Inn hotel on behalf of PMC, as discussed above.
Following the close of the 2004 third quarter, the company sold one wholly-owned, AmeriHost Inn hotel and its ownership interest in a joint venture that owns and operates a non-AmeriHost Inn hotel. Both transactions will be reported in the company's fourth quarter results.
Since the company announced its plans to dispose of 25 to 30 hotels in July 2003, the company has sold 18 hotels, exclusive of the sale of the PMC hotel and the sale of our ownership interest in a non-AmeriHost Inn joint venture. "We currently have eight additional hotels under sale contracts, including PMC hotels, and we expect the sales pipeline to remain active," Herman said. "We are on target with our original disposition schedule of our Operation Sell program. We believe the rebounding economy and improving lodging industry fundamentals will benefit our sales efforts."
The company's hotel assets designated for sale within the next 12 months have been classified as "held for sale" on the accompanying balance sheet as of September 30, 2004. The operations of the non-AmeriHost Inn hotels to be sold have been reclassified from the company's continuing operations and presented as "discontinued operations" in the consolidated statements of operations.
It should be noted that when the company has hotels under contract for sale, even with nonrefundable cash deposits in certain cases, certain conditions to closing remain, and there can be no assurance that these sales will be consummated as anticipated. Any forecasted amounts from closed or pending sales could differ from the final amounts included in the company's applicable quarterly and annual financial statements when issued. Furthermore, such forecasted amounts do not represent guidance on, or forecasts of, the results of the company's entire consolidated operations, which are reported on a quarterly basis.
Development Program Update
Arlington broke ground on an 82-room AmeriHost Inn & Suites in Lansing, Mich. during the third quarter of 2004 for a joint venture in which it is a partner. This project features one of Arlington's new 80- to 90-room hotel designs, developed specifically for larger markets. The hotel is expected to open in the 2005 second quarter.
The company has secured debt and equity commitments for an 87-room AmeriHost Inn & Suites at the Columbus, Ohio airport, and expects to begin construction in the near future, pending finalizing all closing conditions. The company has four additional development sites in California and one in Virginia under agreement, pending completion of due diligence and the arrangement of both debt and equity financing. These developments are also expected to utilize the new, larger prototype design. However, there can be no assurance that any of these transactions will be completed as contemplated.
"We are ramping up our development program as fast as prudently possible," Herman said. "As the outlook for an improving hotel economy continues to gain momentum, we expect to increase our hotel development activities."
About Arlington Hospitality
Arlington Hospitality, Inc. is a hotel development and management company that builds, operates and sells mid-market hotels. Arlington is the nation's largest owner and franchisee of AmeriHost Inn hotels, a 106-property, mid-market, limited-service hotel brand owned and presently franchised in 20 states and Canada by Cendant Corporation (NYSE: CD). Currently, Arlington Hospitality, Inc. owns or manages 51 properties in 15 states, including 48 AmeriHost Inn hotels, for a total of 3,672 rooms, with additional AmeriHost Inn & Suites hotels under development.
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