Winston Hotels Reports Third Quarter 2005 Results

November 08, 2005 09:23 AM US Eastern Timezone 



Winston Hotels Reports Third Quarter 2005 Results 



RALEIGH, N.C.--(BUSINESS WIRE)--Nov. 8, 2005--Winston Hotels, Inc. (NYSE: WXH), a real estate investment trust (REIT) and owner of premium limited-service, upscale extended-stay and full-service hotels, today announced results for the three and nine months ended September 30, 2005. 





Net loss available to common shareholders was $8.7 million for the 2005 third quarter, or ($0.33) per share, compared to net income available to common shareholders of $3.1 million, or $0.12 per share, for the same period a year earlier. The 2005 results include a non-cash impairment charge of $13.0 million. Net income would have been $3.6 million, or $0.14 per share, for the 2005 third quarter were it not for the impairment charge. 



Funds from operations ("FFO") available to common shareholders for the 2005 third quarter, including the non-cash impairment charge, decreased to ($4.3) million, or ($0.16) per common share, compared to $7.7 million, or $0.28 per common share, for the 2004 third quarter. The company had approximately 27.6 million fully diluted weighted average common shares outstanding in both the 2005 and 2004 reporting periods. 



FFO available to common shareholders for the third quarter of 2005 was also reduced by approximately $0.01 per share due to a non-cash income tax expense, while FFO available to common shareholders for the third quarter of 2004 was increased by $0.02 per share due to a non-cash income tax benefit. 



Excluding the effects of the non-cash impairment charge and non-cash income tax expense (benefit), FFO available to common shareholders would have been $0.33 per share for the third quarter of 2005, versus $0.26 per share for the third quarter of 2004. 



Recent Developments - Third and Fourth Quarter 



Hotel Acquisitions 



-- Closed the $46.0 million purchase of five Marriott Towneplace Suites and one Courtyard by Marriott 



-- Closed the $16.3 million purchase of the Hampton Inn & Suites in Baltimore, Md. 



-- Closed the $18.0 million purchase of the Stanley Hotel, Estes Park, Colo. through a joint venture 



Hotel Developments 



-- Broke ground on a 142-room $19.6 million Homewood Suites hotel in Princeton, N.J., expected to open during the first quarter 2007 



-- Broke ground on a 121-room $12.0 million Hilton Garden Inn in Akron, Ohio through a joint venture, expected to open during the fourth quarter 2006 



-- Continued the development of the 123-room $16.7 million Courtyard by Marriott in Kansas City, Mo., expected to open during the third quarter 2006 



-- Continued due diligence to buy a site in Wilmington, N.C. to build a 119-room $13.3 million Hilton Garden Inn expected to break ground during the fourth quarter 2005 and open during the first quarter 2007 



Debt Investment Financing Program 



-- Closed $14.0 million purchase of four senior participation interests in certain mezzanine loans through Credit Suisse First Boston 



-- Closed a $2.0 million senior note participation for a Miami, Fla. condo hotel project 



Financing 



-- Expanded the company's GE Line from $155 million to $215 million 



-- Created additional $13.2 million in credit facilities with Marathon Structured Finance Fund, L.P. 



Hotel Acquisitions 



On October 31, 2005, the company purchased six hotels with an aggregate of 698 rooms for $46.0 million. The properties consist of one Courtyard by Marriott hotel and five Towneplace Suites hotels. Five of 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, Ala. None of the hotels was seriously impacted by Hurricane Rita. All of the hotels are less than six years old. "These properties are in excellent condition with strong locations 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 eighth management company. 



