sv11za
As filed with the
Securities and Exchange Commission on February 2,
2011
Registration
No. 333-170176
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF
1933
OF SECURITIES
OF CERTAIN REAL ESTATE
COMPANIES
CHATHAM LODGING TRUST
(Exact name of registrant as
specified in governing instruments)
50 Cocoanut Row,
Suite 216
Palm Beach, Florida
33480
(561) 802-4477
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Jeffrey H. Fisher
Chief Executive
Officer
50 Cocoanut Row,
Suite 216
Palm Beach, Florida
33480
(561) 802-4477
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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David C. Wright
Hunton & Williams LLP
Riverfront Plaza, East Tower
951 E. Byrd Street
Richmond, Virginia
23219-4074
(804) 788-8200
(804) 788-8218
(Telecopy)
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Julian T. H. Kleindorfer
Latham & Watkins LLP
355 South Grand Avenue
Los Angeles, California 90071-1560
(213) 485-1234
(213) 891-8763 (Telecopy)
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the Securities registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
CALCULATION OF
REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Securities Being
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Aggregate
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Registration
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Registered
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Offering
Price(1)(2)
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Fee(1)
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Common shares of beneficial interest, $0.01 par value
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$
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150,000,000
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$
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10,695
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(1) |
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Estimated solely for the purpose of
computing the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933, as amended.
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(2) |
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Includes the offering price of
common shares that may be purchased by the underwriters upon the
exercise of their over-allotment option.
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The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion, dated
February 2, 2011
PROSPECTUS
4,000,000 Shares
Common Shares
We are offering 4,000,000 common shares of beneficial interest,
$0.01 par value per share, or common shares. Our common shares
are listed on the New York Stock Exchange, or NYSE, under the
symbol CLDT. The last reported sale price of our
common shares on the NYSE on February 1, 2011 was
$16.96 per share.
We are organized and conduct our operations to qualify as a real
estate investment trust, or REIT, for federal income tax
purposes. To assist us in qualifying as a REIT, among other
reasons, ownership of our outstanding common shares by any
person is limited to 9.8% by value or number of shares,
whichever is more restrictive, subject to certain exceptions. In
addition, our declaration of trust contains various other
restrictions on the ownership and transfer of our common shares.
Investing in our common shares involves risks. See
Risk Factors beginning on page 10 of this
prospectus for a discussion of risks that you should consider
before investing in our common shares.
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Per Share
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Total
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Price to the public
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds to us (before expenses)
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$
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$
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We have granted the underwriters the option to purchase up to an
additional 600,000 common shares from us, at the offering price,
less the underwriting discount, within 30 days of the date
of this prospectus to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Barclays Capital, on behalf of the underwriters, expects to
deliver the common shares on or about
February , 2011.
Joint Book-Running Managers
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Barclays
Capital |
UBS Investment Bank |
Joint Lead Manager
FBR Capital Markets
Co-Managers
Prospectus dated February , 2011
TABLE OF
CONTENTS
The names of the brands under which our hotels operate are
registered trademarks of the respective owners of those brands,
and neither they nor any of their officers, directors, agents,
employees, accountants or attorneys:
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have approved any disclosure in which they or the names of their
brands appear; or
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are responsible or liable for any of the content of this
document.
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You should rely only on the information contained in this
prospectus, any free writing prospectus prepared by us or
information to which we have referred you. We have not, and the
underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information
appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus or another date specified
herein. Our business, financial condition and prospects may have
changed since such dates.
Until ,
2011 (the 25th day after the date of this prospectus), all
dealers that effect transactions in our common shares, whether
or not participating in the offering, may be required to deliver
a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
i
PROSPECTUS
SUMMARY
The following summary highlights information contained
elsewhere in this prospectus. This summary is not complete and
does not contain all of the information that you should consider
before investing in our common shares. You should read the
entire prospectus, including Risk Factors, before
making a decision to invest in our common shares. In this
prospectus, references to our company,
we, us, and our mean Chatham
Lodging Trust and our subsidiaries and references to our
operating partnership mean Chatham Lodging, L.P.
Unless otherwise indicated, the information contained in this
prospectus assumes (1) the sale of 4,000,000 common shares
at $16.96 per share, the last reported sale price of our
common shares on the NYSE on February 1, 2011 and
(2) no exercise by the underwriters of their over-allotment
option to purchase up to 600,000 additional common
shares.
Overview
We are a self-advised hotel investment company organized in
October 2009 to invest in premium-branded upscale extended-stay
and select-service hotels. In April 2010, we raised net proceeds
of approximately $158.7 million in our initial public
offering of common shares, or IPO, and an additional
$10 million through a concurrent private placement of our
common shares to Jeffrey H. Fisher, our Chairman, President and
Chief Executive Officer. Since the completion of our IPO, we
have acquired 13 hotels with an aggregate of 1,650 rooms in nine
states for approximately $209 million and have entered into
a contract to purchase a hotel located in the greater
Pittsburgh, Pennsylvania area for approximately $25 million. We
have funded our acquisitions to date with the net proceeds of
our IPO and private placement, through the assumption of debt
and with borrowings under our senior secured revolving credit
facility. We expect to finance the acquisition of the hotel we
have under contract to purchase from the net proceeds of this
offering and through the assumption of $7.3 million in
debt. Our portfolio includes upscale extended-stay hotels that
operate under the Homewood Suites by
Hilton®
brand (seven hotels) and Residence Inn by
Marriott®
brand (three hotels), as well as premium-branded select-service
hotels that operate under the Courtyard by
Marriott®
brand (one hotel), Hampton Inn and Suites by
Hilton®
brand (one hotel) and SpringHill Suites by
Marriott®
brand (one hotel).
We focus our hotel investments primarily in the 25 largest
metropolitan markets in the United States. We believe that
current market conditions will continue to create attractive
opportunities to acquire high quality hotels at cyclically low
prices that will benefit from an improving economy and our
aggressive asset management.
Our management team, led by Mr. Fisher, has extensive
experience acquiring, developing, financing, repositioning,
managing and selling hotels. Prior to forming Chatham Lodging
Trust, Mr. Fisher served as chairman, chief executive
officer and president of Innkeepers USA Trust, or Innkeepers, a
New York Stock Exchange-listed hotel REIT, from its inception in
1994 through its sale in June 2007. In addition, Peter Willis,
our Executive Vice President and Chief Investment Officer, and
Dennis M. Craven, our Executive Vice President and
Chief Financial Officer, served in similar positions at
Innkeepers.
In addition to the hotel we have under contract to purchase, we
have identified and are in various stages of reviewing and
negotiating a number of additional potential hotel acquisition
opportunities. As of February 1, 2011, we were actively
reviewing potential hotel acquisitions having an aggregate
transaction value in excess of $200 million, based on our
preliminary discussions with sellers and our internal assessment
of the properties values. Our management team sourced
these potential acquisitions through its extensive relationships
with hotel owners, management companies, franchisors, brokers,
banks, insurance companies, public institutions, fund managers,
REITs, private investors and developers.
1
Our acquisition of these properties is subject to us negotiating
and executing with the sellers mutually acceptable definitive
and binding purchase and sale agreements with respect to the
properties, which we expect will contain a number of conditions
to closing the acquisitions, including:
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(i)
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our ability to negotiate and execute new management agreements
and franchise agreements, or assume the existing agreements, for
the properties,
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(ii)
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our completion of satisfactory due diligence with respect to the
properties,
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(iii)
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lender approval of our assumption of existing indebtedness with
respect to certain of the properties, and
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(iv)
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satisfaction of customary closing conditions.
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There can be no assurance that the sellers of the properties
discussed above will be willing to proceed with the
transactions, that we will be able to negotiate and execute
satisfactory definitive purchase and sale agreements with the
sellers, that our due diligence will be satisfactory or that the
conditions to closing will be satisfied.
Upon completion of this offering and the application of the net
proceeds as described in Use of Proceeds, we expect
to have approximately
$ million of cash, together
with $85 million of borrowing capacity under our credit
facility, available to invest in additional hotel properties.
We intend to elect and qualify to be treated as a REIT for
federal income tax purposes.
Our
Hotels
The following table sets forth certain operating information for
each of our hotels. The operating data includes periods prior to
our acquisition of these hotels.
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Number
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Purchase
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Nine Months Ended
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Date of
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Year
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of
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Purchase
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Price per
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Assumed
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September 30, 2010
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Property
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Location
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Acquisition
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Opened
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Rooms
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Price
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Room
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Debt
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Occupancy
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ADR
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RevPAR
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(Unaudited)
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Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington
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Billerica, Massachusetts
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April 23, 2010
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1999
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147
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$12.5 million
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$
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85,714
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72.2
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%
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$
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111.36
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$
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80.40
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Homewood Suites by Hilton Minneapolis-Mall of America
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Bloomington, Minnesota
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April 23, 2010
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1998
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144
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$18.0 million
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$
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125,000
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86.9
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$
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108.82
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$
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94.58
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Homewood Suites by Hilton Nashville-Brentwood
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Brentwood, Tennessee
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April 23, 2010
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1998
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121
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$11.3 million
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$
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93,388
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76.0
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%
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$
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100.45
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$
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76.30
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Homewood Suites by Hilton Dallas-Market Center
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Dallas, Texas
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April 23, 2010
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1998
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137
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$10.7 million
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$
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78,102
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65.7
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%
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$
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98.63
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$
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64.80
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Homewood Suites by Hilton Hartford-Farmington
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Farmington, Connecticut
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April 23, 2010
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1999
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121
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$11.5 million
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$
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95,041
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68.2
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%
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$
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110.42
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$
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75.34
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Homewood Suites by Hilton Orlando-Maitland
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Maitland, Florida
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April 23, 2010
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2000
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143
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$9.5 million
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$
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66,433
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67.6
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%
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$
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94.90
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$
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64.14
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Hampton Inn & Suites Houston-Medical Center
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Houston, Texas
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July 2, 2010
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1997
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120
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$16.5 million
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$
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137,500
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76.3
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%
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$
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113.27
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$
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86.42
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Residence Inn Long Island Holtsville
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Holtsville, New York
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August 3, 2010
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2004
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124
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$21.3 million
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$
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171,774
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84.2
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%
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$
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119.48
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$
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100.66
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Courtyard Altoona
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Altoona, Pennsylvania
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August 24, 2010
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2001
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105
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$11.3 million
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$
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107,619
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$7.0 million
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71.6
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%
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$
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99.51
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$
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71.23
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Springhill Suites
Washington
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Washington, Pennsylvania
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August 24, 2010
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2000
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86
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$12.0 million
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$
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139,535
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$5.4 million
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85.6
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%
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$
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103.00
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$
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88.15
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Residence Inn White Plains
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White Plains, New York
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September 23, 2010
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1982
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133
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$21.2 million
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$
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159,398
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86.4
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%
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$
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138.12
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$
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119.32
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Residence Inn New Rochelle
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New Rochelle, New York
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October 5, 2010
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2000
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124
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$21.0 million
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$
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169,355
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87.8
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%
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$
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149.63
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$
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131.43
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Homewood Suites by Hilton Carlsbad (North San Diego County)
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Carlsbad, California
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November 3, 2010
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2008
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145
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$32.0 million
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$
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220,690
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88.7
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%
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$
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134.86
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$
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119.65
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Total/Weighted Average
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1,650
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$208.9 million
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$
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126,606
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$12.4 million
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78.2
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%
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$
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115.74
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$
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90.46
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Occupancy represents the average daily occupancy rate for the
period presented. |
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ADR represents average daily rate. |
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RevPAR represents room revenue per available room, calculated as
total revenue divided by available room nights. |
2
Recent
Developments
Hotel Under
Contract
The following table sets forth certain operating information
with respect to the hotel we have under contract to purchase.
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Year
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Nine Months Ended
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Opened/
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Purchase
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Assumed
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September 30, 2010
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Property
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Location
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Renovated
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Price
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Debt
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Occupancy
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ADR
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RevPAR
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(Unaudited)
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Greater Pittsburgh hotel
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Pittsburgh, Pennsylvania
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2000
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$24.9 million
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$
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7.3 million
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76.9%
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$
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118.83
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$
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91.40
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The closing of the purchase of the greater Pittsburgh hotel is
subject to satisfaction of customary closing requirements and
conditions. There is no assurance that this acquisition will be
consummated in a timely manner or at all.
Credit
Facility
On October 12, 2010, we entered into an $85 million
senior secured revolving credit facility to fund future
acquisition, redevelopment and expansion activities. Subject to
the consent of the lenders, we may increase the credit facility
by an additional $25 million, for an aggregate principal
amount of $110 million. The credit facility has a
three-year term and bears interest at our choice of
(i) LIBOR (subject to a floor of 1.25%) plus a margin
between 3.25% and 4.25%, depending on our leverage ratio, or
(ii) a base rate based on the federal funds rate or the
administrative agents then current prime rate
plus a margin between 2.25% to 3.25%, depending on our leverage
ratio. See Management Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. We intend to repay amounts outstanding
under the credit facility from time to time with the proceeds
received from periodic issuances of common and preferred shares,
long-term debt financings and cash flows from operations.
Other
Matters
Although our audited consolidated financial statements for the
year ended December 31, 2010 are not yet complete, we
currently anticipate reporting pro forma revenue per available
room, or RevPAR, for our 13 hotels of $83.27 for the three
months ended December 31, 2010, a 3.5% increase over RevPAR
of $80.48 for these 13 hotels for the three months ended
December 31, 2009. RevPAR for the three months ended
December 31, 2009 and, for a portion of the three months
ended December 31, 2010 with respect to the Residence Inn
by Marriott in New Rochelle, New York and the Homewood
Suites by Hilton in Carlsbad (North San Diego County),
California, reflects operations of the hotels prior to our
ownership. RevPAR for a portion of the three months ended
December 31, 2010 also reflects the adverse impact of
389 rooms (or approximately 24% of our total
portfolio) that were out of service during part of this period
due to accelerated renovations at three of our 13 hotels.
These renovations, as well as renovations at two additional
hotels that begin in the first quarter of 2011, are expected to
continue throughout the first quarter of 2011. Together, we
expect these renovations to account for a total of
670 rooms, or 41% of our total rooms. As a result of these
ongoing renovations, we expect our portfolio RevPAR will
continue to be adversely impacted through the first quarter of
2011.
We have prepared our anticipated RevPAR for the three months
ended December 31, 2010 in good faith based on our internal
reporting. However, our anticipated RevPAR for the three months
ended December 31, 2010 is derived from our anticipated
total revenue for the three months ended December 31, 2010,
an amount that has not been audited and is subject to revision
based on the completion of the accounting and financial
reporting processes necessary to finalize our consolidated
financial statements as of and for the year ended
December 31, 2010. PricewaterhouseCoopers LLP has not
audited, reviewed, compiled or performed any procedures with
respect to our anticipated RevPAR for the three months ended
December 31, 2010. Accordingly, PricewaterhouseCoopers LLP
does not express an opinion or any other form of assurance with
respect to that information. We cannot assure
3
you that, upon completion of such accounting and financial
reporting processes and finalizing the financial statements as
of and for the year ended December 31, 2010, we will not
report RevPAR for the three months ended December 31, 2010
materially different than as set forth above. This information
should be read in conjunction with the consolidated financial
statements and the related notes and Management Discussion
and Analysis of Financial Condition and Results Of
Operations for prior periods included elsewhere in this
prospectus.
On September 27, 2010, we declared our first dividend, a
third quarter dividend of $0.175 per common share, which was
paid on October 29, 2010 to shareholders of record as of
October 15, 2010. On December 16, 2010, we declared
our second dividend, a fourth quarter dividend of $0.175 per
common share, which was paid on January 14, 2011 to
shareholders of record as of December 31, 2010.
On September 9, 2010, we appointed Dennis M. Craven as our
Executive Vice President and Chief Financial Officer. See
Management Trustees and Executive
Officers.
Market
Opportunity
We believe current market conditions will continue to create
attractive opportunities to acquire hotel properties at prices
that represent significant discounts to replacement cost and
that provide potential for significant long-term value
appreciation. Operating performance of the U.S. hotel
industry declined significantly in 2008 and 2009 due to
challenging economic conditions created by declining gross
domestic product, or GDP, high levels of unemployment, low
consumer confidence, a significant decline in home prices and a
reduction in the availability of credit. While the
U.S. hotel industry has shown improvement since the time of
our IPO, industry operating performance remains significantly
below pre-2008 levels. In addition to facing weakened operating
performance, hotel owners have been adversely impacted by a
significant decline in the availability of debt financing. We
believe that the combination of a decline in operating
performance and reduction in the availability of debt financing
has caused hotel values to decline in recent years and will
continue to lead to increased hotel loan foreclosures and
distressed hotel property sales. In addition, we believe that
the supply of new hotels is likely to remain low for the next
several years due to limited availability of debt financing.
Hotel industry operating performance historically has correlated
with U.S. GDP growth, and a number of economists and
government agencies currently predict that the U.S. economy
will grow over the next several years. We believe that
U.S. GDP growth, coupled with limited supply of new hotels,
will lead to increases in lodging industry RevPAR and hotel
operating profits. We believe that our management teams
significant experience in acquiring hotels, our growth oriented
capital structure, and our focused business strategy will
position us to take advantage of hotel investment opportunities
created by current market conditions.
Competitive
Strengths
Experienced management team: We believe that
our senior executive officers, who have extensive lodging
industry experience, will help drive our companys growth.
Our management team is led by Mr. Fisher, who has over
24 years of experience in the lodging industry, including
13 years as founder and chief executive officer of
Innkeepers. Mr. Fisher has longtime relationships with
hotel owners, developers, management companies, franchisors,
brokers, financiers, research analysts and institutional
investors.
Strong acquisition and growth record: Our
management team has executed our initial acquisition growth
strategy, having acquired 13 premium-branded upscale
extended-stay and select-service hotels since our IPO.
Additionally, prior to our formation, Mr. Fisher oversaw
the growth of Innkeepers through a $46.9 million IPO in
1994 and served as its chairman and chief executive officer
until it was sold in 2007 for a total enterprise value of
$1.5 billion.
Prudent capital structure: We believe that
many potential buyers of hotel properties typically utilize
significant levels of debt to fund acquisitions and thus may be
limited in their ability to make acquisitions under current
market conditions. In addition, we believe many potential buyers
of hotel
4
properties already have high leverage levels that could limit
their ability to acquire additional properties. Upon completion
of this offering and application of the net proceeds, as
described in Use of Proceeds, we will have
approximately $ million of
cash, together with $85 million of borrowing capacity under
our credit facility, available to invest in additional hotel
properties and to fund renovations at our existing properties,
and only $12.4 million in debt. We plan to maintain a
prudent capital structure and intend to limit our consolidated
indebtedness, net of cash, to not more than 35% of our
investment in hotel properties at cost (defined as our initial
acquisition price plus the gross amount of any subsequent
capital investment and excluding any impairment charges).
Longtime relationships with leading lodging franchise and
management companies: Mr. Fisher has
longtime relationships with several leading hotel franchise and
management companies, having acquired and developed a
significant number of hotels that operate under premium hotel
brands, including but not limited to Marriotts Residence
Inn®
and Courtyard by
Marriott®
brands as well as Hiltons Homewood
Suites®
and Hampton
Inn®
brands, among others.
Strategy and
Investment Criteria
Our primary objective is to generate attractive returns for our
shareholders through investing in hotel properties at prices
that provide strong returns on invested capital, paying
dividends and generating long-term value appreciation. We
believe we can create long-term value by pursuing the following
strategies:
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Disciplined acquisition of hotel
properties: We invest primarily in
premium-branded upscale extended-stay and select-service hotels
with a focus on the 25 largest metropolitan markets in the
United States. We focus on acquiring hotel properties at prices
below replacement cost in markets that have strong demand
generators and where we expect demand growth will outpace new
supply. We also seek to acquire properties that we believe are
undermanaged or undercapitalized. We currently do not intend to
engage in new hotel development.
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Opportunistic hotel repositioning: We employ
value-added strategies, such as re-branding, renovating, or
changing management, when we believe such strategies will
increase the operating results and values of the hotels we
acquire.
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Aggressive asset management: Although as a
REIT we cannot operate our hotels, we proactively manage our
third-party hotel managers in seeking to maximize hotel
operating performance. Our asset management activities seek to
ensure that our third-party hotel managers effectively utilize
franchise brands marketing programs, develop effective
sales management policies and plans, operate properties
efficiently, control costs, and develop operational initiatives
for our hotels that increase guest satisfaction. As part of our
asset management activities, we regularly review opportunities
to reinvest in our hotels to maintain quality, increase
long-term value and generate attractive returns on invested
capital.
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Flexible selection of hotel management
companies: We are flexible in our selection of
hotel management companies and select managers that we believe
will maximize the performance of our hotels. We utilize both
brand-affiliated management companies and independent management
companies, including Island Hospitality Management Inc., or IHM,
a hotel management company 90% owned by Mr. Fisher that
currently manages five of our hotels. We believe this strategy
increases the universe of potential acquisition opportunities we
can consider because many hotel properties are encumbered by
long-term management contracts.
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Selective investment in hotel debt: We may
consider selectively investing in debt secured by hotel property
if we believe we can foreclose on or acquire ownership of the
underlying hotel property in the relative near term. We do not
intend to invest in any debt
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where we do not expect to gain ownership of the underlying
property or to originate any debt financing.
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Summary Risk
Factors
An investment in our common shares involves various risks. You
should carefully consider the matters discussed in Risk
Factors beginning on page 10 of this prospectus
before you decide whether to invest in our common shares. Some
of the risks include the following:
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We were organized in October 2009 and have limited operating
history.
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The closing of our purchase of the hotel we have under contract
is subject to customary closing conditions and may not be
consummated in a timely manner or at all.
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Our success depends upon the efforts and expertise of our
management team. The loss of their services, and our inability
to find suitable replacements, could have an adverse impact on
our business.
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A substantial part of our business strategy is based on our
belief that lodging industry fundamentals will improve. If these
fundamentals do not improve when or as we expect, or
deteriorate, our ability to execute our business strategy and
our financial condition, operating results and cash flow may be
adversely affected.
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We rely on third-party hotel management companies to operate our
hotel properties under the terms of hotel management agreements.
Even if we believe our hotel properties are being operated
inefficiently or in a manner that does not result in
satisfactory RevPAR or profits, we may not be able to force the
hotel management company to change its method of operating our
hotels.
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Our hotel management agreements require us, through the
wholly-owned subsidiaries of our taxable REIT subsidiaries, or
TRSs, to bear the operating risks of our hotel properties. We
refer to our TRSs and their wholly-owned subsidiaries as our TRS
lessees. Any increases in hotel operating expenses or decreases
in revenues may have a significant adverse impact on our
operating results and cash flow.
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Because our chief executive officer, Mr. Fisher, owns 90%
of IHM, a hotel management company that currently manages five
of our hotels and that we may engage to manage certain
additional hotels we acquire in the future, conflicts of
interest may arise as to the terms of management agreements
between us and IHM.
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To qualify and maintain our qualification for taxation as a
REIT, we are generally required to distribute at least 90% of
our REIT taxable income, determined without regard to the
deduction for dividends paid and excluding any net capital gain,
each year to our shareholders and we will be subject to regular
corporate income taxes to the extent that we distribute less
than 100% of our REIT taxable income each year. As a result, our
ability to fund capital expenditures, acquisitions and hotel
redevelopment through retained earnings is very limited. We may
not be able to fund capital improvements or acquisitions solely
from cash provided from our operating activities. Consequently,
after investing the net proceeds of this offering, we will rely
upon the availability of debt or equity capital to fund
investments in hotel properties and capital improvements. There
can be no assurance that we will be able to obtain such
financing on favorable terms or at all. We also may not generate
sufficient cash flow to fund distributions required to maintain
our qualification as a REIT.
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Funding distributions to shareholders from the net proceeds of
this offering could be dilutive to our financial results.
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If we fail to qualify, or lose our qualification, as a REIT, we
will be subject to federal income tax on our taxable income. Our
hotel properties leased by our TRS lessees must be operated by
eligible independent contractors, as defined in the
Internal Revenue Code of 1986, as amended, or the Code, in order
for the rental income from our TRS leases to qualify as rents
from real property under the applicable REIT gross income tests.
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Complex constructive ownership rules under the Code apply in
determining whether a person qualifies as an eligible
independent contractor.
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We will incur a 100% excise tax on transactions with any of our
TRSs, including our TRS lessees, that are not conducted on an
arms-length basis.
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Subject to certain exceptions, our declaration of trust provides
that no person may beneficially own more than 9.8% in value or
in number of shares, whichever is more restrictive, of the
outstanding shares of any class or series of our shares of
beneficial interest. In addition, our declaration of trust and
bylaws contain other provisions that may delay, defer or prevent
an acquisition of control of our company by a third party
without our board of trustees approval, even if our
shareholders believe the change of control is in their best
interests.
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Because real estate investments are relatively illiquid, our
ability to promptly sell one or more hotel properties for
reasonable prices in response to changing economic, financial
and investment conditions is limited. In addition, because some
of our hotel management agreements may be long-term and may not
terminate in the event of a sale, our ability to sell hotel
properties may be further limited.
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Our
Organizational Structure
We were formed as a Maryland real estate investment trust in
October 2009. We are the sole general partner of Chatham
Lodging, L.P., the subsidiary through which we conduct
substantially all of our operations and make substantially all
of our investments and which we refer to as our operating
partnership. Upon completion of this offering, we will
contribute to our operating partnership the net proceeds of this
offering in exchange for additional limited partnership
interests in our operating partnership. In the future we may
issue limited partnership interests in our operating partnership
as consideration for the purchase of hotel properties or in
connection with our Equity Incentive Plan.
In order for the income from our hotel operations to constitute
rents from real property for purposes of the gross
income tests required for REIT qualification under the Code, we
cannot directly operate any of our hotel properties. Instead, we
must lease our hotel properties. Accordingly, we lease each of
our hotel properties to one of our TRS lessees, which are wholly
owned by our operating partnership. Our TRS lessees pay rent to
us that can qualify as rents from real property,
provided that the TRS lessees engage eligible independent
contractors to manage our hotels. A TRS is a corporate
subsidiary of a REIT that jointly elects with the REIT to be
treated as a TRS of the REIT and that pays federal income tax at
regular corporate rates on its taxable income. We expect that
all of our hotel properties will continue to be leased to one of
our wholly owned TRS lessees, which pay us rent out of the
revenue of the hotels and engage multiple eligible independent
contractors to manage our hotels.
7
The following chart shows the structure of our company:
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(1) |
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Includes grants of an aggregate of 40,000 restricted common
shares to our independent trustees. Also includes 10,450
restricted common shares awarded to each of Messrs. Willis
and Craven pursuant to our Equity Incentive Plan as part of our
2010 compensation program. |
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(2) |
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Includes 15,650 restricted common shares awarded to
Mr. Fisher pursuant to our Equity Incentive Plan as part of
our 2010 compensation program. |
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Upon completion of our IPO, we issued an aggregate of 231,525
long-term incentive plan, or LTIP, units in our operating
partnership to Messrs. Fisher and Willis. In addition, we issued
26,250 LTIP units to Mr. Craven upon commencement of
his employment in September 2010. See Compensation
Discussion and Analysis Equity Incentive Plan. |
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Includes IHM. |
Tax
Status
Upon filing our federal income tax return for our short taxable
year ended December 31, 2010, we will elect to be taxed as
a REIT for federal income tax purposes. Our qualification as a
REIT depends upon our ability to meet, on a continuing basis,
through actual investment and operating results, various complex
requirements under the Code relating to, among other things, the
sources of our gross income, the composition and values of our
assets, our distribution levels and the diversity of ownership
of our shares of beneficial interest. We believe that we were
organized in conformity with the requirements for qualification
as a REIT under the Code and that our current and intended
manner of operation will enable us to meet the requirements for
qualification and taxation as a REIT for federal income tax
purposes commencing with our short taxable year ended
December 31, 2010 and continuing thereafter.
As a REIT, we generally will not be subject to federal income
tax on our REIT taxable income that we distribute currently to
our shareholders. Under the Code, REITs are subject to numerous
organizational and operational requirements, including a
requirement that they distribute each year at least 90% of their
taxable income, determined without regard to the deduction for
dividends paid and excluding any net capital gains. If we fail
to qualify for taxation as a REIT in any taxable year and do not
qualify for certain statutory relief provisions, our income for
that year will be taxed at regular corporate rates, and we will
be disqualified from taxation as a REIT for the four taxable
years following the year during which we ceased to qualify as a
REIT. Even if we qualify as a REIT for federal income
8
tax purposes, we may still be subject to state and local taxes
on our income and assets and to federal income and excise taxes
on our undistributed income. Additionally, any income earned by
our TRS lessees will be fully subject to federal, state and
local corporate income tax.
Distribution
Policy
We intend over time to make regular quarterly distributions to
our common shareholders. In order to qualify and maintain our
qualification for taxation as a REIT, we intend to make annual
distributions to our shareholders of at least 90% of our taxable
income, determined without regard to the deduction for dividends
paid and excluding any net capital gains. On September 27,
2010, we declared our first dividend, a third quarter dividend
of $0.175 per common share, which was paid on October 29,
2010 to shareholders of record as of October 15, 2010. On
December 16, 2010, we declared our second dividend, a
fourth quarter dividend of $0.175 per common share, which
was paid on January 14, 2011 to shareholders of record as
of December 31, 2010. Distributions will be authorized by
our board of trustees and declared by us based upon a variety of
factors deemed relevant by our board of trustees. Distributions
to our shareholders generally will be taxable to our
shareholders as ordinary income; however, because a significant
portion of our investments represent ownership of equity
interests in hotel properties, which generate depreciation and
other non-cash charges against our income, a portion of our
distributions may constitute a tax-free return of capital. To
the extent not inconsistent with qualifying and maintaining our
qualification as a REIT, we may retain any earnings that
accumulate in our TRSs.
