NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
MHI Hospitality Corporation (the Company) is a self-managed and self-administered lodging real estate
investment trust (REIT) that was incorporated in Maryland on August 20, 2004 to own primarily full-service upper-upscale and upscale hotels located in primary and secondary markets in the Mid-Atlantic and Southern United States. The
hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn.
The Company
commenced operations on December 21, 2004 when it completed its initial public offering (IPO) and thereafter consummated the acquisition of six hotel properties (the initial properties). Substantially all of the
Companys assets are held by, and all of its operations are conducted through, MHI Hospitality, L.P. (the Operating Partnership). The Company also owns a 25.0% noncontrolling interest in the Crowne Plaza Hollywood Beach Resort
through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group (Carlyle).
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at September 30, 2012, was approximately 77.1% owned by the Company, leases its hotels to
a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC, (collectively, MHI TRS), a wholly-owned subsidiary of the Operating Partnership. MHI TRS then engages a hotel management company, MHI Hotels Services, LLC
(MHI Hotels Services), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.
All references in this report to the Company, MHI, we, us and our refer to MHI Hospitality Corporation, its Operating Partnership and its
subsidiaries and predecessors, unless the context otherwise requires or where otherwise indicated.
Significant transactions
occurring during the current and prior fiscal year include the following:
On April 18, 2011, the Company entered into a
sixth amendment to the credit agreement. Among other things, the amendment: (i) extended the final maturity date of the credit facility to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding
advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and
(v) adjusted certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Company reduced the outstanding balance on its then-existing credit facility by approximately $22.7 million.
On April 18, 2011, the Company entered into a Securities Purchase Agreement (the Securities Purchase
Agreement) with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the Investors), under which the Company issued and sold to the Investors in a private placement 25,000 shares of the Companys Series A
Cumulative Redeemable Preferred Stock (the Preferred Stock), and a warrant (the Warrant) to purchase 1,900,000 shares of the Companys common stock, par value $0.01 per share, for a purchase price of $25.0 million. The
Company used the net proceeds from the issuance of the Preferred Stock and the Warrant to partially prepay the amounts owed by the Company under its then-existing credit agreement.
On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to
which the Company has the right to borrow up to $10.0 million on or before December 31, 2011 (the Bridge Financing). The principal amount borrowed bears interest at the rate of 9.25% per annum, payable quarterly in arrears and
will mature on the earlier of April 18, 2015 or the redemption in full of the Preferred Stock.
On June 30, 2011,
the Company entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2012. Under the terms of the extension, the Company will make monthly principal payments of $16,000.
Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00%. The Company also pledged $750,000 in cash collateral held by the lender in an interest-bearing
account.
On August 1, 2011, the Company entered into agreements with PNC Bank, National Association, in its capacity as
trustee of the AFL-CIO Building Investment Trust, to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront until January 22, 2013. During the extension, and pursuant to the loan documents, the interest rate applicable
to the mortgage loan was fixed at 8.0% and the lender waived certain covenants requiring the borrower to further pay down principal under certain circumstances. In order to effect the extension, and pursuant to the loan documents, the Company
tendered to the lender the sum of $4.0 million as principal curtailment of the mortgage loan, thus reducing the mortgage loans current outstanding principal amount to $14.0 million.
On August 5, 2011, the Company obtained a 10-year, $7.5 million mortgage with Bank of Georgetown on the Holiday Inn Laurel West
hotel property. The mortgage bears interest at a rate of 5.25% per annum for the first five years. After five years, the rate
7
of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. The mortgage provides for level payments of
principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Companys indebtedness under its then-existing credit facility.
On October 17, 2011, the Company obtained a 5-year, $8.0 million mortgage with Premier Bank, Inc. on its property in Raleigh, North
Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage may be extended for an additional 5-year period,
at the Companys option if certain conditions have been satisfied, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest. Proceeds of the mortgage were used to pay down a portion of the
Companys indebtedness under its then-existing credit facility.
On December 15, 2011, the Company obtained a
5-year, $12.2 million mortgage with Goldman Sachs Commercial Mortgage Capital, L.P. on the Sheraton Louisville Riverside in Jeffersonville, Indiana. The mortgage bears interest at a rate of 6.2415% per annum and provides for level payments of
principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Companys indebtedness under its then-existing credit facility.
On December 21, 2011, the Company entered into an amendment of its Bridge Financing to extend the lenders loan commitment by
17 months through May 31, 2013.
On December 21, 2011, the Company also amended the terms of the outstanding Warrant
issued by the Company in favor of the Investors. Pursuant to the Warrant amendment, the exercise price per share of common stock covered by the Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting
from such exercise price the per-share amount of such cash dividends. Such adjustment does not take in to account quarterly dividends declared prior to January 1, 2012.