On September 2, 2005, the company acquired the 116-room Hampton Inn & Suites Baltimore Inner Harbor in Maryland for $16.3 million from a private investment group. In 2002, the company co-funded equally with Hall Financial Group a $3.5 million mezzanine loan to help finance the acquisition and renovation of this hotel. The three-year loan required monthly principal and interest payments based on a 10-year amortization period and an interest rate of 30-day LIBOR (3.86 percent at September 30, 2005) plus 10.21 percent. In addition, the loan required quarterly interest payments equal to 4 percent of gross monthly revenues. Interest on the loan also accrued at a rate of 6 percent of gross monthly revenue. Upon acquiring the hotel, the mezzanine loan was paid off, which resulted in a lump sum payment of approximately $5.3 million, including $3.3 million of principal and $2.0 million in accrued interest and disposition fees. The company's portion of the $5.3 million totaled $2.8 million. Upon pay off of the loan, the company realized $0.7 million ($0.025 per share) in interest income that it had not previously received or accrued. 



During 2005, the company entered into a new joint venture with Stanley Holdings, LLC to form New Stanley Associates, L.L.L.P. ("Stanley Associates")for the purpose of acquiring the Stanley Hotel in Estes Park, Colo. The company contributed $3.0 million of the total $5.0 million equity investment in the joint venture. The joint venture acquired the Stanley Hotel on September 5, 2005 and simultaneously closed on a $13.0 million first mortgage loan provided by Credit Suisse First Boston to finance the acquisition. The company currently owns a 60 percent interest in both Stanley Associates, which owns the hotel, and New Stanley Associates Lessee, LLC, which leases the hotel from Stanley Associates. GHG-Stanley Management, LLC will continue to manage the 138-room hotel. 



Hotel Developments 



During the 2005 third quarter, the company announced and began construction on 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 in the Forrestal Center of Princeton University for $2.9 million and plans to build a 142-room Homewood Suites hotel for an estimated all-in cost of approximately $19.6 million, $12.0 million of which is expected to be borrowed under a mortgage loan with the remainder to be funded with funds available under the company's credit facilities. The company broke ground on the hotel in September 2005 and expects to open the hotel 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. The company expects to fund the remainder of the development costs with borrowings under a mortgage loan from 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 30-day LIBOR plus 11 percent, while DeHoff plans to contribute approximately $1.4 million to the joint venture in exchange for common equity. The joint venture broke ground on the hotel in September 2005 with an anticipated late-fall 2006 opening. "We believe development is an attractive investment option during this phase of the real estate cycle," Green said. "Winston 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 borrowed under a mortgage loan from GEFF. As of September 30, 2005, the company had invested $11.1 million toward the construction of this new hotel. 



The company is also continuing due diligence to buy a site in Wilmington, N.C. to build a 119-room Hilton Garden Inn. The estimated all-in cost of this development is expected to be approximately $13.3 million, 65 percent of which is expected to be borrowed under a mortgage loan. If the company completes the acquisition of the site, the hotel is slated to break ground in the fourth quarter of 2005 with an anticipated first quarter 2007 opening. 



The company expects to acquire its equity portion of the pending hotel acquisitions and development projects using borrowings under its GE line of credit and through other available sources of capital. 



Debt Investment Financing Program 



The company has a debt investment financing program that 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. 



In October 2005, the company purchased from an affiliate of Credit Suisse First Boston a $14.0 million portfolio of four senior participation interests in certain mezzanine loans. Lehman Brothers holds the related junior participating interests. The underlying three-year mezzanine loans with two, one-year extensions, bear interest at a rate equal to 30-day LIBOR plus 4.5 percent and are individually secured by the equity interests in affiliates of Walton Street Capital, which entities own an aggregate of four Marriott Renaissance hotels, in Los Angeles, Calif. (499 rooms), St. Petersburg, Fla. (360 rooms), Austin, Texas (478 rooms), and Chicago, Ill. (553 rooms). Each individual mezzanine loan is subordinate to a first mortgage loan secured by the hotels. The loans are not cross-collateralized or cross-defaulted. 



"The underlying hotel assets are well-located and attractive within the marketplace," said Joe Green. "We welcome the opportunity to build on our relationship with Credit Suisse First Boston and other major underwriters." 