Restrictions on
Ownership of Our Common Shares
In order to help us qualify as a REIT, among other reasons, our
declaration of trust, subject to certain exceptions, restricts
the amount of our shares of beneficial interest that a person
may beneficially or constructively own. Our declaration of trust
provides that, subject to certain exceptions, no person may
beneficially or constructively own more than 9.8% in value or in
number of shares, whichever is more restrictive, of the
outstanding shares of any class or series of our shares of
beneficial interest. Our declaration of trust also prohibits any
person from (i) beneficially owning shares of beneficial
interest to the extent that such beneficial ownership would
result in our being closely held within the meaning
of Section 856(h) of the Code (without regard to whether
the ownership interest is held during the last half of the
taxable year), (ii) transferring our shares of beneficial
interest to the extent that such transfer would result in our
shares of beneficial interest being beneficially owned by less
than 100 persons (determined under the principles of
Section 856(a)(5) of the Code), (iii) beneficially or
constructively owning our shares of beneficial interest to the
extent such beneficial or constructive ownership would cause us
to constructively own ten percent or more of the ownership
interests in a tenant (other than a TRS) of our real property
within the meaning of Section 856(d)(2)(B) of the Code or
(iv) beneficially or constructively owning or transferring
our shares of beneficial interest if such ownership or transfer
would otherwise cause us to fail to qualify as a REIT under the
Code, including, but not limited to, as a result of any hotel
management companies failing to qualify as an eligible
independent contractor under the REIT rules. Our board of
trustees, in its sole discretion, may prospectively or
retroactively exempt a person from certain of these limits and
may establish or increase an excepted holder percentage limit
for such person. The person seeking an exemption must provide to
our board of trustees such representations, covenants and
undertakings as our board of trustees may deem appropriate in
order to conclude that granting the exemption will not cause us
to lose our status as a REIT.
9
The
Offering
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Common shares offered |
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4,000,000 common shares (plus up to 600,000 additional common
shares that we may issue and sell upon exercise of the
underwriters over-allotment option). |
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Common shares outstanding upon completion of this offering |
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13,220,854 common
shares(1) |
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Use of proceeds |
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We will contribute the net proceeds of this offering to our
operating partnership. We intend to use approximately
$43 million of the net proceeds of this offering to pay
down debt under our credit facility and approximately $18
million of the net proceeds of this offering to complete the
acquisition of a hotel located in the greater Pittsburgh,
Pennsylvania area, which we currently have under contract to
purchase. |
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Our operating partnership will use the remaining net proceeds to
invest in additional hotel properties in accordance with our
investment strategy described in this prospectus and for general
business purposes, including renovations and upgrades of guest
rooms and common areas at certain of our hotels. Prior to the
full investment of the net offering proceeds in hotel
properties, we intend to invest in interest-bearing short-term
securities or money-market accounts that are consistent with our
intention to qualify as a REIT. These initial investments are
expected to provide a lower net return than we will seek to
achieve from investments in hotel properties. See Use of
Proceeds. |
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New York Stock Exchange symbol |
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CLDT |
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Ownership and transfer restrictions |
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Our declaration of trust, subject to certain exceptions,
prohibits any person from directly or indirectly owning more
than 9.8% by value or number of shares, whichever is more
restrictive, of the outstanding shares of any class or series of
our shares of beneficial interest. See Description of
Shares of Beneficial Interest Restrictions on
Ownership and Transfer. |
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Risk Factors |
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Investing in our common shares involves risks. You should
carefully read and consider the information set forth under
Risk Factors and all other information in this
prospectus before investing in our common shares. |
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(1) |
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Includes 40,000 restricted common shares issued to our
independent trustees concurrent with the closing of our IPO
under our Equity Incentive Plan and an aggregate of 36,550
restricted common shares awarded to Messrs. Fisher, Willis
and Craven pursuant to our Equity Incentive Plan. Excludes
(i) an aggregate of 257,775 common shares underlying LTIP
units in our operating partnership that were issued to
Messrs. Fisher and Willis in connection with our IPO and to
Mr. Craven upon joining our company, (ii) 211,730
common shares reserved for issuance under our Equity Incentive
Plan and (iii) 600,000 common shares issuable upon
exercise of the underwriters over-allotment option. |
Our
Information
Our principal executive offices are located at 50 Cocoanut Row,
Suite 216, Palm Beach, Florida 33480. Our telephone number
is
(561) 802-4477.
10
RISK
FACTORS
An investment in our common shares involves a high degree of
risk. Before making an investment decision, you should carefully
consider the following risk factors, together with the other
information contained in this prospectus, including in
Management Discussion and Analysis of Financial Condition
and Results of Operations. If any of the risks discussed
in this prospectus occurs, our business, prospects, financial
condition, cash flows, results of operations and ability to make
distributions to our shareholders could be materially and
adversely affected. If this were to happen, the price of our
common shares could decline significantly and you could lose all
or a part of your investment. Some statements in this
prospectus, including statements in the following risk factors,
constitute forward-looking statements. See Cautionary Note
Regarding Forward-Looking Statements.
Risks Related to
Our Business
We have limited operating history, which may affect our
ability to generate sufficient operating cash flows to make or
sustain distributions to our shareholders.
We were organized in October 2009 and have limited operating
history. Our ability to make or sustain distributions to our
shareholders depends on many factors, including the availability
of acquisition opportunities that satisfy our investment
strategies and our success in identifying and consummating them
on favorable terms, readily accessible short-term and long-term
financing on favorable terms and conditions in the financial
markets, the real estate market, the hotel industry and the
economy. We cannot assure you that we will be able to acquire
properties with attractive returns or will not seek properties
with greater risk to obtain the same level of returns or that
the value of our properties in the future will not decline
substantially.
The purchase of the property we have under contract may
not be consummated in a timely manner or at all.
We have entered into an agreement to purchase a hotel located in
the greater Pittsburgh, Pennsylvania area. The closing of the
purchase of this hotel is subject to satisfaction of customary
closing requirements and conditions and there is no assurance
that it will be consummated in a timely manner or at all. This
transaction, whether or not it is successful, requires
substantial time and attention from management. Furthermore,
this potential acquisition requires significant expense,
including expenses for due diligence, legal fees and related
overhead. To the extent we do not acquire this hotel, these
expenses will not be offset by revenues from this property. If
we do not consummate this acquisition in a timely manner or at
all, our financial results would be adversely affected.
Although we are in various stages of reviewing and
negotiating a number of potential hotel properties for potential
acquisition, we have not yet committed a substantial portion of
the net proceeds from this offering to any specific hotel
property and, therefore, you will be unable to evaluate the
allocation of a substantial amount of the net proceeds from the
offering or the economic merits of some of our acquisitions
prior to making an investment decision.
We have not yet committed a substantial portion of the net
proceeds of this offering to specific hotel properties and you
will be unable to evaluate the economic merits of investments we
make with a substantial portion of the net proceeds before
making an investment decision to purchase our common shares. As
a result, we will have broad authority to invest the net
proceeds of this offering in any real estate investments that we
may identify in the future, and we may use those proceeds to
make investments with which you may not agree. In addition, our
investment policies may be amended or revised from time to time
at the discretion of our board of trustees, without a vote of
our shareholders. These factors will increase the uncertainty,
and thus the risk, of investing in our common shares. Our
failure to apply the net proceeds of this offering effectively
or find suitable hotel properties to acquire in a timely manner
or on acceptable terms could result in returns that are
substantially below expectations or result in losses.
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Until appropriate investments can be identified, we may invest
the net proceeds of the offering in interest-bearing short-term
securities or money-market accounts that are consistent with our
intention to qualify as a REIT. These investments are expected
to provide a lower net return than we seek to achieve our hotel
properties. We may be unable to invest the net proceeds on
acceptable terms, or at all, which could delay shareholders
receiving an appropriate return on their investment. We cannot
assure you that we will be able to identify properties that meet
our investment criteria, that we will successfully consummate
any investment opportunities we identify, or that investments we
may make will generate income or cash flow.
Because our senior executive officers have broad
discretion to invest the proceeds of the offering, they may make
investments where the returns are substantially below
expectations or which result in net operating losses.
Our senior executive officers have broad discretion, within the
general investment criteria established by our board of
trustees, to invest the net proceeds of the offering and to
determine the timing of such investment. Our senior executive
officers may therefore make investments where the returns are
substantially below expectations or which result in net losses.
Our investment policies are subject to revision from time
to time in our boards discretion, which could diminish
shareholder returns below expectations.
Our investment policies may be amended or revised from time to
time at the discretion of our board of trustees, without a vote
of our shareholders. Such discretion could result in investments
that may not yield returns consistent with investors
expectations.
We depend on the efforts and expertise of our key
executive officers whose continued service is not
guaranteed.
We depend on the efforts and expertise of our chief executive
officer, as well as our other senior executives, to execute our
business strategy. The loss of their services, and our inability
to find suitable replacements, could have an adverse effect on
our business.
If we are unable to successfully manage our growth, our
operating results and financial condition could be adversely
affected.
Our ability to grow our business depends upon our senior
executive officers business contacts and their ability to
successfully hire, train, supervise and manage additional
personnel. We may not be able to hire and train sufficient
personnel or develop management, information and operating
systems suitable for our expected growth. If we are unable to
manage any future growth effectively, our operating results and
financial condition could be adversely affected.
Our future growth depends on obtaining new financing and
if we cannot secure financing in the future, our growth will be
limited.
The success of our growth strategy depends on access to capital
through use of excess cash flow, borrowings or subsequent
issuances of common shares or other securities. Acquisitions of
new hotel properties will require significant additional capital
and existing hotels require periodic capital improvement
initiatives to remain competitive. We may not be able to fund
acquisitions or capital improvements solely from cash provided
from our operating activities because we must distribute at
least 90% of our taxable income (determined before the deduction
for dividends paid and excluding any net capital gains) each
year to satisfy the requirements for qualification as a REIT for
federal income tax purposes. As a result, our ability to fund
capital expenditures for acquisitions through retained earnings
is very limited. Our ability to grow through acquisitions of
hotels will be limited if we cannot obtain satisfactory debt or
equity financing, which will depend on capital markets
conditions. We cannot assure you that we will be able to obtain
additional equity or debt financing or that we will be able to
obtain such financing on favorable terms.
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We must rely on third-party management companies to
operate our hotels in order to qualify as a REIT under the Code
and, as a result, we have less control than if we were operating
the hotels directly.
In order for us to qualify as a REIT, third parties must operate
our hotels. We lease each of our hotels to our TRS lessees. The
TRS lessees, in turn, have entered into management agreements
with third party management companies to operate our hotels.
While we expect to have some input into operating decisions for
those hotels leased by our TRS lessees and operated under
management agreements, we have less control than if we were
managing the hotels ourselves. Even if we believe that our
hotels are not being operated efficiently, we may not be able to
require an operator to change the way it operates our hotels.
Jeffrey H. Fisher, our chief executive officer, controls IHM, a
hotel management company that currently manages five of our
hotels and may manage additional hotels that we acquire in the
future. See Conflicts of interest could result
in future business transactions between us and affiliates owned
by our Chief Executive Officer below.
Our management agreements could adversely affect the sale
or financing of hotel properties and, as a result, our operating
results and ability to make distributions to our shareholders
could suffer.
While we would prefer to enter into flexible management
contracts that will provide us with the ability to replace hotel
managers on relatively short notice and with limited cost, we
may enter into, or acquire properties subject to, management
contracts that contain more restrictive covenants. For example,
the terms of some management agreements may restrict our ability
to sell a property unless the purchaser is not a competitor of
the manager and assumes the related management agreement and
meets specified other conditions. Also, the terms of a long-term
management agreement encumbering our properties may reduce the
value of the property. If we enter into or acquire properties
subject to any such management agreements, we may be precluded
from taking actions that would otherwise be in our best interest
or could cause us to incur substantial expense, which could
adversely affect our operating results and our ability to make
distributions to shareholders. Moreover, the management
agreements that we use in connection with hotels managed by IHM
were not negotiated on an arms-length basis due to
Mr. Fishers control of IHM and therefore may not
contain terms as favorable to us as we could obtain in an
arms-length transaction with a third party. See
Conflicts of interest could result in future business
transactions between us and affiliates owned by our Chief
Executive Officer below.
Our franchisors could cause us to expend additional funds
on upgraded operating standards, which may reduce cash available
for distribution to shareholders.
Our hotels operate under franchise agreements, and we may become
subject to the risks that are found in concentrating our hotel
properties in one or several franchise brands. Our hotel
operators must comply with operating standards and terms and
conditions imposed by the franchisors of the hotel brands under
which our hotels operate. Pursuant to certain of the franchise
agreements, certain upgrades are required every five to six
years, and the franchisors may also impose upgraded or new brand
standards, such as substantially upgrading the bedding,
enhancing the complimentary breakfast or increasing the value of
guest awards under its frequent guest program, which
can add substantial expense for the hotel. The franchisors also
may require us to make certain capital improvements to maintain
the hotel in accordance with system standards, the cost of which
can be substantial and may reduce cash available for
distribution to our shareholders.
Our franchisors may cancel or fail to renew our existing
franchise licenses, which could adversely affect our operating
results and our ability to make distributions to
shareholders.
Our franchisors periodically inspect our hotels to confirm
adherence to the franchisors operating standards. The
failure of a hotel to maintain standards could result in the
loss or cancellation of a franchise license. We rely on our
operators to conform to operational standards. In addition, when
the term of a franchise expires, the franchisor has no
obligation to issue a new franchise. The loss of a
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franchise could have a material adverse effect on the operations
or the underlying value of the affected hotel because of the
loss of associated name recognition, marketing support and
centralized reservation systems provided by the franchisor. The
loss of a franchise or adverse developments with respect to a
franchise brand under which our hotels operate could also have a
material adverse effect on our financial condition, results of
operations and cash available for distribution to shareholders.
Fluctuations in our financial performance, capital
expenditure requirements and excess cash flow could adversely
affect our ability to make and maintain distributions to our
shareholders.
As a REIT, we are required to distribute at least 90% of our
taxable income each year to our shareholders (determined before
the deduction for dividends paid and excluding any net capital
gains). In the event of downturns in our operating results and
financial performance or unanticipated capital improvements to
our hotels (including capital improvements that may be required
by franchisors), we may be unable to declare or pay
distributions to our shareholders, or maintain our then-current
dividend rate. The timing and amount of distributions are in the
sole discretion of our board of trustees, which considers, among
other factors, our financial performance, debt service
obligations and applicable debt covenants (if any), and capital
expenditure requirements. We cannot assure you we will generate
sufficient cash in order to continue to fund distributions.
Among the factors which could adversely affect our results of
operations and distributions to shareholders are reductions in
hotel revenues; increases in operating expenses at the hotels
leased to our TRS lessees; increased debt service requirements,
including those resulting from higher interest rates on variable
rate indebtedness; and capital expenditures at our hotels,
including capital expenditures required by the franchisors of
our hotels. Hotel revenue can decrease for a number of reasons,
including increased competition from new hotels and decreased
demand for hotel rooms. These factors can reduce both occupancy
and room rates at hotels and could directly affect us negatively
by:
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reducing the hotel revenue that we recognize with respect to
hotels leased to our TRS lessees; and
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correspondingly reducing the profits (or increasing the loss) of
hotels leased to our TRS lessees. We may be unable to reduce
many of our expenses in tandem with revenue declines, (or we may
choose not to reduce them for competitive reasons), and certain
expenses may increase while our revenue declines.
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Future debt service obligations could adversely affect our
overall operating results and may require us to liquidate our
properties, which could adversely affect our ability to make
distributions to our shareholders and our share price.
We intend to use secured and unsecured debt to finance long-term
growth. While we intend to target overall debt levels, net of
cash, of not more than 35% of our investment in hotel properties
at cost (defined as our initial acquisition price plus the gross
amount of any subsequent capital investment and excluding any
impairment charges), our board of trustees may change this
financing policy at any time without shareholder approval. As a
result, we may be able to incur substantial additional debt,
including secured debt, in the future. Incurring additional debt
could subject us to many risks, including the risks that:
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operating cash flow will be insufficient to make required
payments of principal and interest;
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our leverage may increase our vulnerability to adverse economic
and industry conditions;
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we may be required to dedicate a substantial portion of our cash
flow from operations to payments on our debt, thereby reducing
cash available for distribution to our shareholders, funds
available for operations and capital expenditures, future
business opportunities or other purposes;
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terms of any refinancing will not be as favorable as the terms
of the debt being refinanced; and
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the terms of our debt may limit our ability to make
distributions to our shareholders.
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If we violate covenants in our debt agreements, we could be
required to repay all or a portion of our indebtedness before
maturity at a time when we might be unable to arrange financing
for such repayment on attractive terms, if at all.
If we are unable to repay our debt obligations in the
future, we may be forced to refinance debt or dispose of or
encumber our assets, which could adversely affect distributions
to shareholders.
If we do not have sufficient funds to repay our outstanding debt
at maturity, or before maturity in the event we breach our debt
agreements and our lenders exercise their right to accelerate
repayment, we may be required to refinance the debt through
additional debt or additional equity financings. Covenants
applicable to our existing and future debt could impair our
planned investment strategy and, if violated, result in a
default. If we are unable to refinance our debt on acceptable
terms, we may be forced to dispose of hotel properties on
disadvantageous terms, potentially resulting in losses. We have
placed mortgages on certain of our hotel properties to secure
our credit facility, have assumed mortgages on two other hotels
we acquired, and may place additional mortgages on certain of
our hotels to secure other debt. To the extent we cannot meet
any future debt service obligations, we will risk losing some or
all of our hotel properties that are pledged to secure our
obligations to foreclosure.
Interest expense on our debt may limit our cash available
to fund our growth strategies and shareholder
distributions.
Higher interest rates could increase debt service requirements
on debt under our credit facility and any floating rate debt
that we incur in the future and could reduce the amounts
available for distribution to our shareholders, as well as
reduce funds available for our operations, future business
opportunities, or other purposes. Interest expense on our credit
facility is based on floating interest rates.
Failure to hedge effectively against interest rate changes
may adversely affect our results of operations and our ability
to make shareholder distributions.
We may obtain in the future one or more forms of interest rate
protection in the form of swap agreements, interest
rate cap contracts or similar agreements to hedge
against the possible negative effects of interest rate
fluctuations. However, such hedging implies costs and we cannot
assure you that any hedging will adequately relieve the adverse
effects of interest rate increases or that counterparties under
these agreement will honor their obligations thereunder.
Furthermore, any such hedge agreements would subject us to the
risk of incurring significant non-cash losses on our hedges due
to declines in interest rates if our hedges were not considered
effective under applicable accounting standards.
Joint venture investments that we make could be adversely
affected by our lack of sole decision-making authority, our
reliance on joint venture partners financial condition and
disputes between us and our joint venture partners.
We may co-invest in the future with third parties through
partnerships, joint ventures or other entities, acquiring
non-controlling interests in or sharing responsibility for
managing the affairs of a property, partnership, joint venture
or other entity. In such event, we would not be in a position to
exercise sole decision-making authority regarding the property,
partnership, joint venture or other entity. Investments in
partnerships, joint ventures or other entities may, under
certain circumstances, involve risks not present were a third
party not involved, including the possibility that joint venture
partners might become bankrupt or fail to fund their share of
required capital contributions. Joint
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venture partners may have economic or other business interests
or goals which are inconsistent with our business interests or
goals, and may be in a position to take actions contrary to our
policies or objectives. Such investments may also have the
potential risk of impasses on decisions, such as a sale, because
neither we nor the partner would have full control over the
partnership or joint venture. Disputes between us and partners
may result in litigation or arbitration that would increase our
expenses and prevent our officers
and/or
trustees from focusing their time and effort on our business.
Consequently, actions by, or disputes with, partners might
result in subjecting properties owned by the partnership or
joint venture to additional risk. In addition, we may in certain
circumstances be liable for the actions of our third-party
partners or co-venturers.
We may from time to time make distributions to our
shareholders in the form of our common shares, which could
result in shareholders incurring tax liability without receiving
sufficient cash to pay such tax.
Although we have no current intention to do so, we may in the
future distribute taxable dividends that are payable in cash and
common shares at the election of each shareholder. Taxable
shareholders receiving such dividends will be required to
include the full amount of the dividend as ordinary income to
the extent of our current and accumulated earnings and profits
for federal income tax purposes. As a result, shareholders may
be required to pay income taxes with respect to such dividends
in excess of the cash dividends received. If a
U.S. shareholder sells the common shares that it receives
as a dividend in order to pay this tax, the sales proceeds may
be less than the amount included in income with respect to the
dividend, depending on the market price of our shares at the
time of the sale. Furthermore, with respect to certain
non-U.S. shareholders,
we may be required to withhold federal income tax with respect
to such dividends, including in respect of all or a portion of
such dividend that is payable in common shares. In addition, if
a significant number of our shareholders determine to sell
common shares in order to pay taxes owed on dividends, it may
put downward pressure on the trading price of our common shares.
Our conflict of interest policy may not be successful in
eliminating the influence of future conflicts of interest that
may arise between us and our trustees, officers and
employees.
We have adopted a policy that any transaction, agreement or
relationship in which any of our trustees, officers or employees
has a direct or indirect pecuniary interest must be approved by
a majority of our disinterested trustees. Other than this
policy, however, we have not adopted and may not adopt
additional formal procedures for the review and approval of
conflict of interest transactions generally. As such, our
policies and procedures may not be successful in eliminating the
influence of conflicts of interest. See Investment
Policies and Policies with Respect to Certain
Activities Conflict of Interest Policy.
Conflicts of interest could result in future business
transactions between us and affiliates owned by our Chief
Executive Officer.
Our chief executive officer, Mr. Fisher, owns 90% of IHM, a
hotel management company that currently manages five of our
hotels and may manage additional hotels that we acquire in the
future. Because Mr. Fisher is our Chief Executive Officer
and controls IHM, conflicts of interest may arise between us and
Mr. Fisher as to whether and on what terms new management
contracts will be awarded to IHM, whether and on what terms
management agreements will be renewed upon expiration of their
terms, enforcement of the terms of the management agreements and
whether hotels managed by IHM will be sold. See Certain
Relationships and Related Transactions.
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Risks Related to
the Lodging Industry
The lodging industry has experienced recent significant
declines and failure of the lodging industry to exhibit
improvement may adversely affect our ability to execute our
business strategy.
The performance of the lodging industry has historically been
closely linked to the performance of the general economy and,
specifically, growth in U.S. GDP. It is also sensitive to
business and personal discretionary spending levels. Declines in
corporate budgets and consumer demand due to adverse general
economic conditions, risks affecting or reducing travel
patterns, lower consumer confidence or adverse political
conditions can lower the revenues and profitability of our
future hotel properties and therefore the net operating profits
of our TRSs. The current global economic downturn has led to a
significant decline in demand for products and services provided
by the lodging industry, lower occupancy levels and
significantly reduced room rates.
A substantial part of our business strategy is based on the
belief that the lodging markets in which we invest will
experience improving economic fundamentals in the future. We
anticipate that recovery will lag an improvement in economic
conditions. However, we cannot predict the severity or length of
the global economic downturn or the extent to which lodging
industry fundamentals will improve. In the event conditions in
the industry do not improve when and as we expect, or
deteriorate, our ability to execute our business strategy would
be adversely affected, which could adversely affect our
financial condition, results of operations, the market price of
our common shares and our ability to make distributions to our
shareholders.
Our ability to make distributions to our shareholders may
be affected by various operating risks common in the lodging
industry.
Hotel properties are subject to various operating risks common
to the hotel industry, many of which are beyond our control,
including:
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competition from other hotel properties in our prospective
markets, some of which may have greater marketing and financial
resources;
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an over-supply or over-building of hotel properties in our
prospective markets, which could adversely affect occupancy
rates and revenues;
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dependence on business and commercial travelers and tourism;
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increases in energy costs and other expenses affecting travel,
which may affect travel patterns and reduce the number of
business and commercial travelers and tourists;
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increases in operating costs due to inflation and other factors
that may not be offset by increased room rates;
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necessity for periodic capital reinvestment to repair and
upgrade hotel properties;
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changes in interest rates and in the availability, cost and
terms of debt financing;
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changes in governmental laws and regulations, fiscal policies
and zoning ordinances and the related costs of compliance with
laws and regulations, fiscal policies and ordinances;
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unforeseen events beyond our control, such as terrorist attacks,
travel related health concerns including pandemics and epidemics
such as H1N1 influenza (swine flu), avian bird flu and SARS,
political instability, regional hostilities, imposition of taxes
or surcharges by regulatory authorities, travel related
accidents and unusual weather patterns, including natural
disasters such as hurricanes, tsunamis or earthquakes;
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adverse effects of a downturn in the economy or in the hotel
industry; and
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risk generally associated with the ownership of hotel properties
and real estate, as we discuss in detail below.
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These factors could reduce the net operating profits of our TRSs
and the rental income we receive from our TRSs, which in turn
could adversely affect our ability to make distributions to our
shareholders.
Competition for acquisitions may reduce the number of
properties we can acquire.
We compete for hotel investment opportunities with competitors
that may have a different tolerance for risk or have
substantially greater financial resources than are available to
us. This competition may generally limit the number of hotel
properties that we are able to acquire and may also increase the
bargaining power of hotel owners seeking to sell, making it more
difficult for us to acquire hotel properties on attractive
terms, or at all.
Competition for guests may lower our hotels revenues
and profitability.
The upscale extended-stay and mid-price segments of the hotel
business are highly competitive. Our hotels compete on the basis
of location, room rates and quality, service levels, reputation,
and reservation systems, among many other factors. Many
competitors will have substantially greater marketing and
financial resources than our operators or us. New hotels create
new competitors, in some cases without corresponding increases
in demand for hotel rooms. The result in some cases may be lower
revenue, which would result in lower cash available for
distribution to shareholders.
The seasonality of the hotel industry may cause
fluctuations in our quarterly revenues that cause us to borrow
money to fund distributions to shareholders.
Some hotel properties have business that is seasonal in nature.
This seasonality can be expected to cause quarterly fluctuations
in revenues. Quarterly earnings may be adversely affected by
factors outside our control, including weather conditions and
poor economic factors. As a result, we may have to enter into
short-term borrowings in order to offset these fluctuations in
revenue and to make distributions to shareholders.
The cyclical nature of the lodging industry may cause the
return on our investments to be substantially less than we
expect.
The lodging industry is highly cyclical in nature. Fluctuations
in lodging demand and, therefore, operating performance, are
caused largely by general economic and local market conditions,
which subsequently affects levels of business and leisure
travel. In addition to general economic conditions, new hotel
room supply is an important factor that can affect the lodging
industrys performance and overbuilding has the potential
to further exacerbate the negative impact of an economic
recession. Room rates and occupancy, and thus RevPAR, tend to
increase when demand growth exceeds supply growth. Decline in
lodging demand, or a continued growth in lodging supply, could
result in returns that are substantially below expectations or
result in losses, which could have a material adverse effect on
our business, financial condition, results of operations and our
ability to make distributions to our shareholders.
Due to our concentration in hotel investments, a downturn
in the lodging industry would adversely affect our operations
and financial condition.
Our entire business is related to the hotel industry. Therefore,
a downturn in the hotel industry, in general, will have a
material adverse effect on our revenues, net operating profits
and cash available to distribute to shareholders.
The ongoing need for capital expenditures at our hotel
properties may adversely affect our financial condition and
limit our ability to make distributions to our
shareholders.
Hotel properties have an ongoing need for renovations and other
capital improvements, including replacements, from time to time,
of furniture, fixtures and equipment. The franchisors of our
hotels also require periodic capital improvements as a condition
of keeping the franchise licenses. In
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addition, our lenders require us to set aside amounts for
capital improvements to our hotel properties. These capital
improvements may give rise to the following risks:
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possible environmental problems;
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construction cost overruns and delays;
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possibility that revenues will be reduced temporarily while
rooms or restaurants offered are out of service due to capital
improvement projects;
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a possible shortage of available cash to fund capital
improvements and the related possibility that financing for
these capital improvements may not be available on affordable
terms;
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uncertainties as to market demand or a loss of market demand
after capital improvements have begun; and
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disputes with franchisors/managers regarding compliance with
relevant management/franchise agreements.
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The costs of all these capital improvements could adversely
affect our financial condition and amounts available for
distribution to our shareholders.
The increasing use of Internet travel intermediaries by
consumers may adversely affect our profitability.
Some of our hotel rooms are booked through Internet travel
intermediaries, including, but not limited to, Travelocity.com,
Expedia.com and Priceline.com. As these Internet bookings
increase, these intermediaries may be able to obtain higher
commissions, reduced room rates or other significant contract
concessions from us and our management companies. Moreover, some
of these Internet travel intermediaries are attempting to offer
hotel rooms as a commodity, by increasing the importance of
price and general indicators of quality (such as
three-star downtown hotel) at the expense of brand
identification. These agencies hope that consumers will
eventually develop brand loyalties to their reservations system
rather than to the brands under which our properties are
franchised. Although most of the business for our hotels is
expected to be derived from traditional channels, if the amount
of sales made through Internet intermediaries increases
significantly, room revenues may flatten or decrease and our
profitability may be adversely affected.
Future terrorist attacks or changes in terror alert levels
could adversely affect travel and hotel demand.
Previous terrorist attacks and subsequent terrorist alerts have
adversely affected the U.S. travel and hospitality
industries over the past several years, often disproportionately
to the effect on the overall economy. The impact that terrorist
attacks in the U.S. or elsewhere could have on domestic and
international travel and our business in particular cannot be
determined but any such attacks or the threat of such attacks
could have a material adverse effect on our business, our
ability to finance our business, our ability to insure our
properties and our results of operations and financial condition.
Potential future outbreaks of contagious diseases, such as
H1N1, could have a material adverse effect on our revenues and
results of operations due to decreased travel, especially in
areas significantly affected by the disease.
The widespread outbreak of infectious or contagious disease in
the United States, such as the H1N1 influenza, could reduce
travel and adversely affect the hotel industry generally and our
business in particular.
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Uninsured and underinsured losses could adversely affect
our operating results and our ability to make distributions to
our shareholders.
We maintain comprehensive insurance on each of our hotel
properties, including liability, terrorism, fire and extended
coverage, of the type and amount customarily obtained for or by
hotel property owners. There can be no assurance that such
coverage will continue to be available at reasonable rates.
Various types of catastrophic losses, like earthquakes and
floods and losses from foreign terrorist activities such as
those on September 11, 2001 or losses from domestic
terrorist activities such as the Oklahoma City bombing may not
be insurable or may not be insurable on reasonable economic
terms. Lenders may require such insurance and failure to obtain
such insurance could constitute a default under loan agreements.
Depending on our access to capital, liquidity and the value of
the properties securing the affected loan in relation to the
balance of the loan, a default could have a material adverse
effect on our results of operations and ability to obtain future
financing.