On March 5, 2012, the Company obtained a $30.0 million mortgage with TD Bank, N.A. on the Hilton Philadelphia Airport. The mortgage bears interest at a rate of 30-day LIBOR plus additional interest
of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgages maturity date is August 30, 2014, with an extension option until March 1, 2017,
contingent upon the extension or acceptable replacement of the Hilton Worldwide license agreement. Proceeds of the mortgage were used to extinguish the Companys indebtedness under the then-existing credit facility, prepay a portion of the
Companys indebtedness under the Bridge Financing and for working capital. With this transaction, the Companys syndicated credit facility was extinguished and the Crowne Plaza Tampa Westshore hotel property was released from any mortgage
encumbrance.
On June 15, 2012, the Company entered into an amendment of its Bridge Financing that provides, subject to a
$1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments will be increased to $7.0 million, of which $2.0 million is reserved to repay principal amounts outstanding on the Crowne Plaza
Jacksonville Riverfront hotel property.
On June 15, 2012, the Company simultaneously entered into an agreement with the
holders of the Companys Preferred Stock to redeem approximately 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.
On June 18, 2012, the Company obtained a $14.0 million mortgage with C1 Bank on the Crowne Plaza Tampa Westshore in
Tampa, Florida. The mortgage bears interest at a rate of 5.60% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgages maturity date is June 18,
2017. Proceeds of the mortgage were used to pay the outstanding indebtedness under the Bridge Financing and to redeem approximately 11,514 shares of Preferred Stock.
On June 22, 2012, the Company entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2013. Under
the terms of the extension, the Company will continue to make monthly principal payments of $16,000 and will also make quarterly principal payments to the lender of $200,000 each on July 1, 2012, October 1, 2012, January 1,
2013 and April 1, 2013. Interest payable monthly pursuant to the mortgage will remain at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum.
On July 10, 2012, the Company obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in
Jacksonville, Florida. The mortgage bears interest at a rate of LIBOR plus additional interest of 3.0% per annum and amortizes on a 25-year schedule. The maturity date is July 10, 2015, but may be extended for an additional year pursuant
to certain terms and conditions. The mortgage also contains an earn-out feature which allows for an additional draw of up to $3.0 million during the term of the loan contingent upon satisfaction of certain debt service coverage and
loan-to-value covenants. Proceeds of the mortgage were used to repay the existing mortgage indebtedness and to pay closing costs.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the
Company presented herein include all of the accounts of MHI Hospitality Corporation, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2012 and December 31, 2011 and for the three months and nine months ended
September 30, 2012 and 2011. All significant inter-company balances and transactions have been eliminated.
8
Investment in Hotel Properties
Investments in hotel properties include investments in
operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon
the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Companys accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project,
which constitute additions or improvements that extend the life of the property, are capitalized.
Depreciation is computed
using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the
shorter of the lease term or the useful lives of the related assets.
The Company reviews its investments in hotel properties
for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the
demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the
estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an
adjustment to reduce the carrying amount to the related hotel propertys estimated fair market value is recorded and an impairment loss recognized.
Investment in Joint Venture
Investment in joint venture represents
the Companys noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a
management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the $22.0
million junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these entities. The Company accounts for its investment in the joint venture under the equity method of accounting and is entitled to
receive its pro rata share of annual cash flow. The Company also has the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of
net sale proceeds.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company holds cash accounts at several
institutions in excess of the Federal Deposit Insurance Corporation (the FDIC) protection limits of $250,000. The Companys exposure to credit loss in the event of the failure of these institutions is represented by the difference
between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Companys potential
risk.
Restricted Cash
Restricted cash
includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in the Companys various mortgage agreements and line of credit.
Inventories
Inventories which consist primarily of food and beverage are stated at
the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.
Franchise License Fees
Fees expended to obtain or renew a franchise
license are amortized over the life of the license or renewal. The un-amortized franchise fees as of September 30, 2012 and December 31, 2011 were $251,464 and $284,090, respectively. Amortization expense for the three months and nine
months ended September 30, 2012 totaled $10,875 and $32,525, respectively and $11,587 and $34,763, respectively for the three months and nine months ended September 30, 2011.
Deferred Financing Costs
Deferred financing costs are recorded at cost and
consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense
in the consolidated statements of operations.
Derivative Instruments
The Companys derivative instruments are reflected as
assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest
rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument
designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders equity to the extent the hedge is effective. For a derivative instrument designated as a fair value
hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not
designated as a hedge, the change in fair value each period is reported in earnings.
9
The Company uses derivative instruments to add stability to interest expense and to manage
its exposure to interest-rate movements. To accomplish this objective, the Company primarily used an interest-rate swap, which was required under its credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts
from a counterparty in exchange for the Company making fixed-rate payments without exchange of the underlying principal amount. The Company valued its interest-rate swap at fair value, which it defines as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and included it in accounts payable and accrued liabilities. The Company also uses derivative instruments in the
Companys stock to obtain more favorable terms on its financing. The Company does not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
The Company accounts for the Warrant based upon the guidance
enumerated in ASC 815-40,
Derivatives and Hedging: Contracts in Entitys Own Stock
. The Warrant contains a provision that could require an adjustment to the exercise price if we issued securities deemed to be dilutive to the Warrant and
therefore is classified as a derivative liability. The Warrant is carried at fair value with changes in fair value reported in earnings as long as the Warrant remains classified as a derivative liability.