In August 2005, the company closed on a $2.0 million participation in a $20.0 million senior bridge interest only loan that bears interest at a fixed rate of 11 percent for two years to finance a 95-unit condo hotel conversion project in Miami, Fla., with Canyon Capital Realty Advisors LLC funding the remaining $18.0 million. 



During the second quarter, the company announced a program with GE Commercial Franchise Finance ("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 loan 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 mortgage loan. Borrowers will work with GEFF and the company 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." 



Financing 



On March 11, 2005, the company through its wholly owned subsidiary, Winston SPE II, LLC, entered into a $155 million credit facility (the "GE Line") with General Electric Capital Corporation ("GECC"). Simultaneous with the closing of the six hotel acquisition discussed above, the GE Line was increased by $60 million to $215 million. The six hotels also were added as collateral to support outstanding balances under the GE Line. The expansion reset the five-year term and availability is now calculated each quarter on a trailing twelve-month basis based primarily upon the underwritten net operating income of the hotels that collateralize the GE Line divided by 12.5 percent, versus 13 percent prior to the expansion. Availability under the GE line at September 30, 2005 was approximately $54 million. 



In September 2005 the company financed three of its existing mezzanine loans under its $50 million master repurchase agreement with Marathon Structured Finance Fund, L.P. and borrowed $7.9 million. In October 2005 the company financed another one of its existing mezzanine loans and borrowed an additional $0.7 million under the agreement. Availability under the Marathon master repurchase agreement is approximately $41 million. 



Simultaneous with the closing of the $14 million mezzanine loan acquisition previously mentioned, Winston Finance closed an $8.4 million, three-year credit facility with Marathon to finance the acquisition. Borrowings under the facility bear interest at a rate of 30-day LIBOR plus 2.25 percent. 



In October 2005, Winston Finance entered into a $4.8 million loan facility with Marathon. Borrowings under the facility bear interest at a rate of 30-day LIBOR plus 2.25 percent and are collateralized by two existing mezzanine loans with a carrying value of $8.0 million. 



Pending Hotel Dispositions 



On November 4, 2005, the company's Board of Directors adopted a formal plan to sell the two hotels for which impairment charges were taken during the third quarter. Accordingly, both of these hotels will be reclassified as "assets held for sale" in the fourth quarter on the company's consolidated balance sheet. Beginning November 4, 2005 the operations for both of these hotels will be reported as discontinued operations. 



Internal Growth/Same Store Operating Statistics 



Revenue per available room (RevPAR) in the third quarter of 2005 improved 5.3 percent, led by a 5.8 percent improvement in average daily room rate (ADR) and offset by a 0.4 percent decrease in occupancy, compared to the same period a year earlier. Third quarter 2005 operating margins increased slightly to 43.0 percent from 42.3 percent, in the same period for the previous year. Third quarter 2005 operating margins were negatively impacted by rising utility costs. 



The following chart details the "same store" operating statistics, which includes 45 hotels that were open throughout both the three and nine months ended September 30, 2005 and the three and nine months ended September 30, 2004 (including 41 wholly owned hotels and four jointly owned hotels). 



Same Store       

 Operating

 Statistics

------------    Three Months Ended           Nine Months Ended

                   September 30,               September 30,

            ---------------------------- -----------------------------

                              Percentage                    Percentage

              2005     2004     Change      2005     2004     Change

            -------- -------- ---------- --------- -------- ----------

 Hotel room

  revenues  $36,217  $34,404    5.3%     $105,564  $99,476    6.1%

 RevPAR      $62.01   $58.88    5.3%       $60.89   $57.17    6.5%

 Occupancy     71.2%    71.5%  -0.4%         69.9%    70.1%  -0.3%

 Average

  Daily rate $87.12   $82.32    5.8%       $87.16   $81.56    6.9%

 Gross                              

  Operating

  Profit

  margin       43.0%    42.3%   0.7%pts.     42.0%    41.9%   0.1%pt.