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Net income available to common shareholders was $3.9 million for the 2005 second quarter, or $0.15 per share, compared to $3.7 million, or $0.14 per share, for the same period a year earlier.
For the 2005 second quarter, funds from operations (FFO) available to common shareholders decreased 4 percent to $8.3 million, or $0.30 per common share, compared to $8.6 million or $0.31 per common share, for the 2004 second quarter. The company had approximately 27.6 million fully diluted weighted average common shares outstanding in both reporting periods. Results were in line with the company's previously reported guidance for FFO available to common shareholders for the second quarter of 2005 of $0.29 to $0.31 per common share.
FFO available to common shareholders for the second quarter of 2005 was reduced approximately $0.02 per share due to a non-cash increase in income tax expense. Excluding non-cash income tax expense (benefit), FFO available to common shareholders would have been $0.31 per share for the second quarter of 2005 versus $0.30 per share for the second quarter of 2004. To realize its deferred tax asset, effective January 1, 2005, the company restructured its leases with its taxable REIT subsidiary, Barclay Hospitality Services, Inc. ("Barclay"). The company's deferred tax asset, which totaled $11.9 million as of June 30, 2005, was created by the acquisition of the leases from third parties (the cost of which was expensed for book purposes and capitalized for tax purposes), as well as by the operating losses experienced by Barclay over the past two years. The company expects the restructuring of the leases to create future taxable income for Barclay, as it did in the second quarter of 2005. Although the company will record income tax in the future based on Barclay's net income, it does not expect to pay taxes until its deferred tax asset is fully realized. "As a result of restructuring the company's leases with Barclay effective January 1, 2005, the company recorded income tax expense totaling $355,000 during the second quarter of 2005, as compared to an income tax benefit of $346,000 during the second quarter of 2004." said Joe Green, president and chief financial officer. "Accordingly, the non-cash income tax expense in 2005 resulted in a reduction in FFO available to common shareholders of approximately $0.02 per common share compared to the second quarter of 2004."
Recent Developments
Pending Hotel Acquisition
The company is currently under contract to purchase a six-property, 698-room portfolio for $46.0 million. The properties consist of one Courtyard by Marriott hotel and five Towneplace Suites hotels. These properties are located in Texas, one in Austin, one in College Station, one in Clearlake and two in Houston and one is located in Birmingham, Alabama. All of the hotels are less than six years old. "These properties are well located, in excellent condition and compete very effectively in their respective markets." Green said. The hotels will continue to be managed by Marriott, which will become the company's 7th management company. The company expects to close the purchase of the hotels during the third quarter of 2005, subject to completing its due diligence review of certain items.
Pending Hotel Developments
Shortly after the close of the 2005 second quarter, the company announced two new development projects, one wholly owned and one through a joint venture. The company closed on the purchase of 4.5 acres of land for $2.94 million and plans to build a 142-room Homewood Suites hotel in the Forrestal Center of Princeton University for an all-in cost of approximately $19.6 million, $12.0 million of which is expected to be borrowed under a mortgage loan. The hotel is scheduled to break ground in the third quarter of 2005 and is expected to open in the first quarter of 2007.
As previously reported, in a joint venture with DeHoff Development Company, a diversified real estate owner and developer, the company plans to build a 121-room Hilton Garden Inn at Gateway Corporate Park, adjacent to the Akron-Canton Airport in Green, Ohio for approximately $12.0 million. The total equity investment in the joint venture is expected to be approximately $4.6 million, with the balance being financed by GE Commercial Franchise Finance ("GEFF"). The company plans to contribute $1.0 million in exchange for common equity in the joint venture, and another $2.2 million in exchange for preferred equity in the joint venture bearing an expected annual cash dividend of LIBOR plus 11 percent, while DeHoff plans to contribute approximately $1.4 million to the joint venture in exchange for common equity. The hotel is slated to break ground in the third quarter of 2005 with an anticipated late fall 2006 opening.
"During this phase of the real estate cycle, we believe development is an attractive investment option," Green said. "We will be responsible for overseeing the development and construction of both projects." As previously reported, the company currently is constructing a third development project that is expected to open in the summer of 2006, a 123-room Courtyard by Marriott hotel in Kansas City, Mo. for approximately $16.7 million (net of historic tax credits totaling approximately $7.7 million), $10.9 million of which is being financed by a mortgage loan from GEFF.
The company expects to acquire its equity portion of the pending hotel acquisitions and development projects using borrowings under its lines of credit and through other available sources of capital. The company expects that the acquisition of each of these hotels will be accretive to its 2005 FFO available to common shareholders.
Hotel Disposition
In May 2005, the company sold the Hilton Head Hampton Inn for $4.4 million in cash, net of closing costs. The disposition resulted in an aggregate gain on sale of $471,000. Proceeds were used primarily to reduce the company's outstanding debt balance under its $155 million line of credit.