The Companys warrant derivative liability was valued at September 30, 2012 and December 31, 2011 using the Monte Carlo
simulation method which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer groups future expected stock prices and
minimizes standard error. The Monte Carlo simulation method takes into account, as of the valuation date, factors including the exercise price, the remaining term of the warrant, the current price of the underlying stock and its expected volatility,
expected dividends on the stock and the risk-free interest rate for the term of the warrant.
The Company classifies the inputs used to measure fair value into the following hierarchy:
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Level 1
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Unadjusted quoted prices in active markets for identical assets or liabilities.
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Level 2
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Unadjusted quoted prices in active markets for similar assets or liabilities, or
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
Inputs other than quoted prices that are observable for the asset or liability.
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Level 3
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Unobservable inputs for the asset or liability.
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The Company endeavors to utilize the best available information in measuring fair value. Financial assets
and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our derivative instruments measured at fair value and the basis for that
measurement:
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Level 1
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Level 2
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Level 3
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September 30, 2012
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Interest-rate swap
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$
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$
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$
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Warrant
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(7,287,725
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)
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December 31, 2011
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Interest-rate swap
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Warrant
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(2,943,075
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)
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Cumulative Mandatorily Redeemable Preferred
Stock
The Company accounts for its Preferred Stock based upon the guidance enumerated in ASC 480,
Distinguishing Liabilities from Equity.
The Preferred Stock is mandatorily redeemable on April 18, 2016, or upon the earlier
occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance.
Noncontrolling Interest in Operating Partnership
Certain hotel properties have been acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or
decreased by the limited partners pro rata share of the Operating Partnerships net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Companys
common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Companys
common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.
Revenue Recognition
Revenues from operations of the hotels are recognized
when the services are provided. Revenues consist of room sales, food and beverage sales and other hotel department revenues, such as telephone, parking, gift shop sales, and rentals from restaurant tenants, rooftop leases and gift shop operators.
Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.
10
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the Code). As a REIT, the Company generally will not be subject to federal income tax on that portion of its net income that does not relate to MHI Hospitality TRS, LLC, the
Companys wholly-owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, which leases the Companys hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.
The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of September 30, 2012, the Company has no uncertain tax
positions. In addition, the Company recognizes obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. The period from December 21, 2004 through December 31, 2011 remains open to
examination by the major taxing jurisdictions to which the Company is subject.
Stock-based Compensation
The Companys
2004 Long Term Incentive Plan (the Plan) permits the grant of stock options, restricted (non-vested) stock and performance stock compensation awards to its employees for up to 350,000 shares of common stock. The Company believes that
such awards better align the interests of its employees with those of its stockholders.
Under the Plan, the Company has made
restricted stock and deferred stock awards totaling 261,938 shares including 195,438 shares issued to certain executives and employees, and 65,000 restricted shares and 1,500 unrestricted shares issued to its independent directors. Of the 195,438
shares issued to certain of the Companys executives and employees, all have vested except 7,000 shares issued to the Vice President and General Counsel upon execution of his employment contract which will vest on the anniversary of the
effective date of his employment agreement next year. Regarding the restricted shares awarded to the Companys independent directors, all of the shares have vested except 15,000 shares which vest at the end of 2012.
The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the
Companys stock price on the date of grant or issuance. Under the Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of September 30, 2012, no performance-based stock awards
have been granted. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Compensation cost recognized under the Plan was $13,078 and $39,233, respectively, for the three
months and nine months ended September 30, 2012 and $11,698 and $35,093, respectively, for the three months and nine months ended September 30, 2011.
Comprehensive Income (Loss)
Comprehensive income (loss), as
defined, includes all changes in equity (net assets) during a period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).
Segment Information
The Company has determined that its business is
conducted in one reportable segment, hotel ownership.
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have
been made to the prior period balances to conform to the current period presentation.
Recent Accounting Pronouncements
There are no recent
accounting pronouncements which the Company believes will have a material impact on its financial statements.
11
3. Acquisition of Hotel Properties
There were no new acquisitions during the nine months ended September 30, 2012.
4. Investment in Hotel Properties
Investment in hotel properties as of September 30, 2012 and
December 31, 2011 consisted of the following (in thousands):
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September 30, 2012
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December 31, 2011
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(unaudited)
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Land and land improvements
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$
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19,404
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$
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19,374
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Buildings and improvements
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180,913
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179,585
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Furniture, fixtures and equipment
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33,157
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32,419
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233,474
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231,378
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Less: accumulated depreciation
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(56,080
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)
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(49,909
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)
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$
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177,394
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$
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181,469
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5. Debt
Credit Facility.
During 2011 and for a portion of the nine months ended September 30, 2012, the Company had
a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company. The credit facility was established during the second quarter of 2006 and replaced a $23.0
million secured, revolving credit facility with BB&T. On March 5, 2012, the Company extinguished the credit facility in conjunction with the refinance of the mortgage on the Hilton Philadelphia Airport.