In the event of a substantial loss, insurance coverage may not
be sufficient to cover the full current market value or
replacement cost of the lost investment. Should an uninsured
loss or a loss in excess of insured limits occur, we could lose
all or a portion of the capital we invested in a hotel property,
as well as the anticipated future revenue from that particular
hotel. In that event, we might nevertheless remain obligated for
any mortgage debt or other financial obligations related to the
property. Inflation, changes in building codes and ordinances,
environmental considerations and other factors might also keep
us from using insurance proceeds to replace or renovate a hotel
after it has been damaged or destroyed. Under those
circumstances, the insurance proceeds we receive might be
inadequate to restore our economic position on the damaged or
destroyed property.
Noncompliance with environmental laws and governmental
regulations could adversely affect our operating results and our
ability to make distributions to shareholders.
Under various federal, state and local laws, ordinances and
regulations, an owner of real property may be liable for the
costs of removal or remediation of certain hazardous or toxic
substances on or in such property. Such laws often impose such
liability without regard to whether the owner knew of or was
responsible for, the presence of such hazardous or toxic
substances. The cost of any required remediation and the
owners liability therefor as to any property are generally
not limited under such laws and could exceed the value of the
property
and/or the
aggregate assets of the owner. The presence of such substances,
or the failure to properly remediate contamination from such
substances, may adversely affect the owners ability to
sell the real estate or to borrow funds using such property as
collateral, which could have an adverse effect on our return
from such investment.
Furthermore, various court decisions have established that third
parties may recover damages for injury caused by release of
hazardous substances and for property contamination. For
instance, a person exposed to asbestos while working at or
staying in a hotel may seek to recover damages if he or she
suffers injury from the asbestos. Lastly, some of these
environmental issues restrict the use of a property or place
conditions on various activities. One example is laws that
require a business using chemicals to manage them carefully and
to notify local officials if regulated spills occurs.
Although it is our policy to require an acceptable Phase I
environmental survey for all real property in which we invest,
such surveys are limited in scope and there can be no assurance
that there are no hazardous or toxic substances on such property
that we would purchase. We cannot assure you:
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that future laws, ordinances or regulations will not impose
material environmental liability; or
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that the current environmental condition of a hotel will not be
affected by the condition of properties in the vicinity of the
hotel (such as the presence of leaking underground storage
tanks) or by third parties unrelated to us.
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Compliance with the Americans with Disabilities Act and
other changes in governmental rules and regulations could
substantially increase our cost of doing business and adversely
affect our operating results and our ability to make
distributions to our shareholders.
Our hotel properties are subject to the Americans with
Disabilities Act of 1990, or the ADA. Under the ADA, all places
of public accommodation are required to meet certain federal
requirements related to access and use by disabled persons.
Although we intend to continue to acquire assets that are
substantially in compliance with the ADA, we may incur
additional costs of complying with the ADA at the time of
acquisition and from
time-to-time
in the future to stay in compliance with any changes in the ADA.
A number of additional federal, state and local laws exist that
also may require modifications to our investments, or restrict
certain further renovations thereof, with respect to access
thereto by disabled persons. Additional legislation may impose
further burdens or restrictions on owners with respect to access
by disabled persons. If we were required to make substantial
modifications at our properties to comply with the ADA or other
changes in governmental rules and regulations, our ability to
make expected distributions to our shareholders could be
adversely affected.
The Employee Free Choice Act could substantially increase
our cost of doing business and adversely affect our operating
results and our ability to make distributions to
shareholders.
A number of members of the U.S. Congress and President
Obama have stated that they support the Employee Free Choice
Act, which, if enacted, would discontinue the current practice
of having an open process where both the union and the employer
are permitted to educate employees regarding the pros and cons
of joining a union before having an election by secret ballot.
Under the Employee Free Choice Act, employees would only hear
the unions side of the argument before making a commitment
to join the union. The Employee Free Choice Act would permit
unions to quietly collect employee signatures supporting the
union without notifying the employer and permitting the employer
to explain its views before a final decision is made by the
employees. Once a union has collected signatures from a majority
of the employees, the employer would have to recognize, and
bargain with, the union. If the employer and the union fail to
reach agreement on a collective bargaining contract within a
certain number of days, both sides would be forced to submit
their respective proposals to binding arbitration and a federal
arbitrator would be permitted to create an employment contract
binding on the employer. If the Employee Free Choice Act is
enacted, a number of the hotel properties we own or seek to
acquire could become unionized.
Generally, unionized hotel employees are subject to a number of
work rules that could decrease operating margins at the
unionized hotels. If that is the case, we believe that the
unionization of hotel employees at hotels that we acquire may
result in a significant decline in hotel profitability and
value, which could adversely affect our financial condition,
results of operations, the market price of our common shares and
our ability to make distributions to our shareholders.
General Risks
Related to Real Estate Industry
Illiquidity of real estate investments could significantly
impede our ability to respond to adverse changes in the
performance of our hotel properties and adversely affect our
financial condition.
Because real estate investments are relatively illiquid, our
ability to promptly sell one or more hotel properties in our
portfolio in response to changing economic, financial and
investment conditions may be limited. The real estate market is
affected by many factors that are beyond our control, including:
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adverse changes in international, national, regional and local
economic and market conditions;
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changes in interest rates and in the availability, cost and
terms of debt financing;
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changes in governmental laws and regulations, fiscal policies
and zoning ordinances and the related costs of compliance with
laws and regulations, fiscal policies and ordinances;
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the ongoing need for capital improvements, particularly in older
structures;
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changes in operating expenses; and
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civil unrest, acts of God, including earthquakes, floods and
other natural disasters, which may result in uninsured losses,
and acts of war or terrorism, such as those that occurred on
September 11, 2001.
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We may seek to sell hotel properties in the future. There can be
no assurance that we will be able to sell any hotel property on
acceptable terms.
Currently, little credit is available to purchasers of hotel
properties and financing structures such as CMBS, which have
been used to finance many hotel acquisitions in recent years,
have been reduced. If financing for hotel properties is not
available or is not available on attractive terms, it will
adversely impact the ability of third parties to buy our hotels.
As a result, we may hold our hotel properties for a longer
period than we would otherwise desire and may sell hotels at a
loss.
We may be required to expend funds to correct defects or to make
improvements before a hotel property can be sold. We cannot
assure you that we will have funds available to correct those
defects or to make those improvements. In acquiring a hotel
property, we may agree to lock-out provisions that materially
restrict us from selling that property for a period of time or
impose other restrictions, such as a limitation on the amount of
debt that can be placed or repaid on that property. These
factors and any others that would impede our ability to respond
to adverse changes in the performance of our properties could
have a material adverse effect on our operating results and
financial condition, as well as our ability to pay distributions
to shareholders.
Increases in our property taxes would adversely affect our
ability to make distributions to our shareholders.
Hotel properties are subject to real and personal property
taxes. These taxes may increase as tax rates change and as the
properties are assessed or reassessed by taxing authorities. In
particular, our property taxes could increase following our
hotel purchases as the acquired hotels are reassessed. If
property taxes increase, our financial condition, results of
operations and our ability to make distributions to our
shareholders could be materially and adversely affected and the
market price of our common shares could decline.
Our hotel properties may contain or develop harmful mold,
which could lead to liability for adverse health effects and
costs of remediating the problem.
When excessive moisture accumulates in buildings or on building
materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period
of time. Some molds may produce airborne toxins or irritants.
Concern about indoor exposure to mold has been increasing, as
exposure to mold may cause a variety of adverse health effects
and symptoms, including allergic or other reactions. As a
result, the presence of mold to which hotel guests or employees
could be exposed at any of our properties could require us to
undertake a costly remediation program to contain or remove the
mold from the affected property, which could be costly. In
addition, exposure to mold by guests or employees, management
company employees or others could expose us to liability if
property damage or health concerns arise.
Risks Related to
Our Organization and Structure
Our rights and the rights of our shareholders to take
action against our trustees and officers are limited, which
could limit your recourse in the event of actions not in your
best interests.
Under Maryland law generally, a trustee is required to perform
his or her duties in good faith, in a manner he or she
reasonably believes to be in our best interests and with the
care that an ordinarily prudent person in a like position would
use under similar circumstances. Under Maryland
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law, trustees are presumed to have acted with this standard of
care. In addition, our declaration of trust limits the liability
of our trustees and officers to us and our shareholders for
money damages, except for liability resulting from:
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actual receipt of an improper benefit or profit in money,
property or services; or
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active and deliberate dishonesty by the trustee or officer that
was established by a final judgment as being material to the
cause of action adjudicated
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Our bylaws obligate us to indemnify our trustees and officers
for actions taken by them in those capacities to the maximum
extent permitted by Maryland law. Our bylaws require us to
indemnify each trustee or officer, to the maximum extent
permitted by Maryland law, in the defense of any proceeding to
which he or she is made, or threatened to be made, a party by
reason of his or her service to us. In addition, we may be
obligated to advance the defense costs incurred by our trustees
and officers. As a result, we and our shareholders may have more
limited rights against our trustees and officers than might
otherwise exist absent the current provisions in our declaration
of trust and bylaws or that might exist with other companies.
Provisions of Maryland law may limit the ability of a
third party to acquire control of our Company and may result in
entrenchment of management and diminish the value of our common
shares.
Certain provisions of the Maryland General Corporation Law
(MGCL) applicable to Maryland real estate investment
trusts may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change of
control under circumstances that otherwise could provide our
common shareholders with the opportunity to realize a premium
over the then-prevailing market price of such shares, including:
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Business combination provisions that, subject
to limitations, prohibit certain business combinations between
us and an interested shareholder (defined generally
as any person who beneficially owns 10% or more of the voting
power of our shares) or an affiliate of any interested
shareholder for five years after the most recent date on which
the shareholder becomes an interested shareholder, and
thereafter imposes special appraisal rights and special
shareholder voting requirements on these combinations; and
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Control share provisions that provide that
our control shares (defined as shares which, when
aggregated with other shares controlled by the shareholder,
entitle the shareholder to exercise one of three increasing
ranges of voting power in electing trustees) acquired in a
control share acquisition (defined as the direct or
indirect acquisition of ownership or control of control
shares) have no voting rights except to the extent
approved by our shareholders by the affirmative vote of at least
two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
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Additionally, Title 8, Subtitle 3 of the MGCL permits our
board of trustees, without shareholder approval and regardless
of what is currently provided in our declaration of trust or
bylaws, to implement certain takeover defenses, such as a
classified board, some of which we do not yet have. These
provisions may have the effect of inhibiting a third party from
making an acquisition proposal for us or of delaying, deferring
or preventing a change in control of us under the circumstances
that otherwise could provide our common shareholders with the
opportunity to realize a premium over the then current market
price.
Provisions of our declaration of trust may limit the
ability of a third party to acquire control of our Company and
may result in entrenchment of management and diminish the value
of our common shares.
Our declaration of trust authorizes our board of trustees to
issue up to 500,000,000 common shares and up to 100,000,000
preferred shares. In addition, our board of trustees may,
without
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shareholder approval, amend our declaration of trust to increase
the aggregate number of our shares or the number of shares of
any class or series that we have the authority to issue and to
classify or reclassify any unissued common shares or preferred
shares and to set the preferences, rights and other terms of the
classified or reclassified shares. As a result, our board of
trustees may authorize the issuance of additional shares or
establish a series of common or preferred shares that may have
the effect of delaying or preventing a change in control of our
company, including transactions at a premium over the market
price of our shares, even if shareholders believe that a change
of control is in their interest.
Failure to make required distributions would subject us to
tax.
In order for federal corporate income tax not to apply to
earnings that we distribute, each year we must distribute to our
shareholders at least 90% of our REIT taxable income, determined
before the deductions for dividends paid and excluding any net
capital gain. To the extent that we satisfy this distribution
requirement, but distribute less than 100% of our taxable
income, we will be subject to federal corporate income tax on
our undistributed REIT taxable income. In addition, we will be
subject to a 4% nondeductible excise tax if the actual amount
that we pay out to our shareholders in a calendar year is less
than a minimum amount specified under the Code. Our only source
of funds to make these distributions comes from distributions
that we will receive from our operating partnership.
Accordingly, we may be required to borrow money, sell assets,
use the proceeds from this offering or make taxable
distributions of our capital shares or debt securities, to
enable us to pay out enough of our taxable income to satisfy the
distribution requirement and to avoid federal corporate income
tax and the 4% nondeductible excise tax in a particular year.
Failure to qualify as a REIT, or failure to remain
qualified as a REIT, would subject us to federal income tax and
potentially to state and local taxes.
We intend to elect to be taxed as a REIT for federal income tax
purposes, commencing with our short taxable year ended
December 31, 2010 upon the filing of our federal income tax
return for that year. However, qualification as a REIT involves
the application of highly technical and complex provisions of
the Code, for which only a limited number of judicial and
administrative interpretations exist. Even an inadvertent or
technical mistake could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of certain
asset, income, organizational, distribution, shareholder
ownership and other requirements on a continuing basis.
Moreover, new tax legislation, administrative guidance or court
decisions, in each instance potentially applicable with
retroactive effect, could make it more difficult or impossible
for us to qualify as a REIT. If we were to fail to qualify as a
REIT in any taxable year, we would be subject to federal income
tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates, and distributions to
shareholders would not be deductible by us in computing our
taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for
distribution to our shareholders, which in turn could have an
adverse impact on the value of our shares of beneficial
interest. If, for any reason, we failed to qualify as a REIT and
we were not entitled to relief under certain Code provisions, we
would be unable to elect REIT status for the four taxable years
following the year during which we ceased to so qualify, which
would negatively impact the value of our common shares.
Our TRS lessee structure subjects us to the risk of
increased hotel operating expenses that could adversely affect
our operating results and our ability to make distributions to
shareholders.
Our leases with our TRS lessees require our TRS lessees to pay
us rent based in part on revenues from our hotels. Our operating
risks include decreases in hotel revenues and increases in hotel
operating expenses, which would adversely affect our TRS
lessees ability to pay us rent due under the leases,
including but not limited to the increases in wage and benefit
costs, repair and maintenance expenses, energy costs, property
taxes, insurance costs and other operating expenses.
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Increases in these operating expenses can have a significant
adverse impact on our financial condition, results of
operations, the market price of our common shares and our
ability to make distributions to our shareholders.
The formation of our TRS lessees increases our overall tax
liability.
Our TRS lessees are subject to federal, state and local income
tax on their taxable income, which consists of the revenues from
the hotel properties leased by our TRS lessees, net of the
operating expenses for such hotel properties and rent payments
to us. Accordingly, although our ownership of our TRS lessees
allows us to participate in the operating income from our hotel
properties in addition to receiving rent, that operating income
is fully subject to income tax. The after-tax net income of our
TRS lessees is available for distribution to us.
Our ownership of TRSs is limited and our transactions with
our TRSs will cause us to be subject to a 100% penalty tax on
certain income or deductions if those transactions are not
conducted on arms-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A
TRS may hold assets and earn income that would not be qualifying
assets or income if held or earned directly by a REIT, including
gross operating income from hotels that are operated by eligible
independent contractors pursuant to hotel management agreements.
Both the subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of
the stock will automatically be treated as a TRS. Overall, no
more than 25% of the value of a REITs assets may consist
of stock or securities of one or more TRSs. In addition, the TRS
rules limit the deductibility of interest paid or accrued by a
TRS to its parent REIT to assure that the TRS is subject to an
appropriate level of corporate taxation. The rules also impose a
100% excise tax on certain transactions between a TRS and its
parent REIT that are not conducted on an arms-length basis.
Our TRSs are subject to federal, foreign, state and local income
tax on their taxable income, and their after-tax net income is
available for distribution to us but is not required to be
distributed to us. We believe that the aggregate value of the
stock and securities of our TRSs is and will continue to be less
than 25% of the value of our total assets (including our TRS
stock and securities). Furthermore, we will monitor the value of
our respective investments in our TRSs for the purpose of
ensuring compliance with TRS ownership limitations. In addition,
we will scrutinize all of our transactions with our TRSs to
ensure that they are entered into on arms-length terms to
avoid incurring the 100% excise tax described above. There can
be no assurance, however, that we will be able to comply with
the 25% limitation discussed above or to avoid application of
the 100% excise tax discussed above.
If our leases with our TRS lessees are not respected as
true leases for federal income tax purposes, we would fail to
qualify as a REIT.
To qualify as a REIT, we will be required to satisfy two gross
income tests, pursuant to which specified percentages of our
gross income must be passive income, such as rent. For the rent
paid pursuant to the hotel leases with our TRS lessees, which we
anticipate will constitute substantially all of our gross
income, to qualify for purposes of the gross income tests, the
leases must be respected as true leases for federal income tax
purposes and must not be treated as service contracts, joint
ventures or some other type of arrangement. We have structured
our leases, and intend to structure any future leases, so that
the leases will be respected as true leases for federal income
tax purposes, but there can be no assurance that the IRS will
agree with this characterization. If the leases were not
respected as true leases for federal income tax purposes, we
would not be able to satisfy either of the two gross income
tests applicable to REITs and likely would fail to qualify as a
REIT status.
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Dividends payable by REITs do not qualify for the reduced
tax rates available for some dividends.
The maximum tax rate applicable to income from qualified
dividends payable to U.S. shareholders that are
individuals, trusts and estates has been reduced by legislation
to 15% currently (through the end of 2012). Dividends payable by
REITs, however, generally are not eligible for the reduced
rates. The more favorable rates applicable to regular corporate
qualified dividends could cause investors who are individuals,
trusts and estates to perceive investments in REITs to be
relatively less attractive than investments in the stocks of
non-REIT corporations that pay dividends, which could adversely
affect the value of the shares of REITs, including our common
shares.
If our hotel managers do not qualify as eligible
independent contractors, we would fail to qualify as a
REIT.
Rent paid by a lessee that is a related party tenant
of ours will not be qualifying income for purposes of the two
gross income tests applicable to REITs. We lease substantially
all of our hotels to our TRS lessees. A TRS lessee will not be
treated as a related party tenant, and will not be
treated as directly operating a lodging facility, which is
prohibited, to the extent the TRS lessee leases properties from
us that are managed by an eligible independent
contractor.
We believe that the rent paid by our TRS lessee is qualifying
income for purposes of the REIT gross income tests and that our
TRSs qualify to be treated as taxable REIT subsidiaries for
federal income tax purposes, but there can be no assurance that
the IRS will not challenge this treatment or that a court would
not sustain such a challenge. If the IRS were successful in
challenging this treatment, it is possible that we would fail to
meet the asset tests applicable to REITs and substantially all
of our income would fail to qualify for the gross income tests.
If we failed to meet either the asset or gross income tests, we
would likely lose our REIT qualification for federal income tax
purposes, unless certain relief provisions applied.
If our hotel managers do not qualify as eligible
independent contractors, we would fail to qualify as a
REIT. Each of the hotel management companies that enters into a
management contract with our TRS lessees must qualify as an
eligible independent contractor under the REIT rules
in order for the rent paid to us by our TRS lessees to be
qualifying income for our REIT income test requirements. Among
other requirements, in order to qualify as an eligible
independent contractor a manager must not own more than 35% of
our outstanding shares (by value) and no person or group of
persons can own more than 35% of our outstanding shares and the
ownership interests of the manager, taking into account only
owners of more than 5% of our shares and, with respect to
ownership interests in such managers that are publicly traded,
only holders of more than 5% of such ownership interests.
Complex ownership attribution rules apply for purposes of these
35% thresholds. Although we intend to monitor ownership of our
shares by our property managers and their owners, there can be
no assurance that these ownership levels will not be exceeded.
Our ownership limitations may restrict or prevent you from
engaging in certain transfers of our common shares.
In order to satisfy the requirements for REIT qualification, no
more than 50% in value of our outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) at any time during the
last half of each taxable year beginning with our 2011 taxable
year. To assist us to satisfy the requirements for our REIT
qualification, our declaration of trust contains an ownership
limit on each class and series of our shares. Under applicable
constructive ownership rules, any common shares owned by certain
affiliated owners generally will be added together for purposes
of the common share ownership limit, and any shares of a given
class or series of preferred shares owned by certain affiliated
owners generally will be added together for purposes of the
ownership limit on such class or series.
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If anyone transfers shares in a way that would violate the
ownership limit, or prevent us from qualifying as a REIT under
the federal income tax laws, those shares instead will be
transferred to a trust for the benefit of a charitable
beneficiary and will be either redeemed by us or sold to a
person whose ownership of the shares will not violate the
ownership limit. If this transfer to a trust fails to prevent
such a violation or our continued qualification as a REIT, then
the initial intended transfer shall be null and void from the
outset. The intended transferee of those shares will be deemed
never to have owned the shares. Anyone who acquires shares in
violation of the ownership limit or the other restrictions on
transfer in our declaration of trust bears the risk of suffering
a financial loss when the shares are redeemed or sold if the
market price of our shares falls between the date of purchase
and the date of redemption or sale.
Complying with REIT requirements may limit our ability to
hedge effectively and may cause us to incur tax
liabilities.
The REIT provisions of the Code substantially limit our ability
to hedge our liabilities. Any income from a hedging transaction
we enter into to manage risk of interest rate changes with
respect to borrowings made or to be made to acquire or carry
real estate assets does not constitute gross income
for purposes of the 75% or 95% gross income tests. To the extent
that we enter into other types of hedging transactions, the
income from those transactions is likely to be treated as
non-qualifying income for purposes of both of the gross income
tests. See Material U.S. Federal Income Tax
Considerations Gross Income Tests
Hedging Transactions. As a result of these rules, we
intend to limit our use of advantageous hedging techniques or
implement those hedges through a TRS. This could increase the
cost of our hedging activities because our TRS would be subject
to tax on gains or expose us to greater risks associated with
changes in interest rates than we would otherwise want to bear.
In addition, losses in our TRSs will generally not provide any
tax benefit, except for being carried forward against future
taxable income in the TRSs.
The ability of our board of trustees to revoke our REIT
qualification without shareholder approval may cause adverse
consequences to our shareholders.
Our declaration of trust provides that our board of trustees may
revoke or otherwise terminate our REIT election, without the
approval of our shareholders, if it determines that it is no
longer in our best interest to continue to qualify as a REIT. If
we cease to qualify as a REIT, we would become subject to
U.S. federal income tax on our taxable income and would no
longer be required to distribute most of our taxable income to
our shareholders, which may have adverse consequences on our
total return to our shareholders.
The ability of our board of trustees to change our major
policies may not be in your interest.
Our board of trustees determines our major policies, including
policies and guidelines relating to our acquisitions, leverage,
financing, growth, operations and distributions to shareholders
and our continued qualification as a REIT. Our board may amend
or revise these and other policies and guidelines from time to
time without the vote or consent of our shareholders.
Accordingly, our shareholders will have limited control over
changes in our policies and those changes could adversely affect
our financial condition, results of operations, the market price
of our common shares and our ability to make distributions to
our shareholders.
If we fail to implement and maintain an effective system
of internal controls, we may not be able to accurately determine
our financial results or prevent fraud. As a result, our
investors could lose confidence in our reported financial
information, which could harm our business and the market value
of our common shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We may
in the future discover areas of our internal controls that need
improvement. Section 404 of the Sarbanes-Oxley Act of 2002
will require us to evaluate and report on our internal controls
over financial reporting and have our independent auditors
annually attest to our
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evaluation, as well as issue their opinion on our internal
control over financial reporting. While we intend to undertake
substantial work to prepare for compliance with
Section 404, we cannot be certain that we will be
successful in implementing or maintaining adequate control over
our financial reporting and financial processes. Furthermore, as
we rapidly grow our business and acquire new hotel properties
with existing internal controls that may not be consistent with
our own, our internal controls will become more complex, and we
will require significantly more resources to ensure our internal
controls remain effective. If we or our independent auditors
discover a material weakness, the disclosure of that fact, even
if quickly remedied, could reduce the market value of our common
shares. In particular, we will need to establish, or cause our
third party hotel managers to establish, controls and procedures
to ensure that hotel revenues and expenses are properly recorded
at our hotels. The existence of any material weakness or
significant deficiency would require management to devote
significant time and incur significant expense to remediate any
such material weaknesses or significant deficiencies and
management may not be able to remediate any such material
weaknesses or significant deficiencies in a timely manner. Any
such failure could cause investors to lose confidence in our
reported financial information and adversely affect the market
value of our common shares or limit our access to the capital
markets and other sources of liquidity.
Complying with REIT requirements may cause us to forego
otherwise attractive opportunities or liquidate otherwise
attractive investments.
To qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our shareholders and the
ownership of our shares of beneficial interest. In order to meet
these tests, we may be required to forego investments we might
otherwise make. Thus, compliance with the REIT requirements may
hinder our performance.
In particular, we must ensure that at the end of each calendar
quarter, at least 75% of the value of our assets consists of
cash, cash items, government securities and qualified real
estate assets. The remainder of our investment in securities
(other than government securities, securities that constitute
qualified real estate assets and securities of our TRSs)
generally cannot include more than 10% of the outstanding voting
securities of any one issuer or more than 10% of the total value
of the outstanding securities of any one issuer. In addition, in
general, no more than 5% of the value of our assets (other than
government securities, securities that constitute qualified real
estate assets and securities of our TRSs) can consist of the
securities of any one issuer, and no more than 25% of the value
of our total assets can be represented by the securities of one
or more TRSs. If we fail to comply with these requirements at
the end of any calendar quarter, we must correct the failure
within 30 days after the end of the calendar quarter or
qualify for certain statutory relief provisions to avoid losing
our REIT qualification and suffering adverse tax consequences.
As a result, we may be required to liquidate otherwise
attractive investments. These actions could have the effect of
reducing our income and amounts available for distribution to
our shareholders.
We have not established a minimum distribution payment
level and we may be unable to generate sufficient cash flows
from our operations to make distributions to our shareholders at
any time in the future.
We are generally required to distribute to our shareholders at
least 90% of our taxable income each year for us to qualify as a
REIT under the Code, which requirement we currently intend to
satisfy. To the extent we satisfy the 90% distribution
requirement but distribute less than 100% of our taxable income,
we will be subject to federal corporate income tax on our
undistributed taxable income. We have not established a minimum
distribution payment level, and our ability to make
distributions to our shareholders may be adversely affected by
the risk factors described in this prospectus. We currently do
not expect to use the proceeds from this offering to make
distributions to our shareholders. Subject to satisfying the
requirements for REIT qualification, we intend over time to make
regular quarterly distributions to our shareholders. Our board
of trustees has the sole discretion to determine the timing,
form and amount of any distributions to our shareholders. Our
board of trustees makes determinations regarding distributions
based upon, among other factors, our historical and projected
results of
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operations, financial condition, cash flows and liquidity,
satisfaction of the requirements for REIT qualification and
other tax considerations, capital expenditure and other expense
obligations, debt covenants, contractual prohibitions or other
limitations and applicable law and such other matters as our
board of trustees may deem relevant from time to time. Among the
factors that could impair our ability to make distributions to
our shareholders are:
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our inability to invest the proceeds of the offering;
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our inability to realize attractive returns on our investments;
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unanticipated expenses that reduce our cash flow or non-cash
earnings;
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defaults in our investment portfolio or decreases in the value
of the underlying assets; and
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the fact that anticipated operating expense levels may not prove
accurate, as actual results may vary from estimates.
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As a result, no assurance can be given that we will be able to
continue to make distributions to our shareholders or that the
level of any distributions we do make to our shareholders will
achieve a market yield or increase or even be maintained over
time, any of which could materially and adversely affect the
market price of our common shares. In addition, prior to the
time we have fully invested the net proceeds of this offering,
we may fund our quarterly distributions out of such net
proceeds. The use of our net proceeds for distributions could be
dilutive to our financial results and may constitute a return of
capital to our investors, which would have the effect of
reducing each shareholders basis in its common shares. We
also could use borrowed funds or proceeds from the sale of
assets to fund distributions.
In addition, distributions that we make to our shareholders are
generally taxable to our shareholders as ordinary income.
However, a portion of our distributions may be designated by us
as long-term capital gains to the extent that they are
attributable to capital gain income recognized by us or may
constitute a return of capital to the extent that they exceed
our earnings and profits as determined for tax purposes. A
return of capital is not taxable, but has the effect of reducing
the basis of a shareholders investment in our common
shares.
The trading price of our common shares may be less than
the offering price.
The public offering price for the shares in this offering has
been determined by us and the underwriters. We cannot assure you
that the price at which the common shares will sell in the
public market after the completion of this offering will not be
lower than the price at which they are sold by the underwriters.
The market price of our equity securities may vary
substantially, which may limit your ability to liquidate your
investment.
The trading prices of equity securities issued by REITs have
historically been affected by changes in market interest rates.
One of the factors that may influence the price of our shares in
public trading markets is the annual yield from distributions on
our common or preferred shares as compared to yields on other
financial instruments. An increase in market interest rates, or
a decrease in our distributions to shareholders, may lead
prospective purchasers of our shares to demand a higher annual
yield, which could reduce the market price of our equity
securities.
Other factors that could affect the market price of our equity
securities include the following:
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actual or anticipated variations in our quarterly results of
operations;
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changes in market valuations of companies in the hotel or real
estate industries;
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changes in expectations of future financial performance or
changes in estimates of securities analysts;
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fluctuations in stock market prices and volumes;
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issuances of common shares or other securities in the future;
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the addition or departure of key personnel;
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announcements by us or our competitors of acquisitions,
investments or strategic alliances; and
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unforeseen events beyond our control, such as terrorist attacks,
travel related health concerns including pandemics and epidemics
such as H1N1 influenza, avian bird flu and SARS, political
instability, regional hostilities, increases in fuel prices,
imposition of taxes or surcharges by regulatory authorities,
travel related accidents and unusual weather patterns, including
natural disasters such as hurricanes, tsunamis or earthquakes.
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Because we have a limited equity market capitalization and our
common shares are traded in low volumes, the stock market price
of our common shares is susceptible to fluctuation to a greater
extent than companies with larger market capitalization. As a
result, your ability to liquidate your investment may be limited
and the sale of common shares in this offering could cause the
stock market price of our common shares to decline.
The number of shares available for future sale could
adversely affect the market price of our common shares.
We cannot predict the effect, if any, of future sales of common
shares, or the availability of common shares for future sale, on
the market price of our common shares. Sales of substantial
amounts of common shares (including shares issued to our
trustees and officers), or the perception that these sales could
occur, may adversely affect prevailing market prices for our
common shares.