"This sale and the new developments are part of our on-going program to continuously upgrade our portfolio, through pruning older assets, maintaining our core hotels and acquiring and developing new hotels," Green said. "We have a substantial pipeline of acquisition candidates, and we are looking at additional development projects on a highly selective basis."
Debt Investment Financing Program
During the second quarter, the company announced a program with GEFF to provide a highly streamlined, cost-effective loan program for hoteliers. Under the program, GEFF and the company would provide loans secured by a first mortgage for up to 85 percent of a project's cost. The company would fund approximately 25 percent of the total loan amount which is the first loss piece, or the "B" note, of the loan. Borrowers will work with the two companies as one seamless entity, which is expected to reduce significantly the time and cost to acquire the financing for hotel projects, compared to having to deal with two separate lenders.
"Response has been very positive to this program, and we have an extremely active pipeline," Green said. "Hotel development activity is ramping up, and this program simplifies the paperwork and effort required by developers. Because the company has such extensive experience in hotel development, we believe this gives us a competitive edge in evaluating development projects."
The company's proprietary, non-GEFF, debt investment financing program targets subordinated hotel loans between 60 percent and 85 percent of a project's value, hotels with 100 to 425 rooms and single-asset loan amounts that normally range from $1 million to $15 million. The company also seeks to underwrite and acquire the junior mezzanine portion of loans that are originated in the marketplace under Collateralized Mortgage-Backed Securities (CMBS) programs.
Internal Growth/Same Store Operating Statistics
Revenue per available room (RevPAR) in the second quarter of 2005 improved 8.8 percent, led by an 8.4 percent improvement in average daily room rate (ADR) and a 0.4 percent improvement in occupancy, compared to the same period a year earlier.
The following chart details the "same store" operating statistics, which includes 45 hotels that were open throughout both periods ended June 30, 2005 and 2004 (including 41 wholly owned hotels and four jointly owned hotels).
Same Store Operating Statistics
--------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
Percentage Percentage
2005 2004 Change 2005 2004 Change
-------- -------- --------- -------- -------- ---------
Hotel room
revenues $36,960 $33,967 8.8% $69,347 $65,072 6.6%
RevPAR $63.94 $58.77 8.8% $60.31 $56.30 7.1%
Occupancy 72.5% 72.2% 0.4% 69.2% 69.4% -0.3%
Average
Daily rate $88.20 $81.37 8.4% $87.18 $81.17 7.4%
Gross
Operating
Profit
margin 43.1% 43.3% -0.2% pts. 41.6% 41.7% -0.1%pt.
Second quarter 2005 operating margins decreased slightly to 43.1 percent from 43.3 percent, in the same period for the previous year. Increased operating costs with respect to brand-driven initiatives, higher health insurance costs, and higher labor costs negatively impacted the company's gross operating profit margins for the second quarter of 2005. During the 2005 second quarter, the company declared a regular cash dividend of $0.15 per common share and a cash dividend of $0.50 per share of Series B Preferred Stock. "We remain comfortable with the payout level of our current common stock dividend," said Robert W. Winston, III chief executive officer. "We continue to evaluate our policy on a quarterly basis."
Outlook and Guidance
For the 2005 third quarter, the company forecasts net income per share available to common shareholders of $0.10 to $0.12, compared to net income per share available to common shareholders of $0.12 for the 2004 third quarter. The company expects 2005 third quarter RevPAR to improve 2 percent to 3 percent over the third quarter of 2004, and a slight improvement in gross operating profit margins for the third quarter of 2005 as compared to the third quarter of 2004. These projections for RevPAR and gross operating profit margins reflect our estimates of the negative impact of reduced military business and planned renovation activities during the third quarter of 2005, together with non-recurring incremental hurricane-related revenue experienced during the third quarter of 2004, which we believe will impact five properties. Excluding these properties, RevPAR is expected to improve 5% to 6% over the third quarter of 2004. We believe that, in some cases, new supply additions will also have a negative impact on our third quarter results of operations. However, the company is taking measures to retain its market share in these locations. Accordingly, FFO per share available to common shareholders is expected to be between $0.27 and $0.29 for the third quarter of 2005, compared to FFO per share available to common shareholders of $0.28 for the 2004 third quarter. The third quarter 2005 projected FFO per share available to common shareholders includes a projected non-cash income tax expense of $330,000, while the third quarter 2004 FFO per share available to common shareholder included a non-cash income tax benefit of $501,000, resulting in an estimated $0.03 per share negative impact to the third quarter 2005 compared to the third quarter 2004. Excluding the non-cash income tax expense (benefit) FFO available to common shareholders would have been $0.26 per share for the third quarter of 2004 and would have been projected to be between $0.28 and $0.30 for the third quarter of 2005. This guidance assumes no hotel dispositions, acquisitions, developments or placements of debt during the 2005 third quarter.
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