On June 4, 2010, the Company entered into a fifth amendment to its credit agreement modifying certain provisions of the agreement
including an increase in the rate of interest to LIBOR plus additional interest of 4.00%; a LIBOR floor of 0.75%; a conversion to a non-revolving facility; a provision for mandatory quarterly pre-payments based on excess cash flow, as defined in the
amendment, as well as a mandatory prepayment if the Company raises equity within certain parameters; and provided an option to extend the maturity for one year if certain conditions were met.
On April 18, 2011, the Company entered into a sixth amendment to the credit agreement which, among other things, (i) extended
the final maturity date of advances under the credit agreement to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed;
(iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including
restrictions relating to payment of dividends. In connection with the amendment, the Company reduced the outstanding balance on its then-existing credit facility by approximately $22.7 million.
The Company had borrowings under the credit facility of $0.0 million and approximately $25.5 million at September 30, 2012 and
December 31, 2011, respectively.
12
Mortgage Debt.
As of September 30, 2012 and December 31, 2011, the Company
had approximately $136.6 million and $94.2 million of outstanding mortgage debt, respectively. The following table sets forth the Companys mortgage debt obligations on its hotels:
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Property
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Balance Outstanding as of
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Prepayment
Penalties
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Maturity
Date
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Amortization
Provisions
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Interest Rate
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September 30,
2012
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December 31, 2011
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Crowne Plaza Hampton Marina
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$
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7,807,625
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$
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8,151,625
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None
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06/2013
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$
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16,000
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(1)
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LIBOR plus
4.55
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%
(2)
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Crowne Plaza Jacksonville Riverfront
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14,227,647
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14,000,000
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None
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07/2015
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(3)
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25 years
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LIBOR plus 3.00
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%
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Crowne Plaza Tampa Westshore
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13,937,557
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None
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06/2017
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25 years
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5.60
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%
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DoubleTree by Hilton Brownstone University
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7,857,672
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7,980,385
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Yes
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(4)
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10/2016
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(5)
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25 years
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5.25
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%
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Hilton Philadelphia Airport
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29,692,000
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None
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08/2014
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(6)
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25 years
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LIBOR plus
3.00
|
%
(7)
|
Hilton Savannah DeSoto
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|
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22,163,207
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22,488,916
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|
|
|
(8)
|
|
|
07/2017
|
|
|
|
25 years
|
(9)
|
|
|
6.06
|
%
|
Hilton Wilmington Riverside
|
|
|
21,536,650
|
|
|
|
21,884,909
|
|
|
|
|
(8)
|
|
|
03/2017
|
|
|
|
25 years
|
(10)
|
|
|
6.21
|
%
|
Holiday Inn Laurel West
|
|
|
7,341,351
|
|
|
|
7,451,990
|
|
|
|
Yes
|
(11)
|
|
|
08/2021
|
|
|
|
25 years
|
|
|
|
5.25
|
%
(12)
|
Sheraton Louisville Riverside
|
|
|
12,070,341
|
|
|
|
12,200,000
|
|
|
|
|
(13)
|
|
|
01/2017
|
|
|
|
25 years
|
|
|
|
6.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
136,634,050
|
|
|
$
|
94,157,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company is required to make monthly principal payments of $16,000 as well as quarterly principal payments of $200,000 each on July 1,
2012, October 1, 2012, January 1, 2013 and April 1, 2013.
|
(2)
|
The note bears a minimum interest rate of 5.00%.
|
(3)
|
The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.
|
(4)
|
The note may be partially prepaid to a maximum of 20% of the original loan amount without penalty. Pre-payment greater than 20% of the original loan amount can be made
with penalty until 180 days before the original maturity or as extended maturity, if applicable.
|
(5)
|
The note provides that after five years, the mortgage can be extended if certain conditions have been satisfied for additional five-year period at a rate of
3.00% per annum plus the then-current five-year U.S. Treasury rate of interest.
|
(6)
|
The note provides that the mortgage can be extended until March 2017 if certain conditions have been satisfied.
|
(7)
|
The note bears a minimum interest rate of 3.50%.
|
(8)
|
The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.
|
(9)
|
The note provided for payments of interest only until August 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the
note matures in July 2017.
|
(10)
|
The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until
the note matures in March 2017.
|
(11)
|
Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the
maturity.
|
(12)
|
The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of
interest, with a floor of 5.25%.
|
(13)
|
With limited exception, the note may not be prepaid until two months before maturity.
|
13
Total mortgage debt maturities as of September 30, 2012 without
respect to any additional loan extensions for the following twelve-month periods were as follows:
|
|
|
|
|
September 30, 2013
|
|
$
|
10,688,151
|
|
September 30, 2014
|
|
|
31,161,869
|
|
September 30, 2015
|
|
|
15,431,165
|
|
September 30, 2016
|
|
|
2,075,665
|
|
September 30, 2017
|
|
|
70,807,311
|
|
Thereafter
|
|
|
6,469,889
|
|
|
|
|
|
|
Total future maturities
|
|
$
|
136,634,050
|
|
|
|
|
|
|
Other Loans.