We also may issue from time to time additional common shares or
limited partnership interests in our operating partnership in
connection with the acquisition of properties and we may grant
demand or piggyback registration rights in connection with these
issuances. Sales of substantial amounts of our common shares or
the perception that these sales could occur may adversely affect
the prevailing market price for our common shares or may impair
our ability to raise capital through a sale of additional equity
securities. Upon completion of this offering, we expect to have
13,220,854 common shares outstanding, including the common
shares sold in this offering, or 13,820,854 common shares
outstanding if the underwriters over-allotment option is
exercised in full. Our Equity Incentive Plan provides for grants
of equity based awards up to an aggregate of 565,359 common
shares.
Future offerings of debt or equity securities ranking
senior to our common shares or incurrence of debt (including
under our credit facility) may adversely affect the market price
of our common shares.
If we decide to issue debt or equity securities in the future
ranking senior to our common shares or otherwise incur
indebtedness (including under our credit facility), it is
possible that these securities or indebtedness will be governed
by an indenture or other instrument containing covenants
restricting our operating flexibility and limiting our ability
to make distributions to our shareholders. Additionally, any
convertible or exchangeable securities that we issue in the
future may have rights, preferences and privileges, including
with respect to distributions, more favorable than those of our
common shares and may result in dilution to owners of our common
shares. Because our decision to issue debt or equity securities
in any future offering or otherwise incur indebtedness will
depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or
nature of our future offerings or financings, any of which could
reduce the market price of our common shares and dilute the
value of our common shares.
30
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus that are
subject to risks and uncertainties. These forward-looking
statements include information about possible or assumed future
results of our business, financial condition, liquidity, results
of operations, cash flow and plans and objectives. When we use
the words believe, expect,
anticipate, estimate, plan,
continue, intend, should,
may or similar expressions, we intend to identify
forward-looking statements. Statements regarding the following
subjects, among others, may be forward-looking:
|
|
|
|
|
use of the proceeds of this offering;
|
|
|
|
market trends in our industry, interest rates, real estate
values, the debt financing markets or the general economy or the
demand for commercial real estate loans;
|
|
|
|
our business and investment strategy;
|
|
|
|
our projected operating results;
|
|
|
|
actions and initiatives of the U.S. government and changes
to U.S. government policies and the execution and impact of
these actions, initiatives and policies;
|
|
|
|
the state of the U.S. economy generally or in specific
geographic regions;
|
|
|
|
economic trends and economic recoveries;
|
|
|
|
our ability to obtain and maintain financing arrangements;
|
|
|
|
changes in the value of our properties;
|
|
|
|
our expected portfolio of properties;
|
|
|
|
the degree to which our hedging strategies may or may not
protect us from interest rate volatility;
|
|
|
|
impact of and changes in governmental regulations, tax law and
rates, accounting guidance and similar matters;
|
|
|
|
our ability to satisfy the requirements for REIT qualification
under the Code;
|
|
|
|
availability of qualified personnel;
|
|
|
|
estimates relating to our ability to make distributions to our
shareholders in the future;
|
|
|
|
general volatility of the capital markets and the market price
of our common shares; and
|
|
|
|
degree and nature of our competition.
|
The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us.
Forward-looking statements are not predictions of future events.
These beliefs, assumptions and expectations can change as a
result of many possible events or factors, not all of which are
known to us. Some of these factors are described in this
prospectus under the headings Prospectus Summary,
Risk Factors, Management Discussion and
Analysis of Financial Condition and Results of Operations
and Business. If a change occurs, our business,
financial condition, liquidity and results of operations may
vary materially from those expressed in our forward-looking
statements. Any forward-looking statement speaks only as of the
date on which it is made. New risks and uncertainties arise over
time, and it is not possible for us to predict those events or
how they may affect us. Except as required by law, we are not
obligated to, and do not intend to, update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.
31
USE OF
PROCEEDS
We estimate that the net proceeds of this offering will be
approximately $ after deducting
the underwriting discounts and commissions and other estimated
offering expenses. If the underwriters over-allotment
option is exercised in full, our net proceeds will be
approximately $ .
We will contribute the net proceeds of this offering to our
operating partnership in exchange for additional limited
partnership interests in our operating partnership.
Our operating partnership intends to use approximately
$43 million of the net proceeds of this offering to pay
down debt under our credit facility, which bears interest at a
rate of approximately 4.5% per annum as of February 1, 2011
and will mature on October 12, 2013. We intend to use
approximately $18 million of the net proceeds of this
offering to complete the acquisition of a hotel located in the
greater Pittsburgh, Pennsylvania area, which we currently have
under contract to purchase.
We will use the remaining net proceeds to invest in hotel
properties in accordance with our investment strategy described
in this prospectus and for general business purposes, including
renovations and upgrades of guest rooms and common areas of
certain of our hotels, which we believe will enhance their
competitive position as economic and lodging industry conditions
improve. We generally intend to invest the remaining net
proceeds as promptly as we can identify hotel acquisition
opportunities that are consistent with our investment strategy.
However, we cannot predict if or when we will identify and
acquire hotels that meet our acquisition criteria so as to
permit us to invest the net proceeds of this offering. Prior to
the full investment of the offering proceeds in hotel
properties, we intend to invest in interest-bearing short-term
securities or money-market accounts that are consistent with our
intention to qualify as a REIT. Such investments may include,
for example, government and government agency certificates,
certificates of deposit, interest-bearing bank deposits and
mortgage loan participations. These investments are expected to
provide a lower net return than we seek to achieve from
investments in our hotel properties.
32
CAPITALIZATION
The following table sets forth:
|
|
|
|
|
our actual capitalization as of September 30, 2010;
|
|
|
|
|
|
our pro forma capitalization as of September 30, 2010,
giving effect to (i) borrowings of $42.8 million under
our credit facility, (ii) completion of our acquisitions of
the Residence Inn by
Marriott®
in New Rochelle, New York, the Homewood Suites by
Hilton®
in Carlsbad (North San Diego County), California and (iii) the
probable acquisition of a hotel located in the greater
Pittsburgh, Pennsylvania area, which we currently have under
contract to purchase, to be financed from the net proceeds of
this offering and through the assumption of $7.3 million in
debt; and
|
|
|
|
|
|
our pro forma capitalization as of September 30, 2010, as
adjusted to give effect to the sale of our common shares in this
offering, at an offering price of $16.96 per share, not
including shares subject to the underwriters
over-allotment option, and net of the underwriting discounts and
commissions and other estimated offering expenses payable by us
in connection with this offering, and the application of
$42.8 million of the net proceeds thereof to pay down
borrowings under our credit facility.
|
The following table should be read in conjunction with the
section captioned Management Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Borrowings under revolving credit facility
|
|
|
|
|
|
$
|
42,800
|
|
|
|
|
|
Mortgage loans payable
|
|
|
12,410
|
|
|
|
19,750
|
|
|
|
19,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
12,410
|
|
|
|
62,550
|
|
|
|
19,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value, 500,000,000 shares
authorized, 9,208,750 shares issued and outstanding,
actual; 13,208,750 shares issued and outstanding, as
adjusted(1)
|
|
|
92
|
|
|
|
92
|
|
|
|
132
|
|
Additional paid-in capital
|
|
|
168,966
|
|
|
|
168,966
|
|
|
|
232,463
|
|
Retained deficit
|
|
|
(2,542
|
)
|
|
|
(2,542
|
)
|
|
|
(2,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
166,516
|
|
|
|
166,516
|
|
|
|
230,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in operating partnership
|
|
|
275
|
|
|
|
275
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
179,201
|
|
|
$
|
229,341
|
|
|
$
|
250,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes (i) 478,359 common shares reserved for issuance
under our Equity Incentive Plan and (ii) 600,000 common
shares issuable upon exercise of the underwriters
over-allotment option. |
33
DISTRIBUTION
POLICY
We intend over time to make regular quarterly distributions to
holders of our common shares. In order to qualify for taxation
as a REIT, we intend to make annual distributions to our
shareholders of an amount at least equal to:
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|
|
|
|
90% of our REIT taxable income (determined before the deduction
for dividends paid and excluding any net capital gain); plus
|
|
|
|
90% of the excess of our net income, if any, from foreclosure
property over the tax imposed on such income by the Code; less
|
|
|
|
the sum of certain items of non-cash income (as determined under
Sections 857 of the Code).
|
Generally, we expect to distribute 100% of our REIT taxable
income so as to avoid the income and excise tax on undistributed
REIT taxable income. See Material U.S. Federal Income
Tax Considerations.
|
|
|
|
|
Distributions are authorized by our board of trustees and
declared by us based upon a variety of factors, including:
|
|
|
|
|
|
actual results of operations;
|
|
|
|
the timing of the investment of the net proceeds of this
offering;
|
|
|
|
any debt service requirements;
|
|
|
|
capital expenditure requirements for our properties;
|
|
|
|
our taxable income;
|
|
|
|
the annual distribution requirement under the REIT provisions of
the Code;
|
|
|
|
our operating expenses; and
|
|
|
|
other factors that our board of trustees may deem relevant.
|
Our ability to pay distributions to our shareholders depend, in
part, upon our receipt of distributions from our operating
partnership, which depends upon receipt of rent payments from
our TRS lessees and the management of our hotels by the
third-party hotel management companies that our TRS lessees have
engaged to operate our hotels. Distributions to our shareholders
generally will be taxable to our shareholders as ordinary
income; however, because a significant portion of our
investments consists of ownership of equity interests in hotel
properties, which generates depreciation and other non-cash
charges against our income, a portion of our distributions may
constitute a return of capital for federal income tax purposes.
To the extent not inconsistent with our qualification as a REIT,
we may retain any earnings that accumulate in our TRSs.
Our ability to pay distributions is restricted by the terms of
our credit facility, which limits the amount of our quarterly
distributions to the amount necessary to enable us to
(1) maintain our REIT qualification and (2) avoid
incurring income and excise taxes.
In addition, prior to the time we have fully invested the net
proceeds of this offering, we may fund our quarterly
distributions out of such net proceeds. The use of our net
proceeds for distributions could be dilutive to our financial
results and may constitute a return of capital to our investors,
which would have the effect of reducing each shareholders
basis in its common shares. We also could use borrowed funds or
proceeds from the sale of assets to pay distributions.
34
MARKET PRICE OF
OUR COMMON SHARES
Our common shares are traded on the NYSE under the symbol
CLDT. As of February 1, 2011, we had 9,220,854
common shares outstanding and three registered shareholders of
record of our common shares. This figure does not include
beneficial owners who hold shares in nominee name. On
February 1, 2011, the closing price of our common shares,
as reported on the NYSE, was $16.96. The following table sets
forth, for the periods indicated, the high and low sale prices
of our common shares since completion of our IPO, as reported on
the NYSE, and the dividends paid by us with respect to those
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
High
|
|
Low
|
|
Dividends
|
|
Second quarter (commencing April 16, 2010 to June 30,
2010)
|
|
$
|
20.70
|
|
|
$
|
17.45
|
|
|
|
|
|
Third quarter
|
|
$
|
18.92
|
|
|
$
|
14.25
|
|
|
$
|
0.175
|
|
Fourth quarter
|
|
$
|
19.46
|
|
|
$
|
16.11
|
|
|
$
|
0.175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
First quarter (through February 1, 2011)
|
|
$
|
17.57
|
|
|
$
|
16.46
|
|
|
|
|
|
35
SELECTED
FINANCIAL DATA
The following table presents selected historical financial
information as of and for the nine months ended
September 30, 2010. The selected historical financial
information as of and for the period from inception through
December 31, 2009 has been derived from our historical
financial statements audited by PricewaterhouseCoopers LLP,
independent registered certified public accounting firm, whose
report with respect to such financial information is included
elsewhere in this prospectus. The selected historical financial
information as of and for the nine months ended
September 30, 2010 has been derived from our interim
unaudited financial statements. These interim unaudited
financial statements have been prepared on substantially the
same basis as our audited consolidated financial statements and
reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of our financial position
as of September 30, 2010 and the results of our operations
and cash flow for the nine months ended September 30, 2010.
All such adjustments are of a normal recurring nature. These
results are not necessarily indicative of our results for the
full year. The selected historical financial data should be read
in conjunction with Management Discussion and Analysis of
Financial Condition and Results of Operations, and our
consolidated financial statements and the notes thereto
appearing elsewhere in this prospectus.
The following table presents unaudited selected pro forma
consolidated balance sheet data as of September 30, 2010,
which has been prepared to reflect adjustments to our historical
consolidated balance sheet to illustrate the estimated effect of
the following transactions as if they had occurred on
September 30, 2010:
|
|
|
|
(i)
|
the acquisition of the Residence Inn by
Marriott®
in New Rochelle, New York, which was completed on
October 5, 2010; and
|
|
|
|
|
(ii)
|
the sale of 4,000,000 common shares in this offering at an
assumed public offering price of $16.96 per share, not including
shares subject to the underwriters over-allotment option
and net of underwriting discounts and commissions and offering
costs.
|
The unaudited selected pro forma consolidated operating data in
the table below for the nine months ended September 30,
2010 and the year ended December 31, 2009 has been prepared
to illustrate the estimated effect of the transactions described
in items (i) and (ii) above, assuming such
transactions and our initial public offering were completed on
January 1, 2009, but does not include the estimated effect
of our acquisition of the Homewood Suites by
Hilton®
in Carlsbad (North San Diego County), California for
approximately $32 million or our anticipated acquisition of
a hotel located in the greater Pittsburgh, Pennsylvania area,
which we currently have under contract to purchase, for
approximately $25 million, including the assumption of
$7.3 million in debt.
The following selected historical and pro forma financial data
should be read in conjunction with (i) our historical
audited financial statements as of and for the period ended
December 31, 2009 and the notes thereto appearing elsewhere
in this prospectus, (ii) our historical unaudited financial
statements as of and for the nine months ended
September 30, 2010 and the notes thereto appearing
elsewhere in this prospectus (iii) our unaudited pro forma
financial statements and the notes thereto appearing elsewhere
in this prospectus, (iv) the historical audited
consolidated financial statements of our hotels and the notes
thereto appearing elsewhere in this prospectus and (v) the
Risk Factors, Cautionary Note Regarding
Forward-Looking Statements, and Management
Discussion and Analysis of Results of Operations and Financial
Condition sections in this prospectus. We have based our
unaudited pro forma adjustments on available information and
assumptions that we believe are
36
reasonable. The following selected unaudited pro forma financial
data does not purport to be, and should not be viewed as,
indicative of our future results of operations or financial
condition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Pro Forma
|
|
|
Nine Months
|
|
Year Ended
|
|
Nine Months
|
|
|
Ended
|
|
December 31,
|
|
Ended
|
Property
|
|
September 30, 2010
|
|
2009
|
|
September 30, 2010
|
|
|
(In thousands, except share and per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
13,041
|
|
|
$
|
47,236
|
|
|
$
|
37,144
|
|
Hotel operating expenses
|
|
|
7,592
|
|
|
|
29,062
|
|
|
|
22,463
|
|
Corporate general and administrative
|
|
|
2,340
|
|
|
|
3,387
|
|
|
|
3,168
|
|
Hotel property acquisition costs
|
|
|
2,165
|
|
|
|
|
|
|
|
|
|
Property taxes and insurance
|
|
|
718
|
|
|
|
3,345
|
|
|
|
2,672
|
|
Depreciation and amortization
|
|
|
1,200
|
|
|
|
6,821
|
|
|
|
5,153
|
|
Total operating expenses
|
|
|
14,015
|
|
|
|
42,615
|
|
|
|
33,456
|
|
Operating income (loss)
|
|
|
(974
|
)
|
|
|
4,621
|
|
|
|
3,688
|
|
Interest expense
|
|
|
(19
|
)
|
|
|
(752
|
)
|
|
|
(556
|
)
|
Interest income
|
|
|
109
|
|
|
|
|
|
|
|
109
|
|
Income (loss) before income tax expense
|
|
|
(884
|
)
|
|
|
3,869
|
|
|
|
3,241
|
|
Income tax expense
|
|
|
(46
|
)
|
|
|
(276
|
)
|
|
|
(124
|
)
|
Net income (loss) attributable to common shareholders
|
|
$
|
(930
|
)
|
|
$
|
3,593
|
|
|
$
|
3,117
|
|
Income (loss) per common share, basic and diluted
|
|
$
|
(0.17
|
)
|
|
$
|
0.39
|
|
|
$
|
0.34
|
|
Weighted average number of common shares, basic and diluted
|
|
|
5,448,663
|
|
|
|
9,208,750
|
|
|
|
9,208,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Pro Forma
|
|
|
As of September 30,
|
|
As of September 30,
|
|
|
2010
|
|
2010
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
154,040
|
|
|
$
|
174,755
|
|
Cash and cash equivalents
|
|
|
26,845
|
|
|
|
69,120
|
|
Restricted cash
|
|
|
5,689
|
|
|
|
5,689
|
|
Hotel receivables (net of allowance for doubtful accounts)
|
|
|
859
|
|
|
|
905
|
|
Deferred costs, net
|
|
|
1,047
|
|
|
|
1,109
|
|
Prepaid expenses and other assets
|
|
|
592
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189,072
|
|
|
$
|
252,340
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans payable
|
|
$
|
12,410
|
|
|
$
|
12,410
|
|
Accounts payable and accrued expenses
|
|
|
3,039
|
|
|
|
3,075
|
|
Accrued underwriter fees
|
|
|
5,175
|
|
|
|
5,175
|
|
Distributions payable
|
|
|
1,657
|
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,281
|
|
|
|
22,317
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
166,516
|
|
|
|
229,748
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in operating partnership
|
|
|
275
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
189,072
|
|
|
$
|
252,340
|
|
|
|
|
|
|
|
|
|
|
37
MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the
information provided under the section of this prospectus
entitled Risk Factors, Cautionary Note
Regarding Forward-looking Statements, and
Business and our audited balance sheet and the
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements reflecting
current expectations that involve risks and uncertainties.
Actual results and the timing of events may differ materially
from those contained in these forward-looking statements due to
a number of factors, including those discussed in the section
entitled Risk Factors and elsewhere in this
prospectus.
Overview
We are a self-advised hotel investment company organized in
October 2009 to invest in premium-branded upscale extended-stay
and select-service hotels. In April 2010, we raised net proceeds
of approximately $158.7 million in our IPO and an
additional $10 million through a concurrent private
placement of our common shares to Mr. Fisher. Since the
completion of our IPO, we have acquired 13 hotels with an
aggregate of 1,650 rooms in nine states for approximately
$209 million and have entered into a contract to purchase a
hotel located in the greater Pittsburgh, Pennsylvania area for
approximately $25 million. We have funded our acquisitions to
date with the net proceeds of our IPO and private placement,
through the assumption of debt and with borrowings under our
credit facility. We expect to finance the acquisition of the
hotel we have under contract to purchase from the net proceeds
of this offering and through the assumption of $7.3 million
in debt. Our portfolio includes upscale extended-stay hotels
that operate under the Homewood Suites by
Hilton®
brand (seven hotels) and Residence Inn by
Marriott®
brand (three hotels), as well as premium-branded select-service
hotels they operate under the Courtyard by
Marriott®
brand (one hotel), Hampton Inn and Suites by
Hilton®
brand (one hotel) and SpringHill Suites by
Marriott®
brand (one hotel).
Upscale extended-stay hotels typically have the following
characteristics:
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|
|
their principal customer base includes business travelers who
are on extended assignments and corporate relocations;
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|
|
their services and amenities include complimentary breakfast and
evening hospitality hour, high-speed internet access, in-room
movie channels, limited meeting space, daily linen and room
cleaning service,
24-hour
front desk, guest grocery services, and an
on-site
maintenance staff; and
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|
|
their physical facilities include large suites, quality
construction, full separate kitchens in each guest suite,
quality room furnishings, pool, and exercise facilities.
|
We also invest in premium-branded select-service hotels such as
Courtyard by
Marriott®,
Hampton Inn and
Suites®
and SpringHill Suites by
Marriott®.
The service and amenity offerings of these hotels typically
include complimentary breakfast, high-speed internet access,
local calls, in-room movie channels, and daily linen and room
cleaning service. We focus primarily on hotels in the 25 largest
metropolitan markets in the United States. We believe that
current market conditions will continue to create attractive
opportunities to acquire high quality hotels at cyclically low
prices that will benefit from an improving economy and our
aggressive asset management.
Our management team, led by Mr. Fisher, has extensive
experience acquiring, developing, financing, repositioning,
managing and selling hotels. Prior to forming Chatham Lodging
Trust, Mr. Fisher served as chairman, chief executive
officer and president of Innkeepers USA Trust, or Innkeepers, a
New York Stock Exchange-listed hotel real estate investment
trust, or REIT, from its inception in 1994 through its sale in
June 2007. In addition, Peter Willis, our Executive Vice
President
38
and Chief Investment Officer, and Dennis M. Craven, our
Executive Vice President and Chief Financial Officer, served in
similar positions at Innkeepers.
In addition to the hotel we have under contract to purchase, we
have identified and are in various stages of reviewing and
negotiating a number of additional potential hotel acquisition
opportunities. As of February 1, 2011, we were actively
reviewing potential hotel acquisitions having an aggregate
transaction value in excess of $200 million, based on our
preliminary discussions with sellers and our internal assessment
of the properties values. Our management team sourced
these potential acquisitions through their extensive
relationships with hotel owners, management companies,
franchisors, brokers, banks, insurance companies, public
institutions, fund managers, REITs, private investors and
developers.
Our acquisition of these properties is subject to us negotiating
and executing with the sellers mutually acceptable definitive
and binding purchase and sale agreements with respect to the
properties, which we expect will contain a number of conditions
to closing the acquisitions, including:
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(i)
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our ability to negotiate and execute new management agreements
and franchise agreements, or assume the existing agreements, for
the properties,
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(ii)
|
our completion of satisfactory due diligence with respect to the
properties,
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(iii)
|
lender approval of our assumption of existing indebtedness with
respect to certain of the properties, and
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|
(iv)
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satisfaction of customary closing conditions.
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There can be no assurance that the sellers of the properties
discussed above will be willing to proceed with the
transactions, that we will be able to negotiate and execute
satisfactory definitive purchase and sale agreements with the
sellers, that our due diligence will be satisfactory or that the
conditions to closing will be satisfied.
We intend to elect and qualify to be treated as a REIT for
federal income tax purposes.
For us to qualify as a REIT under the Code, we cannot operate
the hotels that we acquire. Therefore, our operating partnership
and its subsidiaries lease our hotel properties to our TRS
lessees, who in turn have engaged eligible independent
contractors to manage our hotels. Each of these lessees is owned
by a TRS for federal income tax purposes and is consolidated
into our financial statements for accounting purposes. However,
since both our operating partnership and our TRS lessees are
controlled by us, our principal source of funds on a
consolidated basis is from the operations of our hotels. The
earnings of our TRS lessees are subject to taxation as regular C
corporations, reducing such lessees ability to pay
dividends, our funds from operations and the cash available for
distribution to our shareholders.
Results of
Operations
Industry
outlook
Operating performance for the U.S. lodging industry
declined 16.7% in 2009, as reported by Smith Travel Research,
due to the challenging economic conditions created by declining
GDP, high levels of unemployment, low consumer confidence, the
significant decline in home prices and a reduction in available
credit. We believe that the hotel industrys performance is
correlated to the performance of the economy overall, and with
key economic indicators such as GDP growth, employment trends,
corporate profits and consumer confidence improving, we expect a
rebound in the performance of the hotel industry. After 19
consecutive months of declining year over year RevPAR, monthly
RevPAR has been higher year over year beginning in March 2010,
as reported by Smith Travel Research.
39
While the U.S. hotel industry has shown improvement since
the time of our IPO and we are encouraged by these improvements,
industry operating performance remains significantly below
pre-2008 levels. In addition to facing weakened operating
performance, hotel owners have been adversely impacted by a
significant decline in the availability of debt financing. We
believe that the combination of a decline in operating
performance and reduction in the availability of debt financing
has caused hotel values to decline in recent years and will
continue to lead to increased hotel loan foreclosures and
distressed hotel property sales. In addition, we believe that
the supply of new hotels is likely to remain low for the next
several years due to limited availability of debt financing.
Hotel industry operating performance historically has correlated
with U.S. GDP growth, and a number of economists and
government agencies currently predict that the U.S. economy
will grow over the next several years. We believe that
U.S. GDP growth, coupled with limited supply of new hotels,
will lead to increases in lodging industry RevPAR and hotel
operating profits.
Three months
and nine months ended September 30, 2010
Prior to April 21, 2010, operations had not commenced
because we were in our developmental stage. For the third
quarter and year to date of 2010, we had a net loss of
$0.3 million, or a loss of $0.03 per diluted share, and
$0.9 million, or a loss of $0.17 per diluted share,
respectively. For the quarter, FFO, Adjusted FFO, EBITDA and
Adjusted EBITDA were $0.5 million, $2.0 million,
$0.9 million and $2.3 million, respectively. Year to
date, FFO, Adjusted FFO, EBITDA and Adjusted EBITDA were
$0.3 million, $2.7 million, $0.9 million and
$3.3 million, respectively.
Results of operations for the three and nine months ended
September 30, 2010 include the operating activities of the
11 hotels owned at September 30, 2010 since their
acquisition.
Revenues
Total revenue was $8.4 million and $13.0 million for
the quarter and year to date, respectively. Since all of our
hotels are select service or limited service hotels, room
revenue is the primary revenue source as these hotels do not
have a meaningful food and beverage source or large group
conference facilities. As such, room revenue was
$8.1 million and $12.7 million for the quarter and
year to date, respectively, which revenue comprised 97% of total
revenue for the quarter and year to date. Other operating
revenue, comprised of meeting room, gift shop, in-room movie and
other ancillary amenities revenue, was $0.2 million and
$0.3 million for the quarter and year to date, respectively.
Since room revenue is the primary component of total revenue,
our revenue results are dependent on maintaining and improving
occupancy, ADR and RevPAR at our hotels. Occupancy, ADR, and
RevPAR results are presented in the following table based on the
period since our acquisition of the hotels:
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Quarter Ended
|
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Year to Date
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September 30, 2010
|
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September 30, 2010
|
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Portfolio
|
|
|
|
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ADR
|
|
$
|
107.93
|
|
|
$
|
106.32
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Occupancy
|
|
|
74.3
|
%
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|
|
75.7
|
%
|
RevPAR
|
|
$
|
80.21
|
|
|
$
|
80.49
|
|
Hotel Operating
Expenses
Hotel operating expenses were $4.9 million and
$7.6 million for the quarter and year to date,
respectively. As a percentage of total revenue, hotel operating
expenses were 59% and 58% for the quarter and year to date,
respectively. Direct hotel operating expenses included rooms
expense of $1.9 million and $3.0 million for the
quarter and year to date, respectively. Other direct expenses,
which include management and franchise fees, insurance,
utilities, repairs and maintenance, advertising and
40
sales, and corporate general and administrative expenses, were
$3.0 million and $4.6 million for the quarter and year
to date, respectively.
Depreciation and
Amortization
Depreciation and amortization expense was $0.8 million and
$1.2 million for the quarter and year to date,
respectively. Depreciation is recorded on our hotel buildings
over 40 years from the date of acquisition. Depreciable
lives of hotel furniture, fixtures and equipment are generally
three to ten years between the date of acquisition and the date
that the furniture, fixtures and equipment will be replaced.
Amortization of franchise fees is recorded over the term of the
respective franchise agreement.
Real Estate and
Personal Property Taxes
Total real estate and personal property taxes expenses were
$0.5 million and $0.7 million for the quarter and year
to date, respectively.
Corporate General
and Administrative
Corporate general and administrative expenses principally
consist of employee-related costs, including base payroll and
amortization of restricted stock and LTIP unit awards. These
expenses also include corporate operating costs, professional
fees and trustees fees. Total corporate general and
administrative expenses were $1.4 million and
$2.3 million for the quarter and year to date,
respectively. Payroll related costs were $0.4 million and
$0.6 million and share-based compensation was
$0.4 million and $0.6 million for the quarter and year
to date, respectively. During the quarter, payroll costs
included expenses of $0.2 million and share-based
compensation included an expense of $0.1 million related to
the termination of the former chief financial officer.
Organization costs of $0 and $0.1 million are included in
corporate general and administrative expenses for the quarter
and year to date, respectively, and we do not expect these costs
to recur as the costs were related to our
start-up as
an organization.
Hotel Property
Acquisition Costs
We incurred acquisition costs of $1.2 million and
$2.2 million for the quarter and year to date,
respectively. These expenses represent costs associated with the
purchase of the eleven hotels owned at September 30, 2010,
costs associated with the purchase of two hotels acquired
subsequent to the end of the quarter, as well as costs for
potential hotel acquisitions. These acquisition-related costs
are expensed when incurred rather than capitalized. Including
the acquisitions completed subsequent to the end of the quarter,
year to date acquisition costs were approximately 1% of total
assets.
Interest
Income
Interest income on cash and cash equivalents was
$0.1 million for both the quarter and year to date.
Interest
Expense
Interest expense was $19 thousand for both the quarter and
year to date. In connection with the acquisition of two hotels
during the quarter, we assumed two loans with a combined
aggregate principal balance of approximately $12.4 million.
The average interest rate of the two fixed rate loans is 5.9%.
Income Tax
Expense
Income tax expense was $0 and $46 thousand for the quarter
and year to date, respectively. Our TRSs are subject to income
taxes and this expense is based on the taxable income of the
TRSs for the periods at a tax rate of approximately 40%.
41
Material Trends
or Uncertainties
We are not aware of any material trends or uncertainties,
favorable or unfavorable, that may be reasonably anticipated to
have a material impact on either the capital resources or the
revenues or income to be derived from the acquisition and
operation of properties, loans and other permitted investments,
other than those referred to in Risk Factors.
Non-GAAP Financial
Measures
We consider the following non-GAAP financial measures useful to
investors as key supplemental measures of our operating
performance: (1) FFO, (2) Adjusted FFO,
(3) EBITDA, and (4) Adjusted EBITDA. These non-GAAP
financial measures could be considered along with, but not as
alternatives to, net income or loss, cash flows from operations
or any other measures of our operating performance prescribed by
GAAP.
We calculate FFO in accordance with standards established by the
National Association of Real Estate Investment Trusts (NAREIT),
which defines FFO as net income or loss (calculated in
accordance with GAAP), excluding gains or losses from sales of
real estate, items classified by GAAP as extraordinary, the
cumulative effect of changes in accounting principles, plus
depreciation and amortization (excluding amortization of
deferred financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. We believe that
the presentation of FFO provides useful information to investors
regarding our operating performance because it measures our
performance without regard to specified non-cash items such as
real estate depreciation and amortization, gain or loss on sale
of real estate assets and certain other items that we believe
are not indicative of the performance of our underlying hotel
properties. We believe that these items are more representative
of our asset base and our acquisition and disposition activities
than our ongoing operations, and that by excluding the effects
of the items, FFO is useful to investors in comparing our
operating performance between periods and between REITs.
