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Strategic Hotels & Resorts Reports First Quarter 2011 Financial Results

2011-05-05

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Strategic Hotels U.S. Same Store Portfolio RevPAR Increases 16.6 Percent and EBITDA Margins Expand 430 Basis Points in Quarter

Strategic Hotels & Resorts (NYSE: BEE) today reported results for the first quarter ended March 31, 2011.

First Quarter Highlights

Net loss attributable to common shareholders was $35.4 million, or $0.23 per diluted share in the first quarter of 2011, compared with net loss attributable to common shareholders of $40.3 million, or $0.53 per diluted share, in the first quarter of 2010.
Comparable funds from operations (Comparable FFO) was a loss of $0.02 per diluted share compared with a loss of $0.14 per diluted share in the prior year period.
Comparable EBITDA was $28.7 million compared with $22.5 million in the prior year period, a 27.6 percent increase between periods.
United States same store revenue per available room (RevPAR) increased 16.6 percent, driven by a 6.1 percentage point increase in occupancy and a 6.1 percent increase in average daily rate (ADR), compared to the first quarter 2010. Total revenue per available room (Total RevPAR) increased 14.5 percent between periods.
North American same store RevPAR increased 11.9 percent, driven by a 5.5 percentage point increase in occupancy and a 2.7 percent increase in ADR. Total RevPAR increased 10.7 percent with non-rooms revenue increasing by 9.4 percent between periods.
Total North American RevPAR, which includes results from the recently acquired Four Seasons Jackson Hole and Four Seasons Silicon Valley, increased by 11.6 percent and Total RevPAR increased 10.4 percent, driven by a 5.3 percentage point increase in occupancy and a 2.7 percent increase in ADR. Non-rooms revenue increased 9.3 percent.
European RevPAR increased 2.9 percent (1.5 percent in constant dollars), driven by a 0.8 percentage point increase in occupancy and a 1.6 percent increase in ADR (0.2 percent increase in constant dollars) between periods. European Total RevPAR increased 2.8 percent in the first quarter over the prior year period (1.5 percent in constant dollars). The European portfolio excludes results from the Paris Marriott Champs Elysees which was recently sold.
United States same store EBITDA margins expanded 430 basis points compared to the first quarter of 2010. North American same store and Total North American EBITDA margins expanded 230 and 240 basis points, respectively.

"We are extremely pleased by our first quarter performance," said Chief Executive Officer Laurence Geller. "We delivered terrific RevPAR growth and operating margins that far outpaced not only the industry average but our relevant competitors. This is the result of the productivity enhancement programs we put in place during the downturn, our unmatched asset management capabilities and our superior portfolio of irreplaceable hotel and resort properties, which are in excellent physical and competitive condition."

First Quarter 2011 Transaction Review

In March, the Company closed on an agreement to acquire the Four Seasons Jackson Hole and Four Seasons Silicon Valley from The Woodbridge Company Limited (Woodbridge) in exchange for an aggregate of 15.2 million shares of common stock at an agreed upon issuance price of $6.25 per share, or an implied valuation of $95.0 million. In addition, the Company concurrently privately placed and issued an additional 8.0 million shares of common stock at a price of $6.25 per share to an affiliate of Woodbridge resulting in total gross proceeds of $50.0 million.
In February, the Company extended the maturity date of its revolving credit facility to March 2012 and amended certain terms. The amendment included an increase of the advance rate from 45 percent to 55 percent of the borrowing base assets' appraised values, a reduction in the debt service coverage ratio constant from 8 percent to 7 percent and a reduction of the debt service coverage ratio limit from 1.3 times to 1.2 times. In exchange, the Company agreed to reduce the total committed facility from $400 million to $350 million and reduce the maximum total leverage covenant from 80 percent to 70 percent.
In February, the Company completed a recapitalization of the joint venture that owns the Hotel del Coronado. Under terms of the agreement, a new joint venture has been established between the Company, Blackstone Real Estate Advisors (Blackstone) and KSL Resorts. As part of the recapitalization, which valued the hotel at approximately $590 million, the Company invested approximately $57 million to retain a 34.3 percent ownership position in the joint venture and will remain as asset manager of the hotel. Blackstone is a 60 percent owner and general partner of the joint venture. A $425 million debt financing was originated by Deutsche Bank.
In February, the Company terminated $125 million of interest rate swaps for a total termination cost of $4.2 million.
In January, the Company sold its 50 percent interest in BuyEfficient, an electronic purchasing platform, for $9.0 million.