On February 9, 2009, the indirect subsidiary of the Company which is a member of the joint
venture entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the Carlyle Affiliate Lender), for the purpose of improving the
Companys liquidity. In June 2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount the
Company contributed to the joint venture to enable the joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which
currently bears a rate of LIBOR plus additional interest of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The maturity date of the mortgage to which the loan is
tied matures in August 2014. The outstanding balance on the loan at September 30, 2012 and December 31, 2011 was approximately $4.2 million and approximately $4.3 million, respectively.
Available Bridge Financing.
On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint
Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. On December 21, 2011, the Company entered into an
amendment to the agreement extending the right to borrow the remainder of the available financing to May 31, 2013. The principal amount borrowed bears interest at the rate of 9.25% per annum, payable quarterly in arrears. The Bridge
Financing will mature on April 18, 2015 or upon the redemption in full of the Preferred Stock, if earlier. The outstanding balance may be prepaid at the Companys option in whole or in part at any time without penalty. Further, the Company
is obligated (i) to make prepayments in the event of, and to the extent of the proceeds from, new equity issuances, certain debt incurrences and sales of assets and (ii) to repay the Bridge Financing in full following certain trigger
events which also give rise to an obligation to redeem the outstanding shares of Preferred Stock. The agreement provides for certain future securities pledges and/or asset liens to be granted from time to time to the lender to secure the Bridge
Financing, under the circumstances and upon the conditions set forth in the agreement. The outstanding balance on the Bridge Financing at September 30, 2012 and December 31, 2011 was $0.0 million and $5.0 million, respectively. At
September 30, 2012, the Company had borrowing capacity under the Bridge Financing of $7.0 million.
6. Mandatorily Redeemable Preferred Stock and Warrant
On April 18, 2011, the Company completed a private placement to the Investors pursuant to the Securities Purchase
Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Warrant to purchase 1,900,000 shares of the Companys common stock, par value $0.01 per share.
The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per share,
having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary (the Articles Supplementary), which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting
and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of
Preferred Stock at an annual rate of 2.0% of the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Companys Preferred Stock will have the exclusive right, voting separately as a single class, to
elect one (1) member of the Companys board of directors. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Companys Preferred Stock will be entitled to appoint a majority of
the members of the board of directors. The holder(s) of the Companys Preferred Stock will be entitled to require that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms
and at such price as is set forth in the Articles Supplementary.
On June 15, 2012, the Company entered into an agreement
with the holders of the Companys Preferred Stock to redeem approximately 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.
The redemption resulted in a prepayment fee of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to the redeemed shares were written off. On June 18, 2012, the Company used a portion of
the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to redeem the approximately 11,514 shares of Preferred Stock. As of September 30, 2012 and December 31, 2011, there were approximately 14,156 and 25,354 shares of the
Preferred Stock issued and outstanding, respectively.
14
The Warrant, as modified, entitles the holder(s) to purchase up to 1,900,000 shares of the
Companys common stock. Pursuant to the Warrant amendment, the exercise price per share of common stock covered by the Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise
price the per-share amount of such cash dividends. Such adjustment does not take into account quarterly dividends declared prior to January 1, 2012. At September 30, 2012, the adjusted exercise price was $2.18 per share. The Warrant
expires on October 18, 2016. The Warrant holders have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Warrant are both subject to additional adjustments under certain circumstances. The
Warrant also contains a cashless exercise right. Under certain circumstances as set forth in the Warrant, the holders of the Warrant will be entitled to participate in certain future securities offerings of the Company.
The Company determined the fair market value of the Warrant was approximately $1.6 million on the issuance date using the Black-Scholes
option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years, and is included in deferred financing
costs. The deferred cost is amortized to interest expense in the accompanying consolidated statement of operations over the period of issuance to the mandatory redemption date of the Preferred Stock.
7. Commitments and Contingencies
Ground, Building and Submerged Land Leases
The Company leases 2,086 square feet of commercial space next
to the Savannah hotel property for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, the Company signed an amendment to the lease to include rights to the
outdoor esplanade adjacent to the leased commercial space. These areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring
October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for the three months and nine months ended September 30, 2012 totaled $17,074 and $49,136, respectively, and totaled $16,215 and $49,640 for the
three months and nine months ended September 30, 2011, respectively, for this operating lease.
The Company leases, as
landlord, the entire fourteenth floor of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed
to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.
The Company leases a parking lot adjacent to the Doubletree by Hilton Brownstone-University in Raleigh, North Carolina. The land is
leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three
additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the
original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months and nine months ended September 30, 2012 totaled $23,871 and $71,612, respectively, and totaled $23,871 and $71,612
for the three months and nine months ended September 30, 2011, respectively.
In conjunction with the sublease
arrangement for the property at Shell Island which expired in December 2011, the Company incurred an annual lease expense for a leasehold interest. Lease expense totaled $48,750 and $146,250 for the three months and nine months ended
September 30, 2011, respectively.
The Company leases a parking lot adjacent to the Crowne Plaza Tampa Westshore under a
five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense totaled
$638 and $1,864 for the three months and nine months ended September 30, 2012, respectively, and totaled $700 and $2,116 for the three months and nine months ended September 30, 2011, respectively.