We further adjust FFO for certain additional items that are not
in NAREITs definition of FFO, including hotel property
acquisition costs and costs associated with the departure of our
former chief financial officer, which are referred to as
Other charges included in general and administrative
expenses below. We believe that Adjusted FFO provides
investors with another financial measure that may facilitate
comparisons of operating performance between periods and between
REITs.
The following is a reconciliation between net loss to FFO and
Adjusted FFO for the nine months ended September 30, 2010
(in thousands, except share data):
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For the
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Nine Months Ended
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September 30,
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2010
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FFO:
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Net loss attributable to common shareholders
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$
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(930
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)
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Depreciation
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1,200
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|
|
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FFO
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270
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Hotel property acquisition costs
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2,165
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Other charges included in general and administrative expenses
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270
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|
|
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Adjusted FFO
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$
|
2,705
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|
|
|
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We calculate EBITDA as net income or loss excluding interest
expense; provision for income taxes, including income taxes
applicable to sale of assets; and depreciation and amortization
(including amortization of non-cash share-based compensation).
We believe EBITDA is useful to investors in evaluating our
operating performance because it helps investors compare our
operating performance between periods and between REITs by
removing the impact of our capital structure (primarily interest
42
expense) and asset base (primarily depreciation and
amortization) from our operating results. In addition, we use
EBITDA as one measure in determining the value of hotel
acquisitions and dispositions.
We further adjust EBITDA for certain additional items, including
hotel property acquisition costs and costs associated with the
departure of our former chief financial officer, which are
referred to as Other charges included in general and
administrative expenses below and which we believe are not
indicative of the performance of our underlying hotel
properties. We believe that Adjusted EBITDA provides investors
with another financial measure that may facilitate comparisons
of operating performance between periods and between REITs.
The following is a reconciliation between net loss to EBITDA and
Adjusted EBITDA for the nine months ended September 30,
2010 (in thousands):
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|
|
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For the
|
|
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Nine Months Ended
|
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September 30,
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2010
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|
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EBITDA:
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|
|
|
|
Net loss attributable to common shareholders
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|
$
|
(930
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)
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Interest expense
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|
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19
|
|
Income tax expense
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46
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Depreciation and amortization
|
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1,200
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Share-based compensation
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630
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EBITDA
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965
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Hotel property acquisition costs
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2,165
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Other charges included in general and administrative expenses
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183
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|
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Adjusted EBITDA
|
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$
|
3,313
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Although we present FFO, EBITDA and Adjusted EBITDA because we
believe they are useful to investors in comparing our operating
performance between periods and between REITs, these measures
have limitations as analytical tools. Some of these limitations
are:
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FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not reflect our
cash expenditures, or future requirements, for capital
expenditures or contractual commitments;
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FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not reflect
changes in, or cash requirements for, our working capital needs;
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FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not reflect
funds available to make cash distributions;
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EBITDA and Adjusted EBITDA do not reflect the significant
interest expense, or the cash requirements necessary to service
interest or principal payments, on our debts;
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|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may need to be replaced
in the future, and FFO, Adjusted FFO, EBITDA and Adjusted EBITDA
do not reflect any cash requirements for such replacements;
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non-cash compensation is and will remain a key element of our
overall long-term incentive compensation package, although we
exclude it as an expense when evaluating our ongoing operating
performance for a particular period using EBITDA;
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|
|
Adjusted FFO and Adjusted EBITDA do not reflect the impact of
certain cash charges (including acquisition transaction costs)
that result from matters we consider not to be indicative of the
underlying performance of our hotel properties; and
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43
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|
other companies in our industry may calculate FFO, Adjusted FFO,
EBITDA and Adjusted EBITDA differently than we do, limiting
their usefulness as a comparative measure.
|
In addition, FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do
not represent cash generated from operating activities as
determined by GAAP and should not be considered as alternatives
to net income or loss, cash flows from operations or any other
operating performance measure prescribed by GAAP. FFO, Adjusted
FFO, EBITDA and Adjusted EBITDA are not measures of our
liquidity. Because of these limitations, FFO, Adjusted FFO,
EBITDA and Adjusted EBITDA should not be considered in isolation
or as a substitute for performance measures calculated in
accordance with GAAP. We compensate for these limitations by
relying primarily on our GAAP results and using FFO, Adjusted
FFO, EBITDA and Adjusted EBITDA only supplementally. Our
consolidated financial statements and the notes to those
statements included elsewhere in this prospectus are prepared in
accordance with GAAP.
Sources and Uses
of Cash
Our principal sources of cash include net cash from operations
and proceeds from debt and equity issuances. Our principal uses
of cash include acquisitions, capital expenditures, operating
costs, corporate expenditures, debt repayments and distributions
to equity holders.
For the nine months ended September 30, 2010, net cash
flows provided by operations were $1.7 million, as our net
loss of $930 thousand was due in significant part to
non-cash expenses, including $1.2 million of depreciation
and amortization and $630 thousand of share-based
compensation expense. In addition, changes in operating assets
and liabilities due to the timing of cash receipts and payments
from our hotels resulted in net cash inflow of
$834 thousand. Net cash flows used in investing activities
were $148.6 million, which represents the acquisition of
the eleven hotels as well as additional improvements in those
hotels of $0.9 million and $5.7 million of funds
placed into escrows for future acquisitions and lender or
manager required escrows. Net cash flows provided by financing
activities were $173.7 million, comprised primarily from
proceeds generated from the IPO and our concurrent private
placement of common shares to our Chief Executive Officer, net
of underwriting fees and offering costs paid or payable to third
parties of $173.9 million.
As of September 30, 2010, we had cash and cash equivalents
of approximately $26.8 million. Subsequent to
September 30, 2010, we used $19.0 million of cash and
cash equivalents and $2.0 million of restricted cash to
fund the acquisition of the Residence Inn by
Marriott®
in New Rochelle, New York and paid $5.2 million of deferred
underwriting fees once we had invested 85% of the IPO proceeds
in hotel properties. Payment of the deferred underwriting fees
was made on October 21, 2010. On October 29, 2010, we
paid $1.7 million in third quarter dividends on our common
shares and distributions on our LTIP units.
Liquidity and
Capital Resources
We intend to limit the outstanding principal amount of our
consolidated indebtedness, net of cash, to not more than 35% of
the investment in our hotel properties at cost (defined as our
initial acquisition price plus the gross amount of any
subsequent capital investment and excluding any impairment
charges) measured at the time we incur debt, and a subsequent
decrease in hotel property values will not necessarily cause us
to repay debt to comply with this limitation. Our board of
trustees may modify or eliminate this policy at any time without
the approval of our shareholders. Upon completion of this
offering, we expect to have approximately
$ million of cash, together
with $85 million of borrowing capacity under our credit
facility, available to fund additional investments in hotel
properties. There can be no assurance that we will continue to
make investments in properties that meet our investment criteria.
We expect to meet our short-term liquidity requirements
generally through net cash provided by operations, existing cash
balances and, if necessary, short-term borrowings under our
credit facility. We believe that our net cash provided by
operations will be adequate to fund operating requirements, pay
interest on any borrowings and fund dividends in accordance with
the requirements for qualification as a REIT under the Code. We
expect to meet our long-term liquidity requirements, such as
hotel property
44
acquisitions, through the cash we will have available upon
completion of this offering and subsequent borrowings and expect
to fund other investments in hotel properties and scheduled debt
maturities through long-term secured and unsecured borrowings
and the issuance of additional equity or debt securities.
On October 12, 2010, we entered into a senior secured
revolving credit facility to fund future acquisition,
redevelopment and expansion activities. Currently, we have
$38 million of outstanding borrowings under this credit
facility. We intend to repay amounts outstanding under the
credit facility from time to time with periodic common and
preferred share issuances, long-term debt financings and cash
flows from operations.
The following chart summarizes certain terms of our credit
facility.
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Lenders
|
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Facility Amount
|
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Interest Rate
|
|
Term
|
|
Security
|
|
Barclays Capital; Regions Capital Markets; Credit Agricole
Corporate and Investment Bank; UBS Securities LLC and US
Bank National Association
|
|
$85,000,000(1)
|
|
Our choice of (i)
LIBOR(2)
(floor of 1.25%) + a margin between 3.25% and 4.25%, depending
on our leverage
ratio(3);
or (ii) base
rate(4) +
2.25% to 3.25%, depending on our leverage
ratio(3)
|
|
3 years (October 12, 2013)
|
|
All borrowing base
properties(5),
including any related personal property, and the equity
interests of certain of our subsidiaries
|
|
|
|
(1) |
|
Subject to the consent of the lenders, we may increase the
facility amount by an additional $25 million, for an
aggregate principal amount of $110 million. |
|
(2) |
|
LIBOR means London Interbank Offered Rate. |
|
(3) |
|
Leverage ratio is the ratio of our consolidated total debt to
the total value of our assets for the four fiscal quarters most
recently ended at the time of calculation. |
|
(4) |
|
Base rate means for any day a fluctuating annual rate equal to
the highest of (a) the federal funds rate plus 0.50%,
(b) the administrative agent banks then-current
prime rate and (c) one-month LIBOR (subject to
a 1.25% floor) plus 1.00%. |
|
(5) |
|
Borrowing base properties are subject to lender approval as set
forth in the credit facility agreements. |
Subject to certain terms and conditions set forth in the credit
agreement, the operating partnership may increase the original
principal amount of the credit agreement by an additional
$25.0 million. Pursuant to the credit agreement, we and
certain of our indirect subsidiaries guaranteed to the lenders
all of the obligations of the operating partnership under the
credit agreement, any notes and the other loan documents,
including any obligations under hedging arrangements. From time
to time, the operating partnership may be required to cause
additional subsidiaries to become guarantors under the credit
agreement.
Availability under the credit agreement is based on the least of
the following: (i) the aggregate commitments of all
lenders, (ii) a percentage of the as-is
appraised value of qualifying borrowing base properties (subject
to certain concentration limitations and other deductions) and
(iii) a percentage of net operating income from qualifying
borrowing base properties (subject to certain limitations and
other deductions). The credit agreement is secured by each
borrowing base property, including all personal property assets
related thereto, and the equity interests of borrowing base
entities and certain other of our subsidiaries. There are
currently seven properties in the borrowing base under the
credit agreement.
The credit agreement provides for revolving credit loans to us.
All borrowings under the credit agreement will bear interest at
a rate per annum equal to, at our option, (i) the greater
of (A) 1.25% plus a margin that fluctuates based upon our
leverage ratio or (B) the Eurodollar Rate (as defined in
45
the credit agreement) plus a margin that fluctuates based upon
our leverage ratio; or (ii) the greatest of (A) 2.25%,
(B) the prime lending rate as set forth on the Reuters
Screen RTRTSY1 (or such other comparable publicly available rate
if such rate no longer appears on the Reuters Screen RTRTSY1),
(C) the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, plus 1/2 of 1%, or
(D) 1% plus the Eurodollar Rate (as defined in the credit
agreement). The credit agreement also permits the issuance of
letters of credit and provides for swing line loans.
The credit agreement contains representations, warranties,
covenants, terms and conditions customary for transactions of
this type, including a maximum leverage ratio, a minimum fixed
charge coverage ratio and minimum net worth financial covenants,
limitations on (i) liens, (ii) incurrence of debt,
(iii) investments, (iv) distributions, and
(v) mergers and asset dispositions, covenants to preserve
corporate existence and comply with laws, covenants on the use
of proceeds of the credit facility and default provisions,
including defaults for non-payment, breach of representations
and warranties, insolvency, non-performance of covenants,
cross-defaults and guarantor defaults. The occurrence of an
event of default under the credit agreement could result in all
loans and other obligations becoming immediately due and payable
and the credit facility being terminated and allow the lenders
to exercise all rights and remedies available to them with
respect to the collateral.
We intend to repay $43 million in borrowings under our
credit facility out of the net proceeds from this offering. We
may fund future acquisitions with the remaining net proceeds of
this offering or with borrowings under our credit facility.
We intend to continue to invest in hotel properties only as
suitable opportunities arise. In the near-term, we intend to
fund future investments in properties with the net proceeds of
this offering. Longer term, we intend to finance our investments
with the net proceeds from additional issuances of common and
preferred shares, issuances of units of limited partnership
interest in our operating partnership or other securities or
borrowings. The success of our acquisition strategy may depend,
in part, on our ability to access additional capital through
issuances of equity securities. There can be no assurance that
we will continue to make investments in properties that meet our
investment criteria.
Quantitative and
Qualitative Disclosure About Market Risk
Interest rate
risk
We may be exposed to interest rate changes primarily as a result
of our assumption of long-term debt in connection with our
acquisitions. Our interest rate risk management objectives are
to limit the impact of interest rate changes on earnings and
cash flows and to lower overall borrowing costs. To achieve
these objectives, we will borrow primarily at fixed rates or
variable rates with the lowest margins available and, in some
cases, with the ability to convert variable rates to fixed
rates. With respect to variable rate financing, we will assess
interest rate risk by identifying and monitoring changes in
interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
At September 30, 2010, our consolidated debt was comprised
only of fixed interest rate loans. The following table provides
information about our financial instruments that are sensitive
to changes in interest rates. The fair value of our fixed rate
debt indicates the estimated principal amount of debt having the
same debt service requirements that could have been borrowed at
the date presented, at then current market interest rates. The
following table provides information about our financial
instruments that are sensitive to changes in interest rates (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair Value
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
80
|
|
|
$
|
334
|
|
|
$
|
354
|
|
|
$
|
375
|
|
|
$
|
398
|
|
|
$
|
10,894
|
|
|
$
|
12,435
|
|
|
$
|
12,346
|
|
Average interest rate
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
5.91
|
%
|
|
|
5.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Inflation
Operators of hotels, in general, possess the ability to adjust
room rates daily to reflect the effects of inflation. However,
competitive pressures may limit the ability of our management
companies to raise room rates.
Seasonality
Depending on a hotels location and market, operations for
the hotel may be seasonal in nature. This seasonality can be
expected to cause fluctuations in our quarterly operating
profits. To the extent that cash flow from operations is
insufficient during any quarter, due to temporary or seasonal
fluctuations in revenue, we expect to utilize cash on hand or
borrowings under our credit facility to make distributions to
our equity holders. We also could utilize proceeds from this
offering to fund distributions.
Debt
During the third quarter, we assumed $12.4 million of fixed
rate mortgage loans in connection with two hotel acquisitions.
The carrying value of the mortgage debt was approximately equal
to the fair value of the debt on the date of assumption. The
weighted average interest rate of the two loans is approximately
5.9%. In connection with our acquisition of a hotel located in
the greater Pittsburgh, Pennsylvania area, which we currently
have under contract to purchase, we expect to assume a $7.3
million loan carrying an interest rate of 6.5% that matures in
September 2021.
Financial
Covenants
The two mortgage loans we assumed contain financial covenants
concerning the maintenance of a minimum debt service coverage
ratio based on hotel EBITDA. The loan encumbering the Altoona
hotel requires a minimum ratio of 1.5x and the hotels
ratio is 1.8x. The loan encumbering the Washington hotel
requires a minimum ratio of 1.65x and the hotels ratio is
2.6x. We are in compliance with these covenants at
September 30, 2010.
Dividend
Policy
We are required to distribute at least 90% of our annual taxable
income, excluding net capital gains, to our stockholders in
order to maintain our qualification as a REIT, including taxable
income recognized for federal income tax purposes but with
regard to which we do not receive cash. Funds used by us to pay
dividends on our common shares are provided through
distributions from the Operating Partnership.
Our current policy on common dividends is generally to
distribute, over time, 100% of our annual taxable income. The
amount of any dividends will be determined by our board of
trustees. On September 27, 2010, we declared our first
dividend, a third quarter dividend of $0.175 per common share
and LTIP unit. The dividends to our common shareholders and the
distributions to our LTIP unit holders were paid on
October 29, 2010 to holders of record as of
October 15, 2010. On December 16, 2010, we declared our
second dividend, a fourth quarter dividend of $0.175 per common
share and LTIP Unit, which was paid on January 14, 2011 to
shareholders of record as of December 31, 2010.
Contractual
Obligations
On October 12, 2010, we, as parent guarantor, and the
operating partnership, as borrower, entered into a
$85.0 million, three-year, secured revolving credit
agreement with the lenders party thereto, Barclays Capital and
Regions Capital Markets as joint lead arrangers, Barclays Bank
PLC as administrative agent, Regions Bank as syndication agent,
Credit Agricole Corporate and Investment Bank, UBS Securities
LLC and US Bank National Association acting as co-documentation
agents.
On October 5, 2010, we acquired the 124-room Residence
Inn by
Marriott®
in New Rochelle, New York for $21 million, plus customary
pro-rated amounts and closing costs, from New Roc Hotels, LLC.
The hotel is managed by IHM pursuant to a
5-year
management agreement. On November 3,
47
2010, we acquired the 145-room Homewood Suites by
Hilton®
Carlsbad in Carlsbad, California for $32 million, plus
customary pro-rated amounts and closing costs, from Royal
Hospitality Washington, LLC and Lee Estates, LLC. The hotel is
managed by IHM pursuant to a
5-year
management agreement. On January 31, 2011, we entered into
a contract to acquire a hotel located in the greater Pittsburgh,
Pennsylvania area for a total purchase price of approximately
$25 million, which includes the assumption of approximately
$7.3 million in debt on the property. The acquisition of
this hotel is subject to customary closing requirements and
conditions, and there is no assurance that this acquisition will
be consummated in a timely manner or at all.
Critical
Accounting Policies
We consider the following policies critical because they require
estimates about matters that are inherently uncertain, involve
various assumptions and require management judgment. The
preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and
liabilities at the balance sheet date and the reported amounts
of revenues and expenses during the reporting period. Actual
results may differ from these estimates and assumptions.
Investment in
Hotel Properties
We allocate the purchase prices of hotel properties acquired
based on the fair value of the acquired real estate, furniture,
fixtures and equipment, identifiable intangible assets and
assumed liabilities. In making estimates of fair value for
purposes of allocating the purchase price, we utilize a number
of sources of information that are obtained in connection with
the acquisition of a hotel property, including valuations
performed by independent third parties and information obtained
about each hotel property resulting from pre-acquisition due
diligence. Hotel property acquisition costs, such as transfer
taxes, title insurance, environmental and property condition
reviews, and legal and accounting fees, are expensed in the
period incurred.
Our investment in hotel properties are carried at cost and are
depreciated using the straight-line method over the estimated
useful lives of the assets, generally 40 years for
buildings, 15 years for building improvements, seven years
for land improvements and three to ten years for furniture,
fixtures and equipment. Renovations
and/or
replacements at the hotel properties that improve or extend the
life of the assets are capitalized and depreciated over their
useful lives, while repairs and maintenance are expensed as
incurred. Upon the sale or retirement of property and equipment,
the cost and related accumulated depreciation are removed from
our accounts and any resulting gain or loss is recognized in the
consolidated statements of operations.
We will periodically review its 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 will perform an analysis to
determine if the estimated undiscounted future cash flows,
without interest charges, 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, an adjustment to reduce the carrying
amount to the related hotel propertys estimated fair
market value is recorded and an impairment loss recognized. We
do not believe that there are any facts or circumstances
indicating impairment in the carrying value of any of our hotel
properties.
We will consider a hotel property as held for sale when a
binding agreement to purchase the property has been signed under
which the buyer has committed a significant amount of
nonrefundable cash, no significant financing contingencies exist
which could cause the transaction not to be completed in a
timely manner and the sale is expected to occur within one year.
If these criteria are met, depreciation and amortization of the
hotel property will cease and an impairment loss if any will be
recognized if the fair value of the hotel property, less the
costs to sell, is lower than the carrying amount of the hotel
property.
48
We will classify the loss, together with the related operating
results, as discontinued operations in the consolidated
statements of operations and classify the assets and related
liabilities as held for sale in the consolidated balance sheets.
As of September 30, 2010, we had no hotel properties held
for sale.
Revenue
Recognition
Revenues from hotel operations are recognized when rooms are
occupied and when services are provided. Revenues consist of
amounts derived from hotel operations, including sales from
room, meeting room, gift shop, in-room movie and other ancillary
amenities. Sales, use, occupancy, and similar taxes are
collected and presented on a net basis (excluded from revenues)
in the accompanying consolidated statements of operations.
Share-Based
Compensation
We measure compensation expense for the restricted share awards
based upon the fair market value of our common shares at the
date of grant. Compensation expense is recognized on a
straight-line basis over the vesting period and is included in
general and administrative expense in the accompanying
consolidated statements of operations. We will pay dividends on
nonvested restricted shares.
Income
Taxes
We intend to elect to be taxed as a REIT under the Code and
intend to operate as such beginning with our short taxable year
ended December 31, 2010. To qualify as a REIT, we must meet
certain organizational and operational requirements, including a
requirement to distribute at least 90% of our annual REIT
taxable income to our shareholders (which is computed without
regard to the dividends paid deduction or net capital gain and
which does not necessarily equal net income as calculated in
accordance with accounting principles generally accepted in the
United States, or GAAP). As a REIT, we generally will not be
subject to federal income tax to the extent we currently
distribute our taxable income to our shareholders. If we fail to
qualify as a REIT in any taxable year, we will be subject to
federal income tax on our taxable income at regular corporate
income tax rates and generally will not be permitted to qualify
for treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which qualification
is lost unless the IRS grants us relief under certain statutory
provisions. Such an event could materially adversely affect our
net income and net cash available for distribution to
shareholders. However, we intend to organize and operate in such
a manner as to qualify for treatment as a REIT.
Recently Issued
Accounting Standards
In June 2009, the FASB issued an accounting standard that
requires enterprises to perform a more qualitative approach to
determining whether or not a variable interest entity will need
to be consolidated. This evaluation will be based on an
enterprises ability to direct and influence the activities
of a variable interest entity that most significantly impact its
economic performance. It requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable
interest entity. This accounting standard is effective for
fiscal years beginning after November 15, 2009. Early
adoption is not permitted. We are evaluating the effect of this
accounting standard on future acquisitions.
In June 2009, the FASB issued an accounting standard that made
the FASB Accounting Standards Codification, or the Codification,
the source of authoritative GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The
Codification has superseded all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative. This accounting standard is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. Following the issuance of
this accounting standard, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates. FASB will not consider Accounting Standards
Updates as authoritative in their own right. Accounting
Standards Updates will serve only to
49
update the Codification, provide background information about
the guidance, and provide the bases for conclusions on the
change(s) in the Codification. The adoption of this accounting
standard did not have a significant impact on our financial
statements.
Off-balance Sheet
Arrangements
As of the date of this prospectus, we have no off-balance sheet
arrangements.
50
BUSINESS
Overview
We are a self-advised hotel investment company organized in
October 2009 to invest in premium-branded upscale extended-stay
and select-service hotels. In April 2010, we raised net proceeds
of approximately $158.7 million in our IPO and an
additional $10 million through a concurrent private
placement of our common shares to Mr. Fisher. Since the
completion of our IPO, we have acquired 13 hotels with an
aggregate of 1,650 rooms in nine states for approximately
$209 million and have entered into a contract to purchase a
hotel located in the greater Pittsburgh, Pennsylvania area for
approximately $25 million. We have funded our acquisitions to
date with the net proceeds of our IPO and private placement,
through the assumption of debt and with borrowings under our
credit facility. We expect to finance the acquisition of the
hotel we have under contract to purchase from the net proceeds
of this offering and through the assumption of $7.3 million
in debt. Our portfolio includes upscale extended-stay hotels
that operate under the Homewood Suites by
Hilton®
brand (seven hotels) and Residence Inn by
Marriott®
brand (three hotels), as well as premium-branded select-service
hotels that operate under the Courtyard by
Marriott®
brand (one hotel), Hampton Inn and Suites by
Hilton®
brand (one hotel) and SpringHill Suites by
Marriott®
brand (one hotel).
We focus our hotel investments primarily in the 25 largest
metropolitan markets in the United States. We believe that
current market conditions will continue to create attractive
opportunities to acquire high quality hotels at cyclically low
prices that will benefit from an improving economy and our
aggressive asset management.
Our management team, led by our chief executive officer,
Mr. Fisher, has extensive experience acquiring, developing,
financing, repositioning, managing and selling hotels. Prior to
forming Chatham Lodging Trust, Mr. Fisher served as
chairman, chief executive officer and president of Innkeepers
USA Trust, or Innkeepers, a New York Stock Exchange-listed
REIT, from its inception in 1994 through its sale in June 2007.
In addition, Peter Willis, our Executive Vice President and
Chief Investment Officer, and Dennis M. Craven, our Executive
Vice President and Chief Financial Officer, served in similar
positions at Innkeepers.
In addition to the hotel we have under contract to purchase, we
have identified and are in various stages of reviewing and
negotiating a number of additional potential hotel acquisition
opportunities. As of February 1, 2011, we were actively
reviewing potential hotel acquisitions having an aggregate
transaction value in excess of $200 million, based on our
preliminary discussions with sellers and our internal assessment
of the properties values. Our management team sourced
these potential acquisitions through their extensive
relationships with hotel owners, management companies,
franchisors, brokers, banks, insurance companies, public
institutions, fund managers, REITs, private investors and
developers.
Our acquisition of these properties is subject to us negotiating
and executing with the sellers mutually acceptable definitive
and binding purchase and sale agreements with respect to the
properties, which we expect will contain a number of conditions
to closing the acquisitions, including:
|
|
|
|
(i)
|
our ability to negotiate and execute new management agreements
and franchise agreements, or assume the existing agreements, for
the properties,
|
|
|
(ii)
|
our completion of satisfactory due diligence with respect to the
properties,
|
|
|
(iii)
|
lender approval of our assumption of existing indebtedness with
respect to certain of the properties, and
|
|
|
(iv)
|
satisfaction of customary closing conditions.
|
There can be no assurance that the sellers of the properties
discussed above will be willing to proceed with the
transactions, that we will be able to negotiate and execute
satisfactory definitive
51
purchase and sale agreements with the sellers, that our due
diligence will be satisfactory or that the conditions to closing
will be satisfied.
Upon completion of this offering and the application of the net
proceeds as described in Use of Proceeds, we expect
to have approximately
$ million of cash, together
with $85 million of borrowing capacity under our credit
facility, available to invest in additional hotel properties.
We intend to elect and qualify to be treated as a REIT for
federal income tax purposes.
Market
Opportunity
We believe current market conditions will continue to create
attractive opportunities to acquire hotel properties at prices
that represent significant discounts to replacement cost and
that provide potential for significant long-term value
appreciation. Operating performance of the U.S. hotel
industry declined significantly in 2008 and 2009 due to
challenging economic conditions created by declining gross
domestic product, or GDP, high levels of unemployment, low
consumer confidence, a significant decline in home prices and a
reduction in the availability of credit. While the
U.S. hotel industry has shown improvement since the time of
our IPO, industry operating performance remains significantly
below pre-2008 levels. In addition to facing weakened operating
performance, hotel owners have been adversely impacted by a
significant decline in the availability of debt financing. We
believe that the combination of a decline in operating
performance and reduction in the availability of debt financing
has caused hotel values to decline in recent years and will
continue to lead to increased hotel loan foreclosures and
distressed hotel property sales. In addition, we believe that
the supply of new hotels is likely to remain low for the next
several years due to limited availability of debt financing.
Hotel industry operating performance historically has correlated
with U.S. GDP growth, and a number of economists and
government agencies currently predict that the U.S. economy
will grow over the next several years. We believe that
U.S. GDP growth, coupled with limited supply of new hotels,
will lead to increases in lodging industry RevPAR and hotel
operating profits. We believe that our management teams
significant experience in acquiring hotels, our growth oriented
capital structure, and our focused business strategy will
position us to take advantage of hotel investment opportunities
created by current market conditions.
As shown in the table below, monthly RevPAR for U.S. hotels
began to grow on a
year-over-year
basis in March 2010 after 19 consecutive months of decline.
Source: Smith Travel Research.
52
In addition to facing a decline in operating results, hotel
owners have been adversely impacted by a significant decline in
the availability of debt financing. As shown in the table below,
the CMBS market historically provided a significant amount of
debt financing to the real estate industry, especially from 2004
through 2007, but new issuances from 2008 through
December 31, 2010 remain significantly below historical
levels.
Source: Commercial Mortgage Alert (CMAlert.com).
Note: Includes U.S. agency and non-agency
issuance.
Given weak current operating conditions in the lodging sector
and limited availability of debt to fund new development
projects, we believe that growth in new hotel room supply is
likely to remain low for the next several years as shown in the
chart below.
Source: Smith Travel Research (1996-2010); Colliers PKF
Hospitality Research, December 2010 February 2011
Edition of Hotel
Horizons®
Econometric Forecasts of U.S. Hotel Markets,
(2011E-2014E).
53
Hotel industry operating performance historically has correlated
with overall GDP growth. As shown below, U.S. real GDP is
projected to grow over the next several years.
Source: U.S. Real GDP from Bureau of Economic
Analysis
(1988-2009)
and IMF World Economic and Financial Surveys (2010E-2014E).
We believe that a recovery in U.S. GDP growth, coupled with
limited growth in new hotel room supply, will lead to
significant increases in lodging industry RevPAR and operating
profit.
Source: Smith Travel Research (1996-2010); Colliers PKF
Hospitality Research, December 2010 February 2011
Edition of Hotel
Horizons®
Econometric Forecasts of U.S. Hotel Markets,
(2011E-2014E).
Our hotels operate in the upscale or midscale without food and
beverage chain-scale segments, as defined by Smith Travel
Research. We believe increases in RevPAR for hotels in the
54
upscale and midscale without food and beverage segments will be
strong, as is reflected in the projections in the table below.
Source: Smith Travel Research (2009-2010); Colliers PKF
Hospitality Research, December 2010 February 2011
Edition of Hotel
Horizons®
Econometric Forecasts of U.S. Hotel Markets,
(2011E-2014E).
We believe our management teams significant experience
acquiring hotels, our growth oriented capital structure with no
legacy issues and our focused business strategy, will position
us to take advantage of acquisition opportunities created by
current market conditions.
Competitive
Strengths
Experienced management team: We believe that
our senior executive officers, who have extensive lodging
industry experience, will help drive our companys growth.