Subsequent Event

On April 6th, the Company continued its planned exit from Europe when it closed on the sale of its leasehold interest in the Paris Marriott Champs Elysees hotel for euro 29.2 million ($41.6 million). The Company has also received euro 10.1 million ($14.4 million) of an additional euro 11.6 million ($16.6 million) owed related to the release of an existing leasehold guarantee and other closing adjustments for total proceeds of euro 40.8 million ($58.2 million).

2011 Guidance

Based on the results of the first quarter and current forecasts for the remainder of the year, management is raising the low end of the full year guidance range for 2011. For the year ending December 31, 2011, the Company anticipates that Comparable EBITDA will be in the range of $140.0 million to $150.0 million and Comparable FFO in the range of $0.01 and $0.07 per fully diluted share. Management is also raising the low end of its guidance for North American same store RevPAR and Total RevPAR growth to be in the range between 7.5 percent and 9.0 percent.

Portfolio Definitions

United States same store hotel comparison for the first quarter 2011 are derived from the Company's hotel portfolio at March 31, 2011, consisting of properties located in the United States and held for five or more quarters, in which operations are included in the consolidated results of the Company. As a result, same store comparisons contain 11 properties and exclude the Four Seasons Jackson Hole and Four Seasons Silicon Valley, which were acquired on March 11, 2011, and the unconsolidated Hotel del Coronado.

North American same store hotel comparison for the first quarter 2011 are derived from the Company's hotel portfolio at March 31, 2011, consisting of properties located in North America and held for five or more quarters, in which operations are included in the consolidated results of the Company. As a result, same store comparisons contain 12 properties and exclude the Four Seasons Jackson Hole and Four Seasons Silicon Valley, which were acquired on March 11, 2011, and the unconsolidated Hotel del Coronado.

Total North American hotel comparisons are derived from the Company's hotel portfolio at March 31, 2011, consisting of properties in which operations are included in the consolidated results of the company, including the Four Seasons Jackson Hole and Four Seasons Silicon Valley.

European hotel comparisons for the first quarter 2011 are derived from the Company's European owned and leased hotel properties at March 31, 2011, consisting of the Marriott London Grosvenor Square and the Marriott Hamburg. The Paris Marriott Champs Elysees, which was sold in the second quarter 2011, is excluded from the European portfolio comparisons.

The following tables reconcile projected 2011 net loss attributable to common shareholders to projected Comparable EBITDA, Comparable FFO and Comparable FFO per diluted share (in millions, except per share data):

Note: Beginning in the first quarter of 2011, the definitions of Comparable EBITDA, Comparable FFO and Comparable FFO per diluted share have been modified to exclude any expense related to the Company's Value Creation Plan.

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)


Investment in the Hotel del Coronado
(in thousands)

On January 9, 2006, we purchased a 45% interest in the unconsolidated affiliate that owns the Hotel del Coronado. On February 4, 2011, we completed a recapitalization of the unconsolidated affiliate. As part of the recapitalization, a new unconsolidated affiliate was formed to own the Hotel del Coronado and to invest cash in the asset. Pursuant to the terms of the recapitalization, we became a limited partner in the new unconsolidated affiliate, and our ownership interest in the Hotel del Coronado decreased from 45% to 34.3%. We account for this investment using the equity method of accounting.