The Company leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of
Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expires in September 2017, requiring annual payments of $6,020. Rent expense totaled $1,285 and $3,765 for
the three months and nine months ended September 30, 2012, respectively, and totaled $1,240 and $3,720 for the three months and nine months ended September 30, 2011, respectively.
The Company leases 3,542 square feet of commercial office space in Williamsburg, Virginia under an agreement that commenced
September 1, 2009 and expires August 31, 2015. Rent expense totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2012, respectively, and totaled $13,750 and $41,250 for the three months and nine months
ended September 30, 2011, respectively.
The Company leases 1,632 square feet of commercial office space in Rockville,
Maryland under an agreement that commenced December 14, 2009 and expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of
$45,696 for the second year of the lease term, increasing 2.75%
15
per year for the remainder of the lease term. Rent expense totaled $11,474 and $33,746 for the three months and nine months ended September 30, 2012, respectively, and totaled $11,046 and
$33,274 for the three months and nine months ended September 30, 2011, respectively.
The Company also leases certain
furniture and equipment under financing arrangements expiring between February 2013 and December 2014.
A schedule of minimum future lease payments for
the following twelve-month periods is as follows:
|
|
|
|
|
September 30, 2013
|
|
$
|
498,328
|
|
September 30, 2014
|
|
|
346,171
|
|
September 30, 2015
|
|
|
280,041
|
|
September 30, 2016
|
|
|
204,330
|
|
September 30, 2017
|
|
|
27,888
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
1,356,758
|
|
|
|
|
|
|
Management Agreements
Each of the operating hotels that the Company wholly-owned at September 30,
2012, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate management agreement with MHI Hotels
Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 (see Note 9).
Franchise
Agreements
As of September 30, 2012, the Companys hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Company is required to pay a franchise fee generally between 2.5% and
5.0% of room revenues, plus additional fees that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between October 2014 and April 2023.
Restricted Cash Reserves
Each month, the Company is required to escrow with its lender on the Hilton
Wilmington Riverside and the Hilton Savannah DeSoto an amount equal to
1
/
12
of the
annual real estate taxes due for the properties. The Company is also required by several of its lenders to establish individual property improvement funds to cover the cost of replacing capital assets at its properties. Each month, contributions
equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Sheraton Louisville Riverside and the Crowne Plaza Hampton Marina and equal 4.0% of room revenues for the Hilton Philadelphia Airport.
Pursuant to the terms of the fifth amendment to the credit agreement and until its termination in March 2012, the Company was required to
escrow with its lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, the Company was required to make monthly contributions equal to 3.0% of room
revenues into a property improvement fund.
Litigation
The Company is not involved in any material litigation,
nor, to its knowledge, is any material litigation threatened against the Company. The Company is involved in routine legal proceedings arising out of the ordinary course of business, all of which the Company expects to be covered by insurance. The
Company does not expect any pending legal proceedings to have a material impact on its financial condition or results of operations.
8. Stockholders Equity
Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares
have been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued.
Common Shares
The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on
all matters submitted to a vote of stockholders. Holders of the Companys common stock are entitled to receive distributions when authorized by the Companys board of directors out of assets legally available for the payment of
distributions.
On January 25, 2011, the Company issued 16,000 non-restricted shares to its Chief Operating Officer and
President in accordance with the terms of his employment contract, as amended.
On March 22, 2011, the Company issued
17,500 shares of non-restricted stock to certain executives and employees as well as 12,000 shares of restricted stock to its then serving independent directors.
16
On June 7, 2011, one holder of units in the Operating Partnership redeemed 115,000
units for an equivalent number of shares of the Companys common stock.
On October 3, 2011, one holder of units in
the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Companys common stock.
On
November 1, 2011, one holder of units in the Operating Partnership redeemed 15,000 units for an equivalent number of shares of the Companys common stock.
On December 1, 2011, one holder of units in the Operating Partnership redeemed 187,000 units for an equivalent number of shares of the Companys common stock.
On February 2, 2012, the Company awarded an aggregate of 29,500 shares of unrestricted stock to certain executives and employees as
well as 1,500 shares of unrestricted stock and 15,000 shares of restricted stock to certain of its independent directors.
As
of September 30, 2012 and December 31, 2011, the Company had 9,999,786 and 9,953,786 shares of common stock outstanding, respectively.
Warrants
The Company has granted no warrants representing the right to purchase common stock other than the Warrant described in Note 6.
Operating Partnership Units
Holders of Operating Partnership units have certain redemption rights, which enable them to
cause the Operating Partnership to redeem their units in exchange for shares of the Companys common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the market price of the Companys common stock at
the time of redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect
of diluting the ownership interests of the limited partners or the stockholders of the Company.
On November 1,
2011, May 1, 2012 and August 1, 2012, the Company redeemed 2,600, 6,000 and 6,000 units, respectively, in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $43,330 pursuant to
the terms of the partnership agreement.
As of September 30, 2012, the total number of Operating Partnership units
outstanding was 2,972,839, with a fair market value of approximately $11.9 million based on the price per share of the common stock on that date.