Our management team is led by Mr. Fisher, who has over
24 years of experience in the lodging industry, including
13 years as founder and chief executive officer of
Innkeepers. Mr. Fisher has longtime relationships with
hotel owners, developers, management companies, franchisors,
hotel brokers, financiers, research analysts and institutional
investors.
Strong acquisition and growth
record: Mr. Fisher oversaw the growth of
Innkeepers through a $46.9 million IPO in 1994 and served
as its chairman and chief executive officer until it was sold in
2007. Mr. Fisher successfully grew Innkeepers from a
portfolio of seven hotels at the time of its IPO in 1994 to 74
hotels at the time of its sale. Measuring its sale from a market
capitalization standpoint, Innkeepers was sold for a total
enterprise value of approximately $1.5 billion, calculated
as Innkeepers net debt prior to its sale (total debt less
cash and cash equivalents, each as reported in Innkeepers
March 31, 2007
10-Q
filing), plus the aggregate liquidation value of its preferred
equity (consisting solely of 5,800,000 Series C preferred
shares, each with a liquidation value of $25.00 per share), plus
its total common equity market capitalization at May 1,
2007, calculated as the total number of common shares and units
outstanding on that date multiplied by the acquisition price of
$17.75 per share. Measuring the Innkeepers sale from a
shareholder return standpoint, an investment in Innkeepers
common shares from the date of its IPO through the date of its
sale would have generated a compound total return of
approximately 318% for each share purchased at the IPO price of
$10.00 and held through the date of sale, according to Factset
Research Systems. Compound total return assumes all cash
dividends were reinvested to purchase additional common shares
of Innkeepers at the closing share price on the record date that
a shareholder was entitled to receive that dividend. The total
return percentage is the percentage change in Innkeepers
55
share price from its IPO price to its acquisition price,
multiplied by the percentage return of each cash distribution
per share paid between Innkeepers IPO date and its
acquisition date. The percentage return of each cash
distribution per share was calculated by dividing the cash
dividend per share by the closing share price on the record date
that a shareholder was entitled to receive that dividend. Over
the period beginning in the same month as the Innkeepers IPO and
ending in June 2007, the month that Innkeepers was sold, the
FTSE NAREIT Equity Lodging/Resorts Index, an index comprised of
all U.S. public lodging REITs with portfolios and
investment strategies ranging from premium full-service hotels
to economy lodging, including those in the upscale extended-stay
category, increased by approximately 209%. This index includes
companies within a wider range of hotel categories and
investment strategies than those on which Innkeepers focused,
including some categories that may have performed poorly during
this period.
Below is a table comparing the annual total returns to
Innkeepers shareholders, for each year beginning with the
partial year 1994, the year of Innkeepers IPO and ending
with the partial year 2007, the year of Innkeepers sale,
as compared to the annual total returns for the FTSE NAREIT
Equity Lodging/Resorts Index for the same years. Also included
for comparison is Innkeepers net income (loss), as
calculated for each year through December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Annual Total
Returns(1)
|
|
Net Income (loss) of
|
December 31 (except
|
|
|
|
FTSE NAREIT Equity
|
|
Innkeepers
|
where footnoted)
|
|
Innkeepers
|
|
Lodging/Resorts Index
|
|
($ in
thousands)(2)
|
|
|
1994
|
|
|
|
(25.6
|
)%(3)
|
|
|
(8.9
|
)%
|
|
$
|
368
|
|
|
1995
|
|
|
|
37.9
|
%
|
|
|
30.8
|
%
|
|
|
3,467
|
|
|
1996
|
|
|
|
65.3
|
%
|
|
|
49.2
|
%
|
|
|
8,489
|
|
|
1997
|
|
|
|
19.6
|
%
|
|
|
30.1
|
%
|
|
|
22,783
|
|
|
1998
|
|
|
|
(16.8
|
)%
|
|
|
(52.8
|
)%
|
|
|
33,164
|
|
|
1999
|
|
|
|
(21.6
|
)%
|
|
|
(16.1
|
)%
|
|
|
36,648
|
|
|
2000
|
|
|
|
51.5
|
%
|
|
|
45.8
|
%
|
|
|
44,774
|
|
|
2001
|
|
|
|
(3.3
|
)%
|
|
|
(8.6
|
)%
|
|
|
26,168
|
|
|
2002
|
|
|
|
(18.1
|
)%
|
|
|
(1.5
|
)%
|
|
|
(1,227
|
)
|
|
2003
|
|
|
|
11.8
|
%
|
|
|
31.7
|
%
|
|
|
(8,161
|
)
|
|
2004
|
|
|
|
72.3
|
%
|
|
|
32.7
|
%
|
|
|
14,600
|
|
|
2005
|
|
|
|
16.2
|
%
|
|
|
9.8
|
%
|
|
|
22,659
|
|
|
2006
|
|
|
|
1.3
|
%
|
|
|
28.2
|
%
|
|
|
30,562
|
|
|
2007
|
|
|
|
16.0
|
%(4)
|
|
|
(22.4
|
)%
|
|
|
N/A
|
|
|
|
|
(1) |
|
Source: Factset Research Systems for Innkeepers total returns;
www.REIT.com for published FTSE NAREIT Equity
Lodging/Resorts Index historical annual total returns. Total
return calculates the compound total return of an issuers
stock assuming all cash dividends are reinvested to purchase
additional stock of the issuer on the dividend ex-date (the date
the owner of the stock of record is entitled to receive the
dividend). |
|
(2) |
|
Source: Innkeepers USA
Trust Form 10-K
SEC filings. Innkeepers IPO occurred in September 1994.
Represents results from Innkeepers period of inception,
September 30, 1994, through December 31, 1994. |
|
(3) |
|
Total return for Innkeepers for the year ended December 31,
1994 reflects its total stock return, including the assumed
reinvestment of cash dividends into additional stock, for the
period beginning September 23, 1994, the first trading day
of its common shares, to December 31, 1994. |
|
(4) |
|
Total return for Innkeepers for the year ended December 31,
2007 reflects its total stock return, including the assumed
reinvestment of cash dividends into additional stock, for the
period beginning January 1, 2007 to June 29, 2007, the
last trading day of its common shares. |
Information regarding Innkeepers and the FTSE NAREIT Equity
Lodging/Resorts Index reflects past performance, may have been
due in part to external factors beyond the control of
Innkeepers
56
management, including superior general economic conditions than
those existing now, and is not a guarantee or prediction of our
future operating results or the returns that our shareholders
should expect to achieve in the future. Furthermore, Innkeepers
experienced considerable challenges resulting from severe
downturns in the lodging industry, such as the period following
the attacks of September 11, 2001, during which Innkeepers
reduced its distributions to shareholders and its capital
investments due to substantial declines in its revenues and
earnings. The geographical distribution of Innkeepers
hotels in key market areas also negatively affected its earnings
and distributions to shareholders, especially in the case of the
downturn in the technology-related business sector, which had a
substantial negative impact on Innkeepers hotels located
in Northern California and Boston. If our management team is
unable to predict or effectively adapt to future economic
downturns or other adverse business developments, our business
may also experience declines.
Prudent capital structure: We believe that
many potential buyers of hotel properties typically utilize
significant levels of debt to fund acquisitions and thus may be
limited in their ability to make acquisitions under current
market conditions. In addition, we believe many potential buyers
of hotel properties already have high leverage levels which
could limit their ability to acquire additional properties. Upon
completion of this offering and application of the net proceeds,
as described under Use of Proceeds, we will have
approximately $ million of
cash available to invest in additional hotel properties,
$85 million of borrowing capacity under our credit facility
available to fund acquisitions and to fund renovations at our
existing properties, and only $12.4 million in debt. We
plan to maintain a prudent capital structure and intend to limit
our consolidated indebtedness, net of cash, to not more than 35%
of our investment in hotel properties at cost (defined as our
initial acquisition price plus the gross amount of any
subsequent capital investment and excluding any impairment
charges).
Longtime relationships with leading lodging franchise and
management companies: Mr. Fisher has
longtime relationships with several leading hotel franchise and
management companies, having acquired and developed a
significant number of hotels operated under Marriotts
Residence
Inn®
and Courtyard by
Marriott®
brands and Hiltons Homewood Suites and Hampton
Inn®
brand. Prior to its sale in 2007, Innkeepers owned 44 Residence
Inns, making it one of the worlds largest owners of
Residence Inn hotels. Mr. Fisher has been a member of
Marriotts Residence Inn Advisory Board since 1998.
Mr. Fisher was one of the early franchisees of Hampton Inn
hotels and Innkeepers owned twelve Hampton Inns at the time of
its sale.
Our Strategy and
Investment Criteria
Our primary objective is to generate attractive returns for our
shareholders through investing in hotel properties at prices
that provide strong returns on invested capital, paying
dividends and generating long-term value appreciation. We
believe we can create long-term value by pursuing the following
strategies:
|
|
|
|
|
Disciplined acquisition of hotel
properties: We invest primarily in
premium-branded upscale extended-stay and select-service hotels
with a focus on the 25 largest metropolitan markets in the
United States. We focus on acquiring hotel properties at prices
below our estimate of replacement cost in markets that have
strong demand generators and where we expect demand growth will
outpace new supply. We also seek to acquire properties that we
believe are undermanaged or undercapitalized. We currently do
not intend to engage in new hotel development.
|
|
|
|
Opportunistic hotel repositioning: We employ
value-added strategies, such as
re-branding,
renovating, or changing management, when we believe such
strategies will increase the operating results and values of the
hotels we acquire.
|
|
|
|
Aggressive asset management: Although as a
REIT we cannot operate our hotels, we proactively manage our
third-party hotel managers in seeking to maximize hotel
operating performance. Our asset management activities seek to
ensure that our third-
|
57
|
|
|
|
|
party hotel managers effectively utilize franchise brands
marketing programs, develop effective sales management policies
and plans, operate properties efficiently, control costs, and
develop operational initiatives for our hotels that increase
guest satisfaction. As part of our asset management activities,
we regularly review opportunities to reinvest in our hotels to
maintain quality, increase long-term value and generate
attractive returns on invested capital.
|
|
|
|
|
|
Flexible selection of hotel management
companies: We are flexible in our selection of
hotel management companies and select managers that we believe
will maximize the performance of our hotels. We utilize both
brand-affiliated management companies such as Marriott
International, Inc., Hilton Worldwide, Starwood
Hotels & Resorts Worldwide, Inc., Hyatt Hotels
Corporation and InterContinental Hotels Group, as well as
independent management companies such as IHM. We believe this
strategy will increase the universe of potential acquisition
opportunities we can consider because many hotel properties are
encumbered by long-term management contracts. We believe that
our willingness to utilize brand-affiliated management companies
may lead to these companies bringing off-market
transactions to our attention that may not be available to other
hotel investors.
|
|
|
|
Selective investment in hotel debt: We may
consider selectively investing in debt secured by hotel property
if we believe we can foreclose on or acquire ownership of the
underlying hotel property in the relative near term. We do not
intend to invest in any debt where we do not expect to gain
ownership of the underlying property or to originate any debt
financing.
|
Our
Hotels
The following table sets forth certain operating information for
each of our hotels. The operating data includes periods prior to
our acquisition of these hotels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
Purchase
|
|
|
|
Nine Months Ended
|
|
|
|
|
Date of
|
|
Year
|
|
of
|
|
Purchase
|
|
Price per
|
|
Assumed
|
|
September 30, 2010
|
Property
|
|
Location
|
|
Acquisition
|
|
Opened
|
|
Rooms
|
|
Price
|
|
Room
|
|
Debt
|
|
Occupancy
|
|
ADR
|
|
RevPAR
|
|
|
(Unaudited)
|
|
Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington
|
|
Billerica, Massachusetts
|
|
April 23, 2010
|
|
1999
|
|
147
|
|
$12.5 million
|
|
$
|
85,714
|
|
|
|
|
|
72.2
|
%
|
|
$
|
111.36
|
|
|
$
|
80.40
|
|
Homewood Suites by Hilton Minneapolis-Mall of America
|
|
Bloomington, Minnesota
|
|
April 23, 2010
|
|
1998
|
|
144
|
|
$18.0 million
|
|
$
|
125,000
|
|
|
|
|
|
86.9
|
%
|
|
$
|
108.82
|
|
|
$
|
94.58
|
|
Homewood Suites by Hilton Nashville-Brentwood
|
|
Brentwood, Tennessee
|
|
April 23, 2010
|
|
1998
|
|
121
|
|
$11.3 million
|
|
$
|
93,388
|
|
|
|
|
|
76.0
|
%
|
|
$
|
100.45
|
|
|
$
|
76.30
|
|
Homewood Suites by Hilton Dallas-Market Center
|
|
Dallas, Texas
|
|
April 23, 2010
|
|
1998
|
|
137
|
|
$10.7 million
|
|
$
|
78,102
|
|
|
|
|
|
65.7
|
%
|
|
$
|
98.63
|
|
|
$
|
64.80
|
|
Homewood Suites by Hilton Hartford-Farmington
|
|
Farmington, Connecticut
|
|
April 23, 2010
|
|
1999
|
|
121
|
|
$11.5 million
|
|
$
|
95,041
|
|
|
|
|
|
68.2
|
%
|
|
$
|
110.42
|
|
|
$
|
75.34
|
|
Homewood Suites by Hilton Orlando-Maitland
|
|
Maitland, Florida
|
|
April 23, 2010
|
|
2000
|
|
143
|
|
$9.5 million
|
|
$
|
66,433
|
|
|
|
|
|
67.6
|
%
|
|
$
|
94.90
|
|
|
$
|
64.14
|
|
Hampton Inn & Suites Houston-Medical Center
|
|
Houston, Texas
|
|
July 2, 2010
|
|
1997
|
|
120
|
|
$16.5 million
|
|
$
|
137,500
|
|
|
|
|
|
76.3
|
%
|
|
$
|
113.27
|
|
|
$
|
86.42
|
|
Residence Inn Long Island Holtsville
|
|
Holtsville, New York
|
|
August 3, 2010
|
|
2004
|
|
124
|
|
$21.3 million
|
|
$
|
171,774
|
|
|
|
|
|
84.2
|
%
|
|
$
|
119.48
|
|
|
$
|
100.66
|
|
Courtyard Altoona
|
|
Altoona, Pennsylvania
|
|
August 24, 2010
|
|
2001
|
|
105
|
|
$11.3 million
|
|
$
|
107,619
|
|
|
$7.0 million
|
|
|
71.6
|
%
|
|
$
|
99.51
|
|
|
$
|
71.23
|
|
Springhill Suites
Washington
|
|
Washington, Pennsylvania
|
|
August 24, 2010
|
|
2000
|
|
86
|
|
$12.0 million
|
|
$
|
139,535
|
|
|
$5.4 million
|
|
|
85.6
|
%
|
|
$
|
103.00
|
|
|
$
|
88.15
|
|
Residence Inn White Plains
|
|
White Plains, New York
|
|
September 23, 2010
|
|
1982
|
|
133
|
|
$21.2 million
|
|
$
|
159,398
|
|
|
|
|
|
86.4
|
%
|
|
$
|
138.12
|
|
|
$
|
119.32
|
|
Residence Inn New Rochelle
|
|
New Rochelle, New York
|
|
October 5, 2010
|
|
2000
|
|
124
|
|
$21.0 million
|
|
$
|
169,355
|
|
|
|
|
|
87.7
|
%
|
|
$
|
149.63
|
|
|
$
|
131.43
|
|
Homewood Suites by Hilton Carlsbad (North San Diego County)
|
|
Carlsbad, California
|
|
November 3, 2010
|
|
2008
|
|
145
|
|
$32.0 million
|
|
$
|
220,690
|
|
|
|
|
|
88.7
|
%
|
|
$
|
134.86
|
|
|
$
|
119.65
|
|
Total/Weighted Average
|
|
|
|
|
|
|
|
1,650
|
|
$208.9 million
|
|
$
|
126,606
|
|
|
$12.4 million
|
|
|
78.2
|
%
|
|
$
|
115.74
|
|
|
$
|
90.46
|
|
|
|
|
(1) |
|
Occupancy is the average daily occupancy for the period
presented. |
|
(2) |
|
ADR is average daily rate. |
|
(3) |
|
RevPAR is room revenue per available room. |
58
Hotel Under
Contract
The following table sets forth certain operating information
with respect to the hotel we have under contract to purchase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Opened/
|
|
Purchase
|
|
Assumed
|
|
September 30, 2010
|
Property
|
|
Location
|
|
Renovated
|
|
Price
|
|
Debt
|
|
Occupancy
|
|
ADR
|
|
RevPAR
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater Pittsburgh Hotel
|
|
Pittsburgh, Pennsylvania
|
|
2000
|
|
|
$24.9 million
|
|
|
$
|
7.3 million
|
|
|
|
76.9
|
%
|
|
$
|
118.83
|
|
|
$
|
91.40
|
|
The closing of the greater Pittsburgh hotel is subject to
satisfaction of customary closing requirements and conditions.
There is no assurance that this acquisition will be consummated
in a timely manner or at all.
Hotel Operating
Statistics
The table below presents operating statistics for all of our
currently owned hotels on a combined basis for the nine months
ended September 30, 2010 (pro forma) and the years ended
December 31, 2008 and 2009. Information for the nine months
ended September 30, 2010 includes periods during which we
owned our hotels and periods prior to our ownership. Information
for the years ended December 31, 2008 and 2009 reflects
periods prior to our ownership.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Nine Months Ended
|
|
Fiscal Year Ended
|
|
|
September 30,
|
|
December 31,
|
Operating Statistics
|
|
2010
|
|
2009
|
|
2008
|
|
Occupancy
|
|
|
78.2
|
%
|
|
|
71.7
|
%
|
|
|
76.3
|
%
|
ADR(1)
|
|
$
|
115.74
|
|
|
$
|
116.36
|
|
|
$
|
125.32
|
|
RevPar(2)
|
|
$
|
90.46
|
|
|
$
|
83.42
|
|
|
$
|
95.68
|
|
|
|
|
(1) |
|
ADR represents average daily rate. |
|
(2) |
|
RevPAR represents revenue per available room, calculated as room
revenue divided by available room nights. |
The table below presents financial information for all of our
currently owned hotels on a combined basis for the nine months
ended September 30, 2010 (pro forma), with the exception of
the Homewood Suites Carlsbad. Information for the nine months
ended September 30, 2010 includes periods during which we
owned our hotels and periods prior to our ownership.
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Revenue
|
|
$
|
37,144
|
|
Net income
|
|
|
3,117
|
|
Interest expense
|
|
|
556
|
|
Income tax expense
|
|
|
124
|
|
Depreciation and amortization
|
|
|
5,153
|
|
Corporate general and administrative
expense(1)
|
|
|
3,168
|
|
|
|
|
|
|
Property
EBITDA(2)
|
|
$
|
12,118
|
|
59
The tables below present financial information for all of our
currently owned hotels for the years ended December 31,
2008 and 2009 on a historical basis, with the exception of the
Homewood Suites Carlsbad. These periods were prior to our
ownership.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton Inn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
& Suites by
|
|
|
Residence Inn
|
|
|
|
|
|
Residence Inn
|
|
|
|
|
Fiscal Year Ended
|
|
Initial Acquisition
|
|
|
Hilton
|
|
|
by Marriott
|
|
|
|
|
|
by Marriott
|
|
|
|
|
December 31, 2009
|
|
Hotels(3)
|
|
|
Houston(4)
|
|
|
Holtsville(5)
|
|
|
Moody
Portfolio(6)
|
|
|
New
Rochelle(7)
|
|
|
Total
|
|
|
Revenue
|
|
|
21,738
|
|
|
|
3,634
|
|
|
|
4,509
|
|
|
|
11,590
|
|
|
|
5,765
|
|
|
|
47,236
|
|
Net income (loss)
|
|
|
457
|
|
|
|
(290
|
)
|
|
|
334
|
|
|
|
(640
|
)
|
|
|
(403
|
)
|
|
|
(542
|
)
|
Interest expense
|
|
|
3,573
|
|
|
|
854
|
|
|
|
740
|
|
|
|
2,571
|
|
|
|
930
|
|
|
|
8,668
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,619
|
|
|
|
435
|
|
|
|
506
|
|
|
|
1,642
|
|
|
|
1,136
|
|
|
|
6,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
EBITDA(2)
|
|
|
6,649
|
|
|
|
999
|
|
|
|
1,580
|
|
|
|
3,573
|
|
|
|
1,663
|
|
|
|
14,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton Inn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
& Suites by
|
|
|
Residence Inn
|
|
|
|
|
|
Residence Inn
|
|
|
|
|
Fiscal Year Ended
|
|
Initial Acquisition
|
|
|
Hilton
|
|
|
by Marriott
|
|
|
|
|
|
by Marriott
|
|
|
|
|
December, 2008
|
|
Hotels(3)
|
|
|
Houston(4)
|
|
|
Holtsville(5)
|
|
|
Moody
Portfolio(6)
|
|
|
New
Rochelle(7)
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Revenue
|
|
|
24,964
|
|
|
|
3,893
|
|
|
|
4,844
|
|
|
|
13,228
|
|
|
|
7,198
|
|
|
|
54,127
|
|
Net income (loss)
|
|
|
2,069
|
|
|
|
1,054
|
|
|
|
103
|
|
|
|
(811
|
)
|
|
|
63
|
|
|
|
2,478
|
|
Interest expense
|
|
|
3,672
|
|
|
|
799
|
|
|
|
757
|
|
|
|
3,594
|
|
|
|
934
|
|
|
|
9,756
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,481
|
|
|
|
372
|
|
|
|
850
|
|
|
|
1,610
|
|
|
|
1,102
|
|
|
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
EBITDA(2)
|
|
|
8,222
|
|
|
|
2,225
|
|
|
|
1,710
|
|
|
|
4,393
|
|
|
|
2,099
|
|
|
|
18,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pro Forma Property EBITDA does not
reflect any corporate general and administrative expense. See
Pro forma financial information of Chatham Lodging
Trust.
|
|
(2) |
|
Property EBITDA is defined as net
income (loss) (calculated in accordance with GAAP) before
interest, taxes, depreciation and amortization and is presented
here based on historical financial information for all hotels
acquired by us during 2010, with the exception of the Homewood
Suites by Hilton Carlsbad. We believe that the presentation of
historical Property EBITDA for our hotels provides useful
supplemental information to investors regarding the financial
condition of the hotels. Property EBITDA is also a factor in our
evaluation of hotel level operating performance and is one
measure in determining the value of acquisitions. However,
Property EBITDA should not be considered as an alternative to
net income, net cash provided by operating activities or any
other financial and operating performance measure prescribed by
GAAP and should only be used in accordance with GAAP measures.
Property EBITDA does not reflect any corporate general and
administrative expense.
|
|
(3) |
|
Includes the Homewood Suites by
Hilton Boston Billerica/Bedford/Burlington; Homewood
Suites by Hilton Minneapolis Mall of America;
Homewood Suites by Hilton Nashville Brentwood;
Homewood Suites by Hilton Dallas Market Center;
Homewood Suites by Hilton Farmington and Homewood Suites by
Hilton Orlando Maitland information acquired on
April 23, 2010.
|
|
(4) |
|
Acquired on July 2, 2010.
|
|
(5) |
|
Acquired on August 3, 2010.
|
|
(6) |
|
Includes the Courtyard by Marriot
Altoona and Springhill Suites by Marriott Washington we acquired
on August 24, 2010 and the Residence Inn by Marriott White
Plains we acquired on September 23, 2010.
|
|
(7) |
|
Acquired on October 5, 2010.
|
The following information relates to the hotels we currently own
and reflects periods both before and during our ownership.
Homewood Suites
Billerica
The 147-room Homewood Suites Billerica is centrally located
in Bostons high-tech corridor within minutes from Routes 3
and 128 and I-495, the main thoroughfares for Northeast
Massachusetts technology based businesses. The hotel
offers easy access to the areas businesses and cultural
attractions and is only a short drive to numerous corporate
headquarters and downtown Boston.
60
Primary demand generators include the many high technology
companies located in the area, Hanscom Air Force Base, the
University of Massachusetts Billerica and the Lahey Clinic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
3,313
|
|
|
$
|
3,826
|
|
|
$
|
4,476
|
|
|
|
|
|
Occupancy
|
|
|
72.2
|
%
|
|
|
61.9
|
%
|
|
|
66.7
|
%
|
|
|
|
|
ADR
|
|
$
|
111.36
|
|
|
$
|
111.90
|
|
|
$
|
120.48
|
|
|
|
|
|
RevPAR
|
|
$
|
80.40
|
|
|
$
|
69.30
|
|
|
$
|
80.31
|
|
|
|
|
|
Homewood Suites
Bloomington
The 144-room Homewood Suites Bloomington is located in
Bloomington, Minnesota directly across the street from the Mall
of America, the largest indoor shopping complex in the
U.S. The hotel is located three miles from the
Minneapolis/St. Paul International Airport and offers easy
access to downtown Minneapolis, the Metrodome and Como Park Zoo
and Conservatory. Primary demand generators include the Mall of
America, which has approximately 40 million annual
visitors, the Minneapolis/St. Paul International Airport, and
several publicly traded Fortune 1000 companies
headquartered in the city of Bloomington, including Toro,
Donaldson Corporation and Ceridian Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
3,837
|
|
|
$
|
4,695
|
|
|
$
|
5,200
|
|
|
|
|
|
Occupancy
|
|
|
86.9
|
%
|
|
|
79.9
|
%
|
|
|
80.5
|
%
|
|
|
|
|
ADR
|
|
$
|
108.82
|
|
|
$
|
108.16
|
|
|
$
|
117.63
|
|
|
|
|
|
RevPAR
|
|
$
|
94.58
|
|
|
$
|
86.40
|
|
|
$
|
94.65
|
|
|
|
|
|
Homewood Suites
Brentwood
The 121-room Homewood Suites Brentwood is located in
Maryland Farms, Nashvilles largest office park, and is
approximately nine miles south of downtown Nashville. Primary
demand generators include AT&T, Gulfstream Aircraft, IASIS
Healthcare and other Fortune 500 companies located in and
proximate to the Maryland Farms office park, the Nashville
Convention Center and tourist attractions in the Nashville area,
including the Grand Ole Opry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,569
|
|
|
$
|
2,966
|
|
|
$
|
3,450
|
|
|
|
|
|
Occupancy
|
|
|
76.0
|
%
|
|
|
66.1
|
%
|
|
|
72.6
|
%
|
|
|
|
|
ADR
|
|
$
|
100.45
|
|
|
$
|
99.59
|
|
|
$
|
103.96
|
|
|
|
|
|
RevPAR
|
|
$
|
76.30
|
|
|
$
|
65.78
|
|
|
$
|
75.50
|
|
|
|
|
|
Homewood Suites
Dallas Market Center
The 137-room Homewood Suites Dallas Market Center is
located across the Stemmons Freeway from the Dallas Market
Center, which is the worlds largest wholesale merchandise
mart and is visited by approximately 400,000 retail buyers each
year. Additional demand is generated from the Dallas
61
Convention Center, only three miles from the hotel, as well as
from Methodist Hospital, FDIC,
7-11,
Southwest Airlines, AT&T, Comerica and many other corporate
and medical businesses in the area.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,478
|
|
|
$
|
3,315
|
|
|
$
|
3,718
|
|
|
|
|
|
Occupancy
|
|
|
65.7
|
%
|
|
|
61.4
|
%
|
|
|
73.2
|
%
|
|
|
|
|
ADR
|
|
$
|
98.63
|
|
|
$
|
105.42
|
|
|
$
|
98.27
|
|
|
|
|
|
RevPAR
|
|
$
|
64.80
|
|
|
$
|
64.75
|
|
|
$
|
71.89
|
|
|
|
|
|
Homewood Suites
Farmington
The 121-room Homewood Suites Farmington is located in
Connecticuts Farmington Valley off of I-84 and is eight
miles from downtown Hartford. Primary demand generators include
the University of Connecticut Health Center, a major research
hospital located less than 0.25 miles from the hotel,
businesses in an office park located approximately two miles
from the hotel, including corporate headquarters for Otis
Elevators and Carrier Corporation, Stanley and CSC and the
Hill-Stead museum, as well as numerous companies and attractions
located in downtown Hartford.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,556
|
|
|
$
|
3,567
|
|
|
$
|
4,232
|
|
|
|
|
|
Occupancy
|
|
|
68.2
|
%
|
|
|
67.1
|
%
|
|
|
75.6
|
%
|
|
|
|
|
ADR
|
|
$
|
110.42
|
|
|
$
|
117.60
|
|
|
$
|
121.18
|
|
|
|
|
|
RevPAR
|
|
$
|
75.34
|
|
|
$
|
78.87
|
|
|
$
|
91.60
|
|
|
|
|
|
Homewood Suites
Maitland
The 143-room Homewood Suites Maitland is located in the
heart of the Maitland Business Center, one of the largest office
parks in the Orlando area, approximately six miles north of
downtown Orlando. The hotel offers convenient access to
attractions at Lake Lucien and is a short driving distance from
Walt Disney World, Universal Studios and numerous championship
golf courses. Maitland and the surrounding area are also home to
a number of high technology firms and corporate training centers
for Lucent, Avaya, New Horizons, Northrop Grumman, Darden
Restaurants, CAN, Fidelity and Federal Express, as well as
government employers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,552
|
|
|
$
|
3,369
|
|
|
$
|
3,888
|
|
|
|
|
|
Occupancy
|
|
|
67.6
|
%
|
|
|
63.6
|
%
|
|
|
68.9
|
%
|
|
|
|
|
ADR
|
|
$
|
94.90
|
|
|
$
|
99.59
|
|
|
$
|
105.16
|
|
|
|
|
|
RevPAR
|
|
$
|
64.14
|
|
|
$
|
63.37
|
|
|
$
|
72.43
|
|
|
|
|
|
Hampton
Inn & Suites Houston
The 120-room Hampton Inn & Suites Houston is
located near downtown Houston and within a mile of Minute Maid
Park, where the Houston Astros play. The hotel is located less
than two miles from Texas Medical Center (the largest medical
center in the world), Rice University and the Houston
62
Zoo. Downtown Houston includes attractions such as the Downtown
Aquarium, the Museum of Fine Arts and the Museum of Natural
Science, all within close proximity to the hotel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,903
|
|
|
$
|
3,634
|
|
|
$
|
3,893
|
|
|
|
|
|
Occupancy
|
|
|
76.3
|
%
|
|
|
67.9
|
%
|
|
|
73.4
|
%
|
|
|
|
|
ADR
|
|
$
|
113.27
|
|
|
$
|
119.62
|
|
|
$
|
135.17
|
|
|
|
|
|
RevPAR
|
|
$
|
86.42
|
|
|
$
|
81.26
|
|
|
$
|
99.28
|
|
|
|
|
|
Residence Inn
Holtsville
The 124-room Residence Inn Holtsville on Long Island, New
York is located across from Motorolas enterprise mobility
headquarters, near Hauppauge Industrial Park (home to over
1,300 companies employing more than 55,000 people) and
Islip MacArthur Airport, less than ten miles from SUNY Stony
Brook University and an hour from JFK and LaGuardia Airports.