	Three Months Ended
	March 31,
	2011	2010
Total revenues (100%)	$ 28,260	$ 23,736
Property EBITDA (100%)	$ 7,298	$ 5,554

Equity in losses of unconsolidated affiliate (SHR ownership)
Property EBITDA	$ 2,606	$ 2,499
Depreciation and amortization	(1,635)	(1,991)
Interest expense	(2,305)	(1,833)
Other expenses, net	(739)	(63)
Income taxes	577	537
Equity in losses of unconsolidated affiliate	$ (1,496)	$ (851)

EBITDA Contribution from investment in Hotel del Coronado
Equity in losses of unconsolidated affiliate	$ (1,496)	$ (851)
Depreciation and amortization	1,635	1,991
Interest expense	2,305	1,833
Income taxes	(577)	(537)
EBITDA Contribution from investment in Hotel del Coronado	$ 1,867	$ 2,436

FFO Contribution from investment in Hotel del Coronado
Equity in losses of unconsolidated affiliate	$ (1,496)	$ (851)
Depreciation and amortization	1,635	1,991
FFO Contribution from investment in Hotel del Coronado	$ 139	$ 1,140

Strategic Hotels & Resorts, Inc. and Subsidiaries (SHR)

Non-GAAP Financial Measures

We present five non-GAAP financial measures that we believe are useful to management and investors as key measures of our operating performance: Funds from Operations (FFO); FFO - Fully Diluted; Comparable FFO; Earnings Before Interest Expense, Taxes, Depreciation and Amortization (EBITDA); and Comparable EBITDA.

EBITDA represents net loss attributable to SHR common shareholders excluding: (i) interest expense, (ii) income taxes, including deferred income tax benefits and expenses applicable to our foreign subsidiaries and income taxes applicable to sale of assets; and (iii) depreciation and amortization. EBITDA also excludes interest expense, income taxes and depreciation and amortization of our unconsolidated affiliates. EBITDA is presented on a full participation basis, which means we have assumed conversion of all redeemable noncontrolling interests of our operating partnership into our common stock and includes preferred dividends. We believe this treatment of noncontrolling interests provides more useful information for management and our investors and appropriately considers our current capital structure. We also present Comparable EBITDA, which eliminates the effect of realizing deferred gains on our sale leasebacks, as well as the effect of gains or losses on sales of assets, early extinguishment of debt, impairment losses, foreign currency exchange gains or losses and other non-cash charges, such as the Value Creation Plan expense. We believe EBITDA and Comparable EBITDA are useful to management and investors in evaluating our operating performance because they provide management and investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe they help management and investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA and Comparable EBITDA as measures in determining the value of acquisitions and dispositions.

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which adopted a definition of FFO in order to promote an industry-wide standard measure of REIT operating performance. NAREIT defines FFO as net income (or loss) (computed in accordance with GAAP) excluding losses or gains from sales of depreciable property plus real estate-related depreciation and amortization, and after adjustments for our portion of these items related to unconsolidated affiliates. We also present FFO - Fully Diluted, which is FFO plus income or loss on income attributable to redeemable noncontrolling interests in our operating partnership. We also present Comparable FFO, which is FFO - Fully Diluted excluding the impact of any gains or losses on early extinguishment of debt, impairment losses, foreign currency exchange gains or losses and other non-cash charges, such as the Value Creation Plan expense. We believe that the presentation of FFO, FFO - Fully Diluted and Comparable FFO provides useful information to management and investors regarding our results of operations because they are measures of our ability to fund capital expenditures and expand our business. In addition, FFO is widely used in the real estate industry to measure operating performance without regard to items such as depreciation and amortization. We also present Comparable FFO per diluted share as a non-GAAP measure of our performance. We calculate Comparable FFO per diluted share for a given operating period as our Comparable FFO (as defined above) divided by the weighted average of fully diluted shares outstanding. Comparable FFO per diluted share, in accordance with NAREIT, is adjusted for the effects of dilutive securities. Dilutive securities may include shares granted under share-based compensation plans, operating partnership units and exchangeable debt securities. No effect is shown for securities that are anti-dilutive.

We caution investors that amounts presented in accordance with our definitions of FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA should not be considered as an alternative measure of our net loss or operating performance. FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA can enhance your understanding of our financial condition and results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to comparable GAAP measures such as net loss attributable to SHR common shareholders. In addition, you should be aware that adverse economic and market conditions might negatively impact our cash flow. We have provided a quantitative reconciliation of FFO, FFO - Fully Diluted, Comparable FFO, EBITDA, and Comparable EBITDA to the most directly comparable GAAP financial performance measure, which is net loss attributable to SHR common shareholders.