9. Related Party Transactions
As of September 30, 2012, the members of MHI Hotels Services (a company that is majority-owned and controlled by
the Companys chief executive officer, its chief financial officer and a current and former member of its Board of Directors) owned approximately 10.8% of the Companys outstanding common stock and 1,851,670 Operating Partnership units.
The following is a summary of the transactions between the Company and MHI Hotels Services:
Accounts Receivable
The Company was due $7,345 and $24,880 from MHI Hotels Services at September 30, 2012 and December 31, 2011, respectively.
Shell Island Sublease
The Company has a sublease arrangement with MHI Hotels Services on its expired leasehold interests in the property at Shell Island. Leasehold revenue for the three
months and nine months ended September 30, 2012 was $87,500 and $262,500, respectively, and was $160,000 and $480,000 for the three months and nine months ended September 30, 2011, respectively. The leasehold interests expired on
December 31, 2011.
Strategic Alliance Agreement
On December 21, 2004, the Company entered into a
ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.
Management Agreements
Each of the hotels that the Company owned at September 30, 2012, except for the Crowne Plaza
Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate management agreement with MHI Hotels Services for the management of the
Crowne Plaza Tampa Westshore that expires in March 2019. Under both management agreements, MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base
management fee for any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross
revenues for every year thereafter. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company upon its formation, MHI Hotels Services agreed that the property in
Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, is due annually in arrears
17
within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross
operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation.
Base management fees earned by MHI Hotels Services totaled $649,445 and $1,994,398 for the three months and nine months ended
September 30, 2012, respectively, and $582,737 and $1,799,360 for the three months and nine months ended September 30, 2011, respectively. In addition, estimated incentive management fees of $54,092 and $166,145 were accrued for the three
months and nine months ended September 30, 2012, respectively, and estimated incentive management fees of $(16,188) and $68,431 were accrued for the three months and nine months ended September 30, 2011, respectively.
Employee Medical Benefits
The Company purchases employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI
Health), an affiliate of MHI Hotels Services. Premiums for employee medical benefits paid by the Company were $564,659 and $1,785,547 for the three months and nine months ended September 30, 2012, respectively and $608,502 and $1,876,807 for
the three months and nine months ended September 30, 2011, respectively.
10. Retirement Plan
The Company maintains a 401(k) plan for qualified employees which is subject to safe harbor provisions and
which requires that the Company match 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. All Company matching funds vest immediately in accordance with the safe harbor provision. Company
contributions to the plan totaled $12,308 and $48,113 for the three months and nine months ended September 30, 2012, respectively, and $9,440 and $40,994 for the three months and nine months ended September 30, 2011, respectively.
11. Unconsolidated Joint Venture
The Company owns a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort;
(ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the
hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these entities. The joint venture
purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment, which is accounted for under the equity method, is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
66,410,469
|
|
|
$
|
67,682,291
|
|
Cash and cash equivalents
|
|
|
3,528,779
|
|
|
|
2,589,871
|
|
Accounts receivable
|
|
|
136,580
|
|
|
|
255,233
|
|
Prepaid expenses, inventory and other assets
|
|
|
1,719,268
|
|
|
|
2,059,130
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
71,795,096
|
|
|
$
|
72,586,525
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
$
|
33,100,000
|
|
|
$
|
33,600,000
|
|
Accounts payable and other accrued liabilities
|
|
|
3,365,929
|
|
|
|
2,817,582
|
|
Advance deposits
|
|
|
401,173
|
|
|
|
301,952
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
36,867,102
|
|
|
|
36,719,534
|
|
TOTAL MEMBERS EQUITY
|
|
|
34,927,994
|
|
|
|
35,866,991
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS EQUITY
|
|
$
|
71,795,096
|
|
|
$
|
72,586,525
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2012
|
|
|
Three months ended
September 30, 2011
|
|
|
Nine months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms department
|
|
$
|
2,285,771
|
|
|
$
|
2,167,782
|
|
|
$
|
9,748,930
|
|
|
$
|
8,846,380
|
|
Food and beverage department
|
|
|
509,019
|
|
|
|
440,876
|
|
|
|
1,864,182
|
|
|
|
1,887,038
|
|
Other operating departments
|
|
|
337,036
|
|
|
|
265,186
|
|
|
|
953,643
|
|
|
|
837,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,131,826
|
|
|
|
2,873,844
|
|
|
|
12,566,755
|
|
|
|
11,571,402
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms department
|
|
|
647,369
|
|
|
|
527,917
|
|
|
|
2,130,035
|
|
|
|
1,865,238
|
|
Food and beverage department
|
|
|
425,006
|
|
|
|
375,832
|
|
|
|
1,489,930
|
|
|
|
1,405,916
|
|
Other operating departments
|
|
|
141,882
|
|
|
|
143,074
|
|
|
|
484,500
|
|
|
|
470,174
|
|
Indirect
|
|
|
1,551,360
|
|
|
|
1,456,369
|
|
|
|
5,027,190
|
|
|
|
4,517,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
2,765,617
|
|
|
|
2,503,192
|
|
|
|
9,131,655
|
|
|
|
8,259,106
|
|
Depreciation and amortization
|
|
|
542,683
|
|
|
|
549,493
|
|
|
|
1,825,653
|
|
|
|
1,645,602
|
|
General and administrative
|
|
|
11,987
|
|
|
|
9,037
|
|
|
|
62,958
|
|
|
|
76,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,320,287
|
|
|
|
3,061,722
|
|
|
|
11,020,266
|
|
|
|
9,980,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(188,461
|
)
|
|
|
(187,878
|
)
|
|
|
1,546,489
|
|
|
|
1,590,564
|
|
Interest expense
|
|
|
(440,161
|
)
|
|
|
(443,740
|
)
|
|
|
(1,315,745
|
)
|
|
|
(1,337,084
|
)
|
Loss on expiration of land purchase option
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
(75,000
|
)
|
Unrealized loss on hedging activities
|
|
|
(21,232
|
)
|
|
|
(427,539
|
)
|
|
|
(169,741
|
)
|
|
|
(822,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(649,854
|
)
|
|
$
|
(1,134,157
|
)
|
|
$
|
61,003
|
|
|
$
|
(644,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
12. Income Taxes
The components of the income tax provision for the three
months and nine months ended September 30, 2012 and 2011 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2012
|
|
|
Three months ended
September 30, 2011
|
|
|
Nine months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
(40
|
)
|
|
$
|
16
|
|
State
|
|
|
1
|
|
|
|
2
|
|
|
|
10
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
4
|
|
|
|
(30
|
)
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11
|
|
|
|
(65
|
)
|
|
|
880
|
|
|
|
580
|
|
State
|
|
|
6
|
|
|
|
(11
|
)
|
|
|
241
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
(76
|
)
|
|
|
1,121
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28
|
|
|
$
|
(72
|
)
|
|
$
|
1,091
|
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax
expense (benefit) to the Companys income tax provision is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2012
|
|
|
Three months ended
September 30, 2011
|
|
|
Nine months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Statutory federal income tax benefit
|
|
$
|
(501
|
)
|
|
$
|
(533
|
)
|
|
$
|
(1,883
|
)
|
|
$
|
(785
|
)
|
Effect of non-taxable REIT loss
|
|
|
522
|
|
|
|
470
|
|
|
|
2,723
|
|
|
|
1,381
|
|
State income tax expense (benefit)
|
|
|
7
|
|
|
|
(9
|
)
|
|
|
251
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28
|
|
|
$
|
(72
|
)
|
|
$
|
1,091
|
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012 and December 31, 2011, the Company had a net deferred tax asset of approximately
$2.9 million and $4.1 million, respectively, of which, approximately $2.2 million and $3.4 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by such time. As of
September 30, 2012 and December 31, 2011, approximately $0.4 million of the net deferred tax asset is attributable to the Companys share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses
related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to
year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation. The Company believes that it is more likely than not that the deferred tax asset will be
realized and that no valuation allowance is required.
13. Earnings Per Share
The limited partners outstanding limited partnership units in the Operating Partnership (which may be redeemed
for common stock upon notice from the limited partners and following the Companys election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the
amounts since the limited partners share of income would also be added back to net income. The computation of basic and diluted earnings per share is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2012
|
|
|
Three months ended
September 30, 2011
|
|
|
Nine months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company for basic computation
|
|
$
|
(1,615,020
|
)
|
|
$
|
(1,117,042
|
)
|
|
$
|
(5,563,029
|
)
|
|
$
|
(2,288,925
|
)
|
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest
|
|
|
(27,738
|
)
|
|
|
(6,543
|
)
|
|
|
(74,373
|
)
|
|
|
(9,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company for dilutive computation
|
|
$
|
(1,642,758
|
)
|
|
$
|
(1,123,585
|
)
|
|
$
|
(5,637,402
|
)
|
|
$
|
(2,298,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2012
|
|
|
Three months ended
September 30, 2011
|
|
|
Nine months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for basic computation
|
|
|
9,999,786
|
|
|
|
9,701,786
|
|
|
|
9,994,246
|
|
|
|
9,627,006
|
|
Dilutive effect of warrants
|
|
|
801,604
|
|
|
|
100,592
|
|
|
|
608,994
|
|
|
|
165,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number common shares outstanding for dilutive computation
|
|
|
10,801,390
|
|
|
|
9,802,378
|
|
|
|
10,603,240
|
|
|
|
9,792,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share takes into consideration the pro forma dilution of certain unvested stock awards.
14. Subsequent Events
On October 11, 2012, the Company paid a quarterly dividend (distribution) of $0.03 per common share (and unit) to
those stockholders (and unitholders of MHI Hospitality, L.P.) of record on September 14, 2012.
On October 22, 2012,
the Company authorized payment of a quarterly dividend (distribution) of $0.03 per common share (and unit) to those stockholders (and unitholders of MHI Hospitality, L.P.) of record as of December 14, 2012. The dividend (distribution) is to be
paid on January 11, 2013.