The hotel is conveniently located near the Fire Island ferry and
the Long Island Railroad, which offers access to the rest of
Long Island and Manhattan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
3,508
|
|
|
$
|
4,509
|
|
|
$
|
4,844
|
|
|
|
|
|
Occupancy
|
|
|
84.2
|
%
|
|
|
83.3
|
%
|
|
|
86.7
|
%
|
|
|
|
|
ADR
|
|
$
|
119.48
|
|
|
$
|
116.66
|
|
|
$
|
120.31
|
|
|
|
|
|
RevPAR
|
|
$
|
100.66
|
|
|
$
|
97.17
|
|
|
$
|
104.29
|
|
|
|
|
|
Courtyard
Altoona
The 105-room Courtyard Altoona is located in the heart of
the Allegheny mountains near area attractions such as Penn State
Altoona, Blair County Ball Park, Lakemont Park, Delgrossos
Amusement Park and Canoe Creek State Park. Additionally, the
hotel is conveniently connected to the Blair County Convention
Center, which boasts 115,000 square feet of flexible event
space and state of the art technology. The hotel is subject to a
ground lease with the Blair County Convention and Sports
Facility Authority. The term of the lease expires on
April 30, 2029, with 12 additional terms of five years
each. The lease rate is the greater of a fixed rate that is
subject to annual 2.5% increases or a rate based on the
quarterly average room occupancy of the hotel, details of which
are presented in the combined unaudited financial statements for
the hotel, the SpringHill Suites Washington and the Residence
Inn White Plains that are found elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,204
|
|
|
$
|
2,823
|
|
|
$
|
3,174
|
|
|
|
|
|
Occupancy
|
|
|
71.6
|
%
|
|
|
68.1
|
%
|
|
|
70.8
|
%
|
|
|
|
|
ADR
|
|
$
|
99.51
|
|
|
$
|
100.19
|
|
|
$
|
109.97
|
|
|
|
|
|
RevPAR
|
|
$
|
71.23
|
|
|
$
|
68.19
|
|
|
$
|
77.06
|
|
|
|
|
|
SpringHill Suites
Washington
The 86-room SpringHill Suites Washington is centrally
located off I-70/I-79 near The Tanger Outlet Mall, CONSOL Energy
Park (a 3,200-seat minor league ballpark), numerous restaurants
and the
63
headquarters of CONSOL Energy Inc., an energy company with over
8,000 employees. The hotel is located in Washington County,
Pennsylvania, which is the epicenter of the Marcellus Shale, a
massive rock formation and potentially vast source of natural
gas. Additionally, the hotel is just one mile from
Washington & Jefferson College, two miles from The
Meadows Racetrack & Casino and 29 miles from
downtown Pittsburgh and Pittsburgh International Airport.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
2,136
|
|
|
$
|
2,801
|
|
|
$
|
3,031
|
|
|
|
|
|
Occupancy
|
|
|
85.6
|
%
|
|
|
80.8
|
%
|
|
|
84.6
|
%
|
|
|
|
|
ADR
|
|
$
|
103.00
|
|
|
$
|
106.31
|
|
|
$
|
109.57
|
|
|
|
|
|
RevPAR
|
|
$
|
88.15
|
|
|
$
|
85.94
|
|
|
$
|
92.31
|
|
|
|
|
|
Residence Inn
White Plains
The 133-room Residence Inn White Plains is located in
Westchester County, New York, less than ten miles from
Westchester County Airport and less than 20 miles from
LaGuardia Airport. The hotel is in the heart of downtown White
Plains and is located one block from the Metro North rail
station, which offers access to nearby Yankee Stadium and New
York City. Greenwich and Stamford, Connecticut, home to numerous
businesses in the financial and other industries, are each less
than 20 miles away. The hotel is also near numerous
educational institutions, including Sarah Lawrence College,
Manhattanville College and Pace University School of Law.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
4,447
|
|
|
$
|
5,966
|
|
|
$
|
7,023
|
|
|
|
|
|
Occupancy
|
|
|
86.4
|
%
|
|
|
85.7
|
%
|
|
|
82.6
|
%
|
|
|
|
|
ADR
|
|
$
|
138.12
|
|
|
$
|
139.35
|
|
|
$
|
171.82
|
|
|
|
|
|
RevPAR
|
|
$
|
119.32
|
|
|
$
|
119.47
|
|
|
$
|
141.83
|
|
|
|
|
|
Residence Inn New
Rochelle
The 124-room Residence Inn New Rochelle is central to a
major transportation hub and is located just 20 miles from
the center of New York City in Westchester County, which is home
to several Fortune 500 Companies, sports venues, colleges,
banquet halls, country clubs, shopping, and historic sites. The
hotel offers access to nearby LaGuardia and JFK Airports, the
Bronx Zoo, Sarah Lawrence College, New York Botanical Gardens,
College of New Rochelle and Pelham Bay Park. The hotel is party
to an air rights lease with the City of New Rochelle that is
subject to an annual base rent of $10. The lease expires on
December 1, 2062, subject to extension until
December 1, 2104 if certain other conditions are fulfilled.
Further details on the air rights lease are presented in the
combined unaudited financial statements for the hotel found
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
Nine Months Ended
|
|
December 31,
|
|
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
($ in thousands, except
|
|
|
|
|
ADR and RevPAR data)
|
|
Total Revenue
|
|
$
|
4,641
|
|
|
$
|
5,765
|
|
|
$
|
7,198
|
|
|
|
|
|
Occupancy
|
|
|
87.8
|
%
|
|
|
78.1
|
%
|
|
|
85.2
|
%
|
|
|
|
|
ADR
|
|
$
|
149.63
|
|
|
$
|
157.35
|
|
|
$
|
175.33
|
|
|
|
|
|
RevPAR
|
|
$
|
131.43
|
|
|
$
|
122.89
|
|
|
$
|
149.46
|
|
|
|
|
|
64
Homewood Suites
Carlsbad
The 145-room Homewood Suites Carlsbad is located in
Carlsbad, California, 35 miles north of downtown
San Diego, and provides convenient access to many leisure
activities in the surrounding San Diego area, including
Legoland, as well as access to many commercial demand generators
and the McClellan-Palomar Airport. Carlsbad is also a major hub
of the golf industry, with more than 15 golf equipment companies
within 50 miles of each other, including Acushnet, Callaway
and TaylorMade.
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2010
|
|
|
($ in thousands, except ADR
|
|
|
and RevPAR data)
|
|
Total Revenue
|
|
$
|
4,855
|
|
Occupancy
|
|
|
88.7
|
%
|
ADR
|
|
$
|
134.86
|
|
RevPAR
|
|
$
|
119.65
|
|
Greater
Pittsburgh Hotel
The hotel we have under contract to purchase in the greater
Pittsburgh, Pennsylvania area benefits from downtown Pittsburgh
and is close to the headquarters of six Fortune 500 Companies,
three professional sports venues, the University of Pittsburgh,
Carnegie Mellon University, the University of Pittsburgh Medical
Center, Hillman Cancer Center and the Childrens Hospital
of Pittsburgh. The hotel was fully renovated in 2008.
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2010
|
|
|
|
($ in thousands, except ADR
|
|
|
|
and RevPAR data)
|
|
|
Total Revenue
|
|
$
|
4,341
|
|
Occupancy
|
|
|
76.9
|
%
|
ADR
|
|
$
|
118.83
|
|
RevPAR
|
|
$
|
91.40
|
|
The following is a summary of the terms of agreements related to
our hotels and agreements we expect to enter into in connection
with the purchase of the hotel we have under contract.
Hotel Management
Agreements
We assumed the existing hotel management agreements in place at
six of our hotels the Boston-Billerica Homewood
Suites, Minneapolis-Bloomington Homewood Suites,
Nashville-Brentwood Homewood Suites, Hartford-Farmington
Homewood Suites and Orlando-Maitland Homewood Suites
all of which are managed by Promus Hotels, Inc., a subsidiary of
Hilton Hotels Worldwide, or Hilton. Each of these hotel
management agreements became effective on December 20,
2000, has an initial term of 15 years and may be renewed
for an additional five-year period at the managers option
by written notice to us no later than 120 days prior to the
expiration of the initial term.
Under these six hotel management agreements, the manager
receives a base management fee equal to 2% of the hotels
gross room revenue and, if certain financial thresholds are met
or exceeded, an incentive management fee equal to 10% of the
hotels net operating income, less fixed costs, base
management fees,
agreed-upon
return on the owners original investment and debt service
payments. In addition to the management fee, a franchise royalty
fee equal to 4% of the hotels gross room revenue and
program fees equal to 4% of the hotels gross room revenue
are also payable to Hilton. See Hotel Franchise
Agreements. Prior to April 23, 2013, each of these
six management agreements may be terminated for cause, including
the failure of the managed hotel to meet specified performance
levels, and may be terminated by the manager in the event we
undergo a change in control. If the new owner does not assume
the existing management agreement and does not obtain a Homewood
Suites
65
franchise license upon such a change of control, we will be
required to pay a termination fee to the manager. Beginning on
April 23, 2013, we may terminate the six Hilton management
agreements upon six months notice to the manager. If we
were to terminate the management agreements prior to the
termination date, we would be responsible for paying termination
fees to the manager.
Our management agreements with Concord Hospitality Enterprises,
the manager of the Altoona, Pennsylvania Courtyard and the
Washington, Pennsylvania SpringHill Suites, provide for base
management fees equal to 4% of the managed hotels gross
room revenue. The initial ten-year term of each management
agreement expires on February 28, 2017 and will renew
automatically for successive one-year terms unless terminated by
our TRS lessee or the manager by written notice to the other
party no later than 90 days prior to the then current
terms expiration date. The management agreements may be
terminated for cause, including the failure of the managed hotel
operating performance to meet specified levels. If we were to
terminate the management agreements during the first nine years
of the term other than for breach or default by the manager, we
would be responsible for paying termination fees to the manager.
All of our remaining hotels, as well as the hotel we currently
have under contract to purchase, are or will be managed by IHM,
which is 90% owned by Mr. Fisher. Our management agreements
with IHM have an initial term of five years and may be renewed
for two five-year periods at IHMs option by written notice
to us no later than 90 days prior to the then current
terms expiration date. The IHM management agreements
provide for early termination at our option upon sale of any
IHM-managed hotel for no termination fee, with six months
advance notice. The IHM management agreements may be terminated
for cause, including the failure of the managed hotel to meet
specified performance levels. Management agreements with IHM
provide for a base management fee of 3% of the managed
hotels gross revenues, an accounting fee of $1,000 per
month per hotel and, if certain financial thresholds are met or
exceeded, an incentive management fee equal to 10% of the
hotels net operating income less fixed costs, base
management fees and a specified return threshold. The incentive
management fee is capped at 1% of gross hotel revenues.
Hotel Franchise
Agreements
Our TRS lessees have entered into franchise agreements for our
hotels and will enter into a new franchise agreement for the
hotel we have under contract to purchase. Our TRS lessees have
entered into new hotel franchise agreements with Promus Hotels,
Inc., a subsidiary of Hilton, as manager for our seven Homewood
Suites by
Hilton®
hotels. Each of the new hotel franchise agreements has an
initial term of 15 years and may be renewed for an
additional
5-year term.
These Hilton hotel franchise agreements provide for a franchise
royalty fee equal to 4% of the hotels gross room revenue
and a program fee equal to 4% of the hotels gross room
revenue. The Hilton franchise agreements provide that the
franchisor may terminate the franchise agreement in the event
that the applicable franchisee fails to cure an event of
default, or in certain circumstances such as the
franchisees bankruptcy or insolvency, are terminable by
Hilton at will.
Our TRS lessees have entered into franchise agreements with
Marriott International, Inc., or Marriott, relating to our
Residence Inn properties in Holtsville, New York, New Rochelle,
New York and White Plains, New York, our Courtyard property in
Altoona, Pennsylvania and our SpringHill Suites property in
Washington, Pennsylvania. These franchise agreements have
initial terms ranging from 15 to 20 years and will expire
between 2025 and 2030. None of the agreements has a renewal
option. The Marriott franchise agreements provide for franchise
fees ranging from 5.0% to 5.5% of the hotels gross room
sales and marketing fees ranging from 2.0% to 2.5% of the
hotels gross room sales. The Marriott franchise agreements
are terminable by Marriott in the event that the applicable
franchisee fails to cure an event of default or, in certain
circumstances such as the franchisees bankruptcy or
insolvency, are terminable by Marriott at will. The Marriott
franchise agreements provide that, in the event of a proposed
transfer of the hotel, our TRSs interest in the agreement
or more than a specified amount of the TRS to a competitor of
Marriott, Marriott has the right to purchase or lease the hotel
66
under terms consistent with those contained in the respective
offer and may terminate if our TRS elects to proceed with such a
transfer.
The Hampton Inn &
Suites®
Houston-Medical Center is governed by a franchise agreement with
Hampton Inns Franchise LLC, or Hampton Inns. The franchise
agreement has an initial term of approximately 10 years and
expires on July 31, 2020. There is no renewal option. The
Hampton Inns franchise agreement provides for a monthly program
fee equal to 4% of the hotels gross rooms revenue and a
monthly royalty fee equal to 5% of the hotels gross rooms
revenue. Hampton Inns may terminate the franchise agreement in
the event that the franchisee fails to cure an event of default
or, in certain circumstances such as the franchisees
bankruptcy or insolvency, Hampton Inns may terminate the
agreement at will.
Our TRS
Leases
In order for us to qualify as a REIT, we cannot operate the
hotels we own. Our operating partnership, or subsidiaries of our
operating partnership, as lessors, lease our hotels to our TRS
lessees and our TRS lessees have assumed or entered into hotel
management agreements with third-party managers to manage the
hotels.
Financing
Strategies
We plan to maintain a prudent capital structure and intend to
limit our consolidated indebtedness, net of cash, to not more
than 35% of our investment in hotel properties at cost (defined
as our initial acquisition price plus the gross amount of any
subsequent capital investment and excluding any impairment
charges). As a result, we do not believe that a subsequent
decrease in property values will not require us to repay debt.
Over time, we intend to finance our growth with issuances of
common and preferred shares and debt. Our debt may include
mortgage debt secured by our hotel properties, including in
connection with draws under our credit facility, and unsecured
debt.
When purchasing hotel properties, we may issue limited
partnership interests in our operating partnership as full or
partial consideration to sellers who may desire to take
advantage of tax deferral on the sale of a hotel or participate
in the potential appreciation in value of our common shares.
Competition
We face competition for the acquisition and investment in hotel
properties from institutional pension funds, private equity
investors, REITs, hotel companies and others who are engaged in
the acquisition of hotels. Some of these entities have
substantially greater financial and operational resources than
we have. This competition may increase the bargaining power of
property owners seeking to sell, reduce the number of suitable
investment opportunities available to us and increase the cost
of acquiring our targeted hotel properties.
The lodging industry is highly competitive. Our hotels compete
with other hotels for guests in each market in which they
operate. Competitive advantage is based on a number of factors,
including location, convenience, brand affiliation, room rates,
range of services and guest amenities or accommodations offered
and quality of customer service. Competition is often specific
to the individual markets in which our hotels are located and
includes competition from existing and new hotels. Competition
could adversely affect our occupancy rates and RevPAR, and may
require us to provide additional amenities or make capital
improvements that we otherwise would not have to make, which may
reduce our profitability.
Legal
Proceedings
We are not currently involved in any material litigation nor, to
our knowledge, is any material litigation pending or threatened
against us.
67
MANAGEMENT
Trustees and
Executive Officers
Our board of trustees consists of nine trustees. Our board of
trustees is elected annually by our shareholders in accordance
with our bylaws. Our bylaws provide that a majority of the
entire board of trustees may establish, increase or decrease the
number of trustees, provided that the number of trustees shall
never be less than one or more than fifteen. All of our
executive officers serve at the discretion of our board of
trustees. Our board of trustees determines whether our trustees
satisfy the NYSEs independence standards.
The following table sets forth the names and ages of our
executive officers, trustee and each person who has agreed to
become a trustee upon completion of this offering and the
descriptions below set forth information about each such person.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Jeffrey H. Fisher
|
|
|
55
|
|
|
Chairman, President and Chief Executive Officer
|
Peter Willis
|
|
|
43
|
|
|
Executive Vice President and Chief Investment Officer
|
Dennis M. Craven
|
|
|
39
|
|
|
Executive Vice President and Chief Financial Officer
|
Miles Berger
|
|
|
80
|
|
|
Trustee
|
Thomas J. Crocker
|
|
|
57
|
|
|
Trustee
|
Jack P. DeBoer
|
|
|
79
|
|
|
Trustee
|
Glen R. Gilbert
|
|
|
66
|
|
|
Trustee
|
C. Gerald Goldsmith
|
|
|
82
|
|
|
Trustee
|
Robert Perlmutter
|
|
|
49
|
|
|
Trustee
|
Rolf E. Ruhfus
|
|
|
66
|
|
|
Trustee
|
Joel F. Zemans
|
|
|
69
|
|
|
Trustee
|
Jeffrey H.
Fisher Chairman, President & Chief
Executive Officer
Mr. Fisher is our Chairman of the Board, Chief Executive
Officer and President. Mr. Fisher is also the majority
shareholder of IHM, a firm he founded in 2007 that currently
manages 77 hotels for unaffiliated hotel owners. From 1994 to
2007, Mr. Fisher was chairman, chief executive officer and
president of Innkeepers USA Trust, a lodging REIT he founded and
took public in 1994 and was also chairman and majority
shareholder of Innkeepers Hospitality, a privately owned hotel
management company. Mr. Fisher grew Innkeepers
portfolio from seven hotels at the time of its initial public
offering to 74 hotels at the time of its sale. In June of 2007,
Innkeepers was sold to an institutional investor at a total
enterprise value of $1.5 billion. Between 1986 and 1994, he
served as President and Chief Executive Officer of JF Hotel
Management, Inc.
Mr. Fisher received a Bachelor of Science degree in
Business Administration from Syracuse University in 1977, a
Doctor of Jurisprudence degree from Nova Southeastern University
in 1980, and a Masters of Law in Taxation from the University of
Miami in 1981. He is a licensed attorney and practiced at
Jones & Foster P.A. and Jeffrey H. Fisher P.A. for a
total of five years prior to starting his career in the
hospitality industry. Additionally, Mr. Fisher currently
serves as a Board Member of Marriotts The Residence Inn
Association (TRIA).
Peter
Willis Executive Vice President & Chief
Investment Officer
Mr. Willis is our Executive Vice President &
Chief Investment Officer. Mr. Willis has over 20 years
of hotel acquisition experience. From 2001 to 2006, he served as
Vice President of Acquisitions & Business Development
for Innkeepers and oversaw over $500 million of investments
in
68
18 hotels. From June 2006 to January 2009, Mr. Willis
served as Senior Vice President at The Kor Group, a privately
held, fully integrated real estate investment firm with a
portfolio of over $2 billion in upscale hotel and resort
investments, where he focused on U.S. and Caribbean
acquisitions and third-party management contracts. While
evaluating, negotiating and underwriting specific hotel
investments and obtaining and negotiating management contract
prospects, Mr. Willis also supported strategic acquisition
and corporate planning efforts.
Mr. Willis also held positions with an industry-leading
firm supporting the opening of luxury hotels. Establishing the
organizations first international operation in the
Asia/Pacific region in 1994, he directed the repositioning and
opening of properties throughout the region and in the United
States. By 2001, Mr. Willis led overall strategic planning,
business development and investor relations, as well as
integrating acquisitions among the firms operating
entities. Mr. Willis began as an analyst and asset manager
of hotel, residential and commercial properties for Japanese
investment firm JDC America in Tokyo and in the United States.
Mr. Willis received a Bachelor of Science in Business
Administration from the University of Florida in 1989 and has
completed professional programs at Cornell Universitys
Hotel School and Obirin University in Tokyo.
Dennis M.
Craven Executive Vice President & Chief
Financial Officer
Mr. Craven joined our company on September 9, 2010 as
our Executive Vice President and Chief Financial Officer.
Mr. Craven previously served as executive vice president
and chief financial officer of Innkeepers USA Trust, a
NYSE-listed hotel REIT, from March 2006 until the acquisition of
Innkeepers by an affiliate of Apollo Investment Corporation in
June 2007. Following the acquisition, he continued to serve as
chief financial officer of Innkeepers until August 2010. Prior
to joining Innkeepers in 2006, Mr. Craven was a partner in
Addison Capital Advisors, a venture capital firm based in
Memphis, Tennessee, and served as senior vice president and
chief accounting officer of Independent Bank in Memphis. Prior
to that, he served as vice president and controller, and later
vice president and chief accounting officer, of RFS Hotel
Investors, Inc., a NYSE-listed hotel REIT. Prior to joining RFS,
he was a senior manager with PricewaterhouseCoopers LLP in
Memphis and London. Mr. Craven received a Bachelor of
Accountancy from the University of Mississippi in 1993. He is a
licensed Certified Public Accountant in the State of Mississippi.
In addition to Mr. Fisher, the following persons serve on
our board of trustees:
Miles
Berger
Mr. Berger has been engaged in real estate, banking and
financial services since 1950. In 1998, Mr. Berger became
Chairman and Chief Executive Officer of Berger Management
Services LLC, a real estate and financial consulting and
advisory services company. From 1969 to 1998, he served as Vice
Chairman of the Board of Heitman Financial Ltd., a real estate
investment management firm. Mr. Berger served for more than
thirty years, until 2001, as Chairman of the Board of MidTown
Bank and Trust Company of Chicago, served as Vice Chairman
of Columbia National Bank Corp. from
1965-1995
and was Chairman of the Board of Berger Financial Services, a
full-service real estate advisory and financial services company
from 1950 to 2006. Mr. Berger has served on the board of
trustees of Universal Health Realty Income Trust, a publicly
traded health care REIT, since December 1998. Mr. Berger
also serves on the Board of Directors of Medallion Bank and
serves as Trustee for Universal Health Trust and is on the
boards of numerous philanthropic organizations. Mr. Berger
previously served on the Board of Trustees of Innkeepers from
September 1994 until Innkeepers sale in June 2007.
Thomas J.
Crocker
Mr. Crocker is Chief Executive Officer and principal
investor of Crocker Partners, LLC, a privately-held real estate
investment company, which is the general partner of a real
estate private
69
equity fund, Crocker Partners IV, L.P. Mr. Crocker was
previously the Chief Executive Officer of CRT Properties, Inc.
(formerly known as Koger Equity, Inc.), until its sale in
September 2005. CRT Properties, Inc. was a publicly-held real
estate investment trust, which owned or had interests in more
than 137 office buildings, containing 11.7 million
rentable square feet, primarily located in 25 suburban and urban
office projects in 12 metropolitan areas in the Southeastern
United States, Maryland and Texas. Prior to joining Koger
Equity, Inc. in March 2000, Mr. Crocker was Chairman of the
Board and Chief Executive Officer of Crocker Realty Trust, Inc.,
a privately-held REIT, which owned and operated approximately
6.2 million square feet in 133 office buildings located in
six states in the Southeast, plus more than 125 acres of
developable land. Previously, Mr. Crocker was Chairman of
the Board and Chief Executive Officer of Crocker Realty Trust,
Inc., which was an office-based publicly-held REIT in the
southeast U.S., from that companys inception until June
1996, when it merged with Highwoods Properties, a publicly-held
REIT. Prior to forming Crocker Realty Trust, Inc.,
Mr. Crocker headed Crocker & Co., a
privately-held firm responsible for development, leasing and
property management services to approximately 1.7 million
square feet of commercial property and 272 residential units.
Prior to 1984, Mr. Crocker was a real estate lending
officer at Chemical Bank. Mr. Crocker previously served on
the Board of Trustees of Innkeepers from February 1997 until
Innkeepers sale in June 2007.
Jack P.
DeBoer
Mr. DeBoer is Chairman of Consolidated Holdings, Inc., a
private investment company focusing on real estate development
and management. Mr. DeBoer is also the Chairman of the
Board and majority owner of Value Place LLC, owner of the
franchise rights to the Value Place brand of hotels, which
provides affordable extended-stay lodging. Mr. DeBoer
served as Chairman of the Board, President and Chief Executive
Officer of Candlewood Hotel Company, Inc. from its inception in
1995 until it was acquired in December 2003. From October 1993
to September 1995, Mr. DeBoer was self-employed and engaged
in the development of the Candlewood extended-stay hotel
concept. From 1988 to 1993, Mr. DeBoer co-founded and
developed Summerfield Hotel Corporation, an upscale
extended-stay hotel chain. Previously, Mr. DeBoer founded
and developed the Residence Inn franchise prior to selling the
franchise to Marriott in 1987. Mr. DeBoer previously served
on the Board of Trustees of Innkeepers from November 1996 until
Innkeepers sale in June 2007.
Glen R.
Gilbert
Mr. Gilbert has been employed by BFC Financial Corporation,
a publicly-traded savings bank and real estate holding company,
since November 1980. During that period, Mr. Gilbert served
in several senior management positions, including as Chief
Financial Officer from May 1987 to April 2007 and as Executive
Vice President from July 1997 to April 2007. Mr. Gilbert
also served as Senior Executive Vice President for Levitt
Corporation (now known as Woodbridge Holdings Corp.), a then
publicly-traded home builder and real estate developer, from
August 2004 to December 2005, after serving as its Chief
Financial Officer and Executive Vice President from April 1997
to August 2004. Mr. Gilbert has also held various executive
and chief financial officer positions for other entities related
to BFC Financial Corporation. Mr. Gilbert was a certified
public accountant from 1970 through 2008 and graduated from the
University of Florida with a B.S.B.A. degree in accounting.
Mr. Gilbert began his accounting career with KPMG LLP in
1970.
Mr. Goldsmith has been an independent investor and
financial advisor since 1976. He is currently Chairman of the
Board of First Bank of the Palm Beaches, a community bank in
Palm Beach County, Florida, and Chairman of Property Corp.
International, a private real estate investment company. He has
served as a director of several banks and NYSE-listed companies
and various philanthropic organizations. He holds an A.B. from
the University of Michigan and an M.B.A. from Harvard Business
School. Mr. Goldsmith previously served on the Board of
Trustees of Innkeepers from September 1994 until
Innkeepers sale in June 2007.
70
Robert
Perlmutter
Robert Perlmutter is the managing member of Davis Street Land
Company, LLC, a privately held firm focused on the development,
management and ownership of upscale shopping centers, which
currently owns 2.0 million square feet of retail
properties. From 1983 to 1988, Mr. Perlmutter worked as an
investment analyst for Heitman Financial Services, Ltd. in its
acquisitions and dispositions division. From 1988 to 1990, he
served as Heitman Financials President, a capacity in
which he was responsible for overseeing all of its acquisitions,
financings and dispositions. Mr. Perlmutter subsequently
served as Chief Executive Officer of Chicago-based Heitman
Retail Properties from 1990 to 1998, where he supervised overall
operations and growth of its retail holdings from two retail
properties to twenty directly managed malls and twenty-nine
joint ventures in regional malls. From 1998 to 2001, he also
served on the board of directors of Prime Retail Inc., a
NYSE-listed outlet center company. He is a member of the
International Council of Shopping Centers and a board member of
the First Bank of Highland Park. Mr. Perlmutter received a
Bachelor of Sciences degree in business administration, with a
concentration in real estate, from the University of Colorado.
Rolf E.
Ruhfus
Mr. Ruhfus is Chairman and Chief Executive Officer of
LodgeWorks Corporation, a hotel development and management
company, which owns the Hotel Sierra and AVIA hotel brands.
Mr. Ruhfus also serves as Chairman and Chief Executive
Officer of Wichita Consulting Company, L.P., a consulting
services company. Previously, Mr. Ruhfus served as the
Chairman and Chief Executive Officer of Summerfield Hotel
Corporation, an upscale extended-stay hotel chain, from its
founding in 1988 until its sale to Wyndham International, Inc.
in 1998. Mr. Ruhfus served as President of the Residence
Inn Company from February 1983 though July 1987 (when it was
acquired by Marriott International, Inc.). Mr. Ruhfus
joined the Residence Inn Company after spending four years as
Director of Marketing for VARTA Battery, Europes largest
battery manufacturer. Prior to this position, he was a
management consultant for McKinsey and Company in its
Dusseldorf, Germany office. Mr. Ruhfus was a German Air
Force Lieutenant and received a bachelors degree from
Western Michigan University in 1968. His graduate degrees
include an M.B.A. from the Wharton School at the University of
Pennsylvania in 1971 and a Ph.D. in marketing from the
University of Muenster in 1974. Mr. Ruhfus is a member of
the international chapter of The Young Presidents Organization
and serves on the board of several European companies.
Mr. Ruhfus previously served on the Board of Trustees of
Innkeepers from July 1997 until Innkeepers sale in June
2007.
Joel F.
Zemans
Mr. Zemans has been active in the ownership and operation
of real estate and banks since 1969. From 1971 through 1976, he
served as Executive Vice President (and through 1984 as a
Director) of Chicago Properties Corporation, a real estate
development company specializing in the rehabilitation of
multi-unit
residential properties in Chicago. Between 1976 and 2001,
Mr. Zemans served as President and Chief Executive Officer
of de novo Mid Town Bancorp, Inc. and its subsidiary, Mid Town
Bank and Trust Company of Chicago, and as Chairman and
Chief Executive Officer of two wholly-owned subsidiaries, Mid
Town Development Corporation and Equitable Finance Corporation.
He currently serves as a consultant to businesses and
individuals for real estate financing, investing and strategic
planning. Mr. Zemans also serves on the Board of Directors
of Bright Electric Supply and MBA Building Supplies, and he
provides pro-bono consulting to a number of
not-for-profit
organizations. Mr. Zemans holds both a B.A. and an M.B.A.
from the University of Chicago. Mr. Zemans previously
served on the Board of Trustees of Innkeepers from November 2001
until Innkeepers sale in June 2007. Mr. Zemans also
served on the board of Mid America Bank from 2001 to 2004.
71
Promoter
We consider Mr. Fisher, our chairman, president and chief
executive officer, to be our promoter, in that he has taken
initiative in funding and organizing our company.
Mr. Fisher is the only person whom we consider to be our
promoter.
Board
Committees
Our board of trustees has appointed an Audit Committee,
Compensation Committee and a Nominating and Corporate Governance
Committee, and has adopted charters for each of these
committees. Under these charters, the composition of each
committee is required to comply with the listing standards and
other rules and regulations of the NYSE, as amended or modified
from time to time. Each of these committees is composed
exclusively of independent trustees, as defined by the listing
standards of the NYSE then in effect.
Audit
Committee
Our Audit Committee consists of Messrs. Gilbert (Chair),
Berger and Zemans. The Audit Committee makes recommendations
concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the
independence of the independent public accountants, considers
the range of audit and non-audit fees and review the adequacy of
our internal accounting controls.
Mr. Gilbert, an independent trustee, is the chair of our
Audit Committee and is our audit committee financial expert as
that term is defined by the SEC.
Compensation
Committee
Our Compensation Committee consists of Messrs. Goldsmith
(Chair), Berger and Zemans. The Compensation Committee
determines compensation for our executive officers, administers
our Equity Incentive Plan, produces an annual report on
executive compensation for inclusion in our annual meeting proxy
statement and publishes an annual committee report for our
shareholders. All members of our Compensation Committee are
independent under the applicable rules and regulations of the
SEC, the NYSE and the Code.
Nominating and
Corporate Governance Committee
Our Nominating and Corporate Governance Committee consists of
Messrs. Crocker (Chair) and Goldsmith. The Nominating and
Corporate Governance Committee is responsible for seeking,
considering and recommending to the board qualified candidates
for election as trustees and recommending a slate of nominees
for election as trustees at the annual meeting. It also
periodically prepares and submits to the board for adoption the
committees selection criteria for trustee nominees. It
reviews and makes recommendations on matters involving general
operation of the board and our corporate governance, and it
annually recommends to the board nominees for each committee of
the board. In addition, the committee annually facilitates the
assessment of the board of trustees performance as a whole
and of the committees and individual trustees and reports
thereon to the board.
Code of
Ethics
We have adopted a corporate code of ethics relating to the
conduct of our business by our employees, officers and trustees.
We intend to maintain the highest standards of ethical business
practices and compliance with all laws and regulations
applicable to our business, including those relating to doing
business outside the U.S. Specifically, our code of ethics
prohibits payments, directly
72
or indirectly, to any foreign official seeking to influence such
official or otherwise obtain an improper advantage for our
business.
Compensation
Committee Interlocks and Insider Participation
None of the trustees serving on our Compensation Committee is or
has ever been one of our officers or employees, nor has any of
our trustees entered into any transaction with us with a value
in excess of $120,000. None of our executive officers, and no
trustee serving on our Compensation Committee, serves as a
member of the board of trustees (or board of directors) or
Compensation Committee of any entity that has one or more
executive officers serving on our board of trustees.
Indemnification
of Trustees and Executive Officers and Limitations on
Liability
For information concerning limitations of liability and
indemnification applicable to our trustees, executive officers
and, in certain circumstances, employees, see Certain
Provisions of Maryland Law and of Our Declaration of Trust and
Bylaws located elsewhere in this prospectus.
Trustee
Compensation
Each of our independent trustees who does not serve as the
chairman of one of our committees is paid a trustees fee
of $75,000 per year. The trustees who serve as our lead trustee,
Audit Committee chairman, Compensation Committee chairman and
Nominating and Corporate Governance Committee chairman are paid
an additional cash fee of $10,000, $10,000, $7,500 and $5,000,
respectively. Trustees fees are paid one-half in cash and
one-half in our common shares although each trustee may elect to
receive up to all of his trustee fees in the form of our common
shares. Trustees who are employees receive no additional
compensation as trustees. In addition, we reimburse all trustees
for reasonable
out-of-pocket
expenses incurred in connection with their services on the board
of trustees.
73
COMPENSATION
DISCUSSION AND ANALYSIS
We pay base salaries and annual bonuses and make grants of
awards under our Equity Incentive Plan to certain of our
officers. Awards under our Equity Incentive Plan are granted to
provide performance and retention incentives to these
individuals based on factors such as the desire to retain such
officers services over the long-term, aligning such
officers interest with those of our shareholders,
incentivizing such officers over the near-, medium- and
long-term, and rewarding such officers for exceptional
performance. In addition, our Compensation Committee may
determine to make awards to new executive officers to help
attract them to our company.
Our compensation program for our named executive officers,
Messrs. Fisher, Willis and Craven (and, prior to the
termination of his employment, Mr. Morales), consists of
four key elements:
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Cash compensation, in the form of base salaries and annual cash
bonus awards;
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Long-term incentives, in the form of restricted share awards and
awards of LTIP units that vest over time;
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Health and welfare benefits; and
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Severance arrangements under the executives employment
agreements.
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Elements of Named
Executive Officer Compensation
Annual base salary. Base salary is designed to
compensate our named executive officers at a fixed level of
compensation that serves as a retention tool throughout the
executives career. The initial base salaries of
Messrs. Fisher, Willis and Morales were determined by
Messrs. Fisher and Willis prior to completion of our IPO
while they served as our sole officers and trustees, and were
ratified by our Compensation Committee following the completion
of our IPO. The base salary of Mr. Craven was determined by
our Compensation Committee in connection with the commencement
of Mr. Cravens employment in September 2010. In
determining whether to increase base salaries for our named
executive officers in any subsequent year, the Compensation
Committee will consider each executives role and
responsibility, unique skills, future potential with our
company, salary levels for similar positions in our target
market, internal pay equity and such other factors as the
Compensation Committee may determine to be relevant.
Under their employment agreements, Messrs. Fisher, Willis
and Craven were entitled to receive initial annual base salaries
for 2010 of $300,000, $285,000, $285,000, respectively, payable
in approximately equal bi-weekly installments. Base salary
amounts paid to Messrs. Fisher and Willis for 2010 were
prorated from the date of completion of our IPO in April 2010.
Mr. Cravens base salary amount for 2010 was prorated
from the date of commencement of his employment in September
2010. Mr. Moraless base salary amount for 2010 was
prorated from the date of completion of our IPO until the date
of termination of his employment in September 2010.
Annual cash bonus. Annual cash bonuses are
designed to provide incentives to our named executive officers
at a variable level of compensation based on such
individuals performance. In connection with our annual
cash bonus program, our Compensation Committee will determine
annual performance criteria that are flexible and that change
with the needs of our business. Each year, our annual cash bonus
plan will be designed to reward the achievement of specific,
pre-established financial and operational objectives. Pursuant
to our initial growth strategy following the successful
completion of our IPO, all of our named executive officers
agreed not to accept any discretionary cash bonus for 2010.
Restricted Share and LTIP Unit Awards. We have
provided, and expect to provide in the future, awards pursuant
to our Equity Incentive Plan. We made grants of time-based
restricted shares to each of Messrs. Fisher, Willis and
Morales of 15,650 shares, 10,450 shares and
10,450 shares, respectively, following the completion of
our IPO. The number of shares granted, and the type of award
made, were determined by Messrs. Fisher and Willis prior to
completion of our IPO while they served
74
as our sole officers and trustees, and were subsequently
ratified by our Compensation Committee following the completion
of our IPO. 7,200 of Mr. Moraless restricted shares
vested upon termination of his employment and the remaining
shares in Mr. Moraless restricted share award were
forfeited. We also made a grant of 10,450 time-based restricted
shares to Mr. Craven in connection with the commencement of
his employment in September 2010, which was approved by our
Compensation Committee at the time of his appointment. With the
exception of Mr. Moraless restricted share award,
each restricted share award vests in substantially equal
installments on each of the first, second and third
anniversaries of the grant date.
We made grants of time-based LTIP units to each of
Messrs. Fisher, Willis and Morales of 198,940 LTIP units,
32,585 LTIP units and 15,435 LTIP units, respectively, following
the completion of our IPO. The number of LTIP units granted, and
the type of award made, were determined by Messrs. Fisher
and Willis prior to completion of our IPO while they served as
our sole officers and trustees, and were subsequently ratified
by our Compensation Committee following the completion of our
IPO. Mr. Moraless LTIP unit award was forfeited upon
termination of his employment. We also made a grant of 26,250
time-based LTIP units to Mr. Craven in connection with the
commencement of his employment in September 2010, which was
approved by our Compensation Committee at the time of his
appointment. With the exception of Mr. Moraless LTIP
unit award, each LTIP unit award vests in substantially equal
installments on each of the first through fifth anniversaries of
the grant date.
The time-based restricted share awards were designed to foster
equity ownership by our named executive officers in our company
and to align their interests with those of our shareholders.
LTIP unit awards are tied to the performance of our company and
were designed to provide these key executives, who will be
primarily responsible for our growth and operations, with
incentives to focus on long-term goals and enhancing shareholder
value.
In determining future awards under our Equity Incentive Plan,
our Compensation Committee will take into account, among other
things, the companys overall financial performance, the
contributions of each of our named executive officers, the
long-term equity incentive compensation of officers in similar
positions in our target market, internal pay equity and such
other factors as the Compensation Committee may determine to be
relevant.
Retirement savings opportunities. We have
established and plan to maintain a retirement savings plan under
section 401(k) of the Code. All eligible employees are able
to participate in our 401(k) Retirement Savings Plan, or 401(k)
Plan, which allows such employees to defer a portion of their
compensation, within prescribed limits, on a pre-tax basis
through contributions to the 401(k) Plan. Our 401(k) Plan
is intended to help our employees save some amount of their cash
compensation for retirement in a tax efficient manner. We match
employees annual contributions, within prescribed limits,
dollar for dollar up to the first 3% of each employees
compensation contributed and 50% of each employees
contributions above such 3% threshold, up to 5% of such
employees compensation.
Health and welfare benefits. We provide a
competitive benefits package to all full-time employees, which
includes health and welfare benefits, such as medical, dental,
disability insurance and life insurance benefits. The plans
under which these benefits are offered do not discriminate in
scope, terms or operation in favor of officers and trustees and
are available to all full-time employees.
Post-termination pay. As described more fully
under Employment Arrangements and Potential
Payments upon Termination or Change in Control, we have
entered into employment agreements with each of our named
executive officers that provide the officers with compensation
if they are terminated without cause, they leave the
company with good reason (each as defined in the
applicable employment agreement) or their employment terminates
in some circumstances following a change in control. We believe
these common protections promote our ability to attract and
retain management and assure us that our executive officers will
continue to be dedicated and available to provide objective
advice and counsel notwithstanding the possibility, threat or
occurrence of a change in their circumstances or in the control
of our company.
75
Summary
Compensation Table
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Change in Pension
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Value and
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Non-Equity
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Nonqualified Deferred
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Name and
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Share
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Option
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Incentive Plan
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Compensation
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All Other
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principal position
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Year
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Base
Salary(1)
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Bonus(2)
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Awards(3)(4)
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Awards
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Compensation
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Earnings
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Compensation
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Total
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Jeffrey H. Fisher
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2010
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$
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209,589
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$
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3,315,068
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$
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3,524,657
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Chairman, President & Chief Executive Officer
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Peter Willis
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2010
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199,110
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691,727
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890,837
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Executive Vice President & Chief Investment Officer
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Julio E.
Morales(5)
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2010
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110,877
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431,390
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542,267
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Former Executive Vice President & Chief Financial
Officer
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Dennis M. Craven
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2010
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88,233
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574,767
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663,000
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Executive Vice President & Chief Financial Officer
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(1) |
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Amounts represent each named
executive officers annual base salary, prorated to reflect
partial year service. Mr. Fisher and Mr. Willis
received a pro rata portion of their 2010 base salaries
($300,000 and $285,000, respectively) for the period from the
completion of our IPO through December 31, 2010.
Mr. Craven received a pro rata portion of his 2010 base
salary ($285,000) for the period from September 9, 2010,
the commencement date of his employment, through
December 31, 2010. Mr. Morales received a pro rata
portion of his 2010 base salary ($285,000) for the period from
completion of our IPO through September 9, 2010, the date
of termination of his employment.
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(2) |
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Any bonus awards are determined at
the sole discretion of our Compensation Committee and our board
of trustees based on our implementation of our business plan,
including investment of the net proceeds of this offering, and
such other factors as the Compensation Committee and the board
of trustees may deem appropriate.
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(3) |
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Reflects restricted share awards in
2010 to Messrs. Fisher, Willis, Morales and Craven pursuant
to our Equity Incentive Plan as part of our 2010 compensation
program. The restricted share awards were 15,650 shares for
Mr. Fisher, 10,450 for Mr. Willis, 10,450 for
Mr. Morales and 10,450 for Mr. Craven. All restricted
share awards will vest ratably over the first three
anniversaries of the date of grant other than
Mr. Moraless, of which 7,200 shares vested upon
termination of his employment and the rest of which were
forfeited. Amounts in this column represent the aggregate grant
date fair value of the restricted share awards. Amounts were
calculated in accordance with Accounting Standards Codification
Topic 718, Compensation Stock Compensation,
or ASC Topic 718. See Note 10. Equity Incentive Plan
Restricted Share Awards in the notes to our unaudited financial
statements for the nine months ended September 30, 2010
found elsewhere in this prospectus.
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(4) |
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Amounts also account for the grant
of LTIP units to Messrs. Fisher, Willis, Morales and Craven
under our Equity Incentive Plan. Messrs. Fisher, Willis,
Morales and Craven were awarded 198,940, 32,585, 15,435 and
26,250 LTIP units, respectively. All LTIP unit awards will vest
ratably over the first five anniversaries of the date of grant
other than Mr. Moraless, which was forfeited upon
termination of his employment. For purposes of this table and
the pro forma financial information of Chatham Lodging Trust
beginning on
page F-3,
we estimated, under the principles of GAAP, that the discounted
values of the LTIP unit awards are $3,019,909 to
Mr. Fisher, $494,640 to Mr. Willis, $234,303 to
Mr. Morales and $398,475 to Mr. Craven. The
compensation reported in the table related to the LTIP grants
reflects the aggregate grant date fair value of the LTIP units,
calculated in accordance with ASC 718. To determine the
discounted value of the LTIP unit awards, we considered the
inherent uncertainty that the LTIP units will reach parity with
the other common partnership units, appropriateness of discounts
for illiquidity, expectations for future dividends and various
other data available to us as of the date of this grant, as
discussed in Note 10. Equity Incentive Plan
Long-Term Incentive Plan Units in the notes to our unaudited
financial statements for the nine months ended
September 30, 2010 found elsewhere in this prospectus.
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(5) |
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Mr. Craven replaced
Mr. Morales as our Executive Vice President and Chief
Financial Officer on September 9, 2010.
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Grants of
Plan-Based Awards
The following table sets forth information with respect to
plan-based equity awards granted in 2010 to our named executive
officers.
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All Other Share
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Name
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Grant Date
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Awards or Units
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Grant Date Fair Value
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Jeffrey H. Fisher
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April 23, 2010
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198,940
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(1)
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$
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3,019,909
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(4)
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May 20, 2010
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15,650
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(2)
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$
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295,159
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(5)
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Peter Willis
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April 23, 2010
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32,585
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(1)
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$
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494,640
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(4)
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May 20, 2010
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10,450
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(2)
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$
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197,087
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(5)
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Julio E. Morales
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April 23, 2010
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15,435
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(1)
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$
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234,303
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(4)
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May 20, 2010
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10,450
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(2)
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$
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197,087
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(5)
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Dennis M. Craven
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September 9, 2010
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26,250
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(1)
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$
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398,475
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(4)
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September 9, 2010
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10,450
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(3)
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$
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176,292
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(5)
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76
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(1) |
|
Amounts reflect the grant of LTIP unit awards to the executive
under our Equity Incentive Plan in connection with the
completion of our initial public offering or, in the case of
Mr. Craven, in connection with the commencement of his
employment. Each LTIP unit award vests ratably on each of the
first five anniversaries of the date of grant other than
Mr. Moraless, which were forfeited upon termination
of his employment. |
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(2) |
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Represents restricted common shares issued to the executive
pursuant to our Equity Incentive Plan following the first
meeting of our Compensation Committee after completion of our
IPO. Each restricted share award vests ratably on the first
three anniversaries of the date of grant other than
Mr. Moraless, of which 7,200 shares vested upon
termination of his employment and the rest of which were
forfeited. |
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(3) |
|
Represents restricted common shares issued to Mr. Craven
pursuant to our Equity Incentive Plan in connection with the
commencement of his employment. Mr. Cravens
restricted share award vests ratably on the first three
anniversaries of the date of grant. |
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(4) |
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The grant date fair value of the LTIP unit awards was calculated
in accordance with ASC 718. To determine the discounted
value of the LTIP unit awards, we considered the inherent
uncertainty that the LTIP units will reach parity with the other
common partnership units, appropriateness of discounts for
illiquidity, expectations for future dividends and various other
data available to us as of the date of this grant, as discussed
in Note 10. Equity Incentive Plan Long-Term
Incentive Plan Units in the notes to our unaudited financial
statements for the nine months ended September 30, 2010
found elsewhere in this prospectus. |
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(5) |
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Represents the aggregate grant date fair value of the restricted
share awards. Amounts were calculated in accordance with
ASC 718. See Note 10. Equity Incentive
Plan Restricted Share Awards in the notes to our
unaudited financial statements for the nine months ended
September 30, 2010 found elsewhere in this prospectus. |
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth information with respect to
outstanding equity awards held by the named executive officers
as of December 31, 2010.
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Number of Shares or Units That
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|
|
Market Value of Shares That
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Name
|
|
Have Not Vested
|
|
|
Have Not
Vested(4)
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|
|
Jeffrey H. Fisher
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198,940
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(2)
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$
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3,431,715
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15,650
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(3)
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$
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269,963
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Peter Willis
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32,585
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(2)
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$
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562,092
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10,450
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(3)
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$
|
180,263
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|
Julio E.
Morales(1)
|
|
|
|
|
|
|
|
|
Dennis M. Craven
|
|
|
26,250
|
(2)
|
|
$
|
452,813
|
|
|
|
|
10,450
|
(3)
|
|
$
|
180,263
|
|
|
|
|
(1) |
|
Mr. Morales did not hold outstanding equity awards as of
December 31, 2010. |
|
|
|
(2) |
|
Reflects the grant of LTIP unit awards to the executive under
our Equity Incentive Plan upon completion of our initial public
offering or, in the case of Mr. Craven, in connection with
the commencement of his employment. The awards of LTIP units
vest ratably on each of the first five anniversaries of the date
of grant: April 23, 2011, April 23, 2012,
April 23, 2013, April 23, 2014 and April 23,
2015, in the case of Messrs. Fisher and Willis; and on
September 9, 2011, September 9, 2012,
September 9, 2013, September 9, 2014 and
September 9, 2015, in the case of Mr. Craven. |
|
|
|
(3) |
|
Reflects restricted common shares issued to the executive
pursuant to our Equity Incentive Plan following the first
meeting of our board of trustees after completion of our IPO or,
in the case of Mr. Craven, at the time of commencement of
his employment. The awards of restricted common |
77
|
|
|
|
|
shares vest ratably on each of the first three anniversaries of
the date of grant: May 20, 2011, May 20, 2012 and
May 20, 2013, in the case of Messrs. Fisher and
Willis; and on September 9, 2011, September 9, 2012
and September 9, 2013, in the case of Mr. Craven. |
|
|
|
(4) |
|
Unless and until LTIP units reach parity with common shares, the
value of LTIP units can only be estimated. However, for purposes
of calculating the market value of LTIP units and restricted
common shares that have not vested, the market value per
unvested LTIP unit and restricted common share is assumed to be
$17.25, the closing market price per common share at the end of
the last completed fiscal year, December 31, 2010. This
table further assumes that the LTIP units had reached parity
with our common shares on December 31, 2010. However, as of
December 31, 2010, the LTIP units had not reached parity
with our common shares. |
Option Exercises
and Shares Vested
The following table summarizes vesting of common shares
applicable to our named executive officers during the year ended
December 31, 2010. None of the named executive officers
exercised any options during 2010.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Acquired on Vesting
|
|
|
Value Realized on
|
|
Name
|
|
(#)
|
|
|
Vesting
($)(1)
|
|
|
Jeffrey H. Fisher
|
|
|
|
|
|
|
|
|
Peter Willis
|
|
|
|
|
|
|
|
|
Julio E. Morales
|
|
|
7,200
|
|
|
|
121,032
|
|
Dennis M. Craven
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount shown is based on the fair market value of our common
shares ($16.81) on the applicable vesting date
(September 9, 2010). |
Equity Incentive
Plan
Prior to the completion our IPO, our board of trustees adopted,
and our sole shareholder at the time approved, our Equity
Incentive Plan to attract and retain independent trustees,
executive officers and other key employees and service
providers, including officers and employees of our affiliates.
The Equity Incentive Plan provides for the grant of options to
purchase common shares, share awards, share appreciation rights,
performance units and other equity-based awards.
Administration
of the Equity Incentive Plan
The Equity Incentive Plan is administered by our Compensation
Committee, which is authorized to approve all terms of awards
under the Equity Incentive Plan. Our Compensation Committee may
also approve who receives grants under the Equity Incentive Plan
and the number of common shares subject to the grant.
Eligibility
All of our employees and employees of our subsidiaries and
affiliates, including our operating partnership, are eligible to
receive grants under the Equity Incentive Plan. In addition, our
independent trustees and individuals who perform services for us
and our subsidiaries and affiliates, including employees of our
operating partnership, may receive grants under the Equity
Incentive Plan.
Share
Authorization
The number of common shares that may be issued under the Equity
Incentive Plan is 565,359.
78
In connection with share splits, dividends, recapitalizations
and certain other events, our board will make adjustments that
it deems appropriate in the aggregate number of common shares
that may be issued under the Equity Incentive Plan and the terms
of outstanding awards.
If any options or share appreciation rights terminate, expire or
are canceled, forfeited, exchanged or surrendered without having
been exercised or paid or if any share awards, performance units
or other equity-based awards are forfeited, the common shares
subject to such awards will again be available for purposes of
the Equity Incentive Plan.
Options
The Equity Incentive Plan authorizes our Compensation Committee
to grant incentive stock options (under Section 422 of the
Code) and options that do not qualify as incentive share
options. The exercise price of each option will be determined by
the Compensation Committee, provided that the price cannot be
less than 100% of the fair market value of the common shares on
the date on which the option is granted (or 110% of the
shares fair market value on the grant date in the case of
an incentive share option granted to an individual who is a
ten percent shareholder under Sections 422 and
424 of the Code). The exercise price for any option is generally
payable (i) in cash, (ii) by certified check,
(iii) by the surrender of common shares (or attestation of
ownership of common shares) with an aggregate fair market value
on the date on which the option is exercised, equal to the
exercise price, or (iv) by payment through a broker in
accordance with procedures established by the Federal Reserve
Board. The term of an option cannot exceed ten years from the
date of grant (or five years in the case of an incentive share
option granted to a ten percent shareholder).
Share
Awards
The Equity Incentive Plan also provides for the grant of share
awards. A share award is an award of common shares that may be
subject to restrictions on transferability and other
restrictions as our Compensation Committee determines in its
sole discretion on the date of grant. The restrictions, if any,
may lapse over a specified period of time or through the
satisfaction of conditions, in installments or otherwise, as our
Compensation Committee may determine. A participant who receives
a share award will have all of the rights of a shareholder as to
those shares, including, without limitation, the right to vote
and the right to receive dividends or distributions on the
shares. During the period, if any, when share awards are
non-transferable or forfeitable, (i) a participant is
prohibited from selling, transferring, pledging, exchanging,
hypothecating or otherwise disposing of his or her share award
shares, (ii) the company will retain custody of the
certificates and (iii) a participant must deliver a share
power to the company for each share award.
At the first meeting of our board of trustees following the
completion of our IPO, our Compensation Committee approved the
issuance of an aggregate of 36,550 restricted shares to
Mr. Fisher, Mr. Willis and Mr. Morales, our
former chief financial officer. Mr. Craven was granted
10,450 restricted shares at the commencement of his employment
on September 9, 2010. All of these restricted share awards
will vest ratably on the first three anniversaries of the date
of grant other than Mr. Moraless, of which
7,200 shares vested upon termination of his employment and
the rest of which were forfeited.
Share
Appreciation Rights
The Equity Incentive Plan authorizes our Compensation Committee
to grant share appreciation rights that provide the recipient
with the right to receive, upon exercise of the share
appreciation right, cash, common shares or a combination of the
two. The amount that the recipient will receive upon exercise of
the share appreciation right generally will equal the excess of
the fair market value of the common shares on the date of
exercise over the shares fair market value on the date of
grant. Share appreciation rights will become exercisable in
accordance with terms determined by our Compensation Committee.
Share appreciation rights may be granted in tandem with an
option grant or as independents grants. The term of a share
appreciation right cannot exceed ten years from the date of
79
grant or five years in the case of a share appreciation right
granted in tandem with an incentive share option awarded to a
ten percent shareholder.
Performance
Units
The Equity Incentive Plan also authorizes our Compensation
Committee to grant performance units. Performance units
represent the participants right to receive an amount,
based on the value of the common shares, if performance goals
established by the Compensation Committee are met. Our
Compensation Committee will determine the applicable performance
period, the performance goals and such other conditions that
apply to the performance unit. Performance goals may relate to
our financial performance or the financial performance of our
operating partnership, the participants performance or
such other criteria determined by the Compensation Committee. If
the performance goals are met, performance units will be paid in
cash, our common shares or a combination thereof.
Other
Equity-Based Awards
Our Compensation Committee may grant other types of share-based
awards as other
equity-based
awards under the Equity Incentive Plan, including Long-Term
Incentive Plan, or LTIP, units. Other equity-based awards are
payable in cash, our common shares or other equity, or a
combination thereof, determined by the Compensation Committee.
The terms and conditions of other equity-based awards are
determined by the Compensation Committee.
LTIP units are a special class of partnership interests in our
operating partnership. Each LTIP unit awarded will be deemed
equivalent to an award of one common share under the Equity
Incentive Plan, reducing availability for other equity awards on
a
one-for-one
basis. We will not receive a tax deduction for the value of any
LTIP units granted to our employees. The vesting period for any
LTIP units, if any, will be determined at the time of issuance.
LTIP units, whether vested or not, receive the same quarterly
per unit profit distributions as units of our operating
partnership, which profit distribution will generally equal per
share dividends on our common shares. This treatment with
respect to quarterly distributions is similar to the treatment
of our restricted share awards, which generally receive full
dividends whether vested or not. Initially, LTIP units do not
have full parity with operating partnership units with respect
to liquidating distributions. Under the terms of the LTIP units,
our operating partnership will revalue its assets upon the
occurrence of certain specified events, and any increase in
valuation from the time of grant until such event will be
allocated first to the holders of LTIP units to equalize the
capital accounts of such holders with the capital accounts of
operating partnership unit holders. Upon equalization of the
capital accounts of the holders of LTIP units with the other
holders of operating partnership units, the LTIP units will
achieve full parity with operating partnership units for all
purposes, including with respect to liquidating distributions.
If such parity is reached, vested LTIP units may be converted
into an equal number of operating partnership units at any time,
and thereafter enjoy all the rights of operating partnership
units, including exchange rights. However, there are
circumstances under which such parity would not be reached.
Until and unless such parity is reached, the value that an
executive officer will realize for a given number of vested LTIP
units will be less than the value of an equal number of our
common shares.
Upon completion of our IPO, we caused our operating partnership
to issue an aggregate of 246,960 LTIP units to certain of our
officers. The 15,435 LTIP units granted to Mr. Morales at
the completion of our IPO were forfeited upon termination of his
employment. On September 9, 2010, we caused our operating
partnership to grant 26,250 LTIP units to Mr. Craven in
connection with the commencement of his employment with our
company. The LTIP units granted to Messrs. Fisher, Willis
and Craven will vest ratably over the first five anniversaries
of the date of grant. See Our Operating Partnership and
the Partnership Agreement for a further description of the
rights of limited partners in our operating partnership.
80
Dividend
Equivalents
Our Compensation Committee may grant dividend equivalents in
connection with the grant of performance units and other
equity-based awards. Dividend equivalents may be paid currently
or accrued as contingent cash obligations (in which case they
will be deemed to have been invested in common shares) and may
be payable in cash, common shares or a combination of the two.
Our Compensation Committee will determine the terms of any
dividend equivalents.
Change in
Control
If we experience a change in control, the Compensation Committee
may, at its discretion, provide that all outstanding options,
share appreciation rights, share awards, performance units, or
other equity based awards that are not exercised prior to the
change in control will be assumed by the surviving entity, or
will be replaced by a comparable substitute award of
substantially equal value granted by the surviving entity. The
Compensation Committee may also provide that (i) all
outstanding options and share appreciation rights will be fully
exercisable on the change in control, (ii) restrictions and
conditions on outstanding share awards will lapse upon the
change in control and (iii) performance units or other
equity-based awards will become earned in their entirety. The
Compensation Committee may also provide that participants must
surrender their outstanding options and share appreciation
rights, share awards, performance units, and other equity based
awards in exchange for a payment, in cash or our common shares
or other securities or consideration received by shareholders in
the change in control transaction, equal to the value received
by shareholders in the change in control transaction (or, in the
case of options and share appreciation rights, the amount by
which that transaction value exceeds the exercise price).
In summary, a change of control under the Equity Incentive Plan
occurs if:
|
|
|
|
|
a person, entity or affiliated group (with certain exceptions)
acquires, in a transaction or series of transactions, more than
50% of the total combined voting power of our outstanding
securities or common shares;
|
|
|
|
we merge into another entity unless the holders of our voting
shares immediately prior to the merger have more than 50% of the
combined voting power of the securities in the merged entity or
its parent;
|
|
|
|
we sell or dispose of all or substantially all of our assets;
|
|
|
|
we are liquidated or dissolved; or
|
|
|
|
during any period of two consecutive years individuals who, at
the beginning of such period, constitute our board of trustees
together with any new trustees (other than individuals who
become trustees in connection with certain transactions or
election contests) cease for any reason to constitute a majority
of our board of trustees.
|
Amendment;
Termination
Our board of trustees may amend or terminate the Equity
Incentive Plan at any time, provided that no amendment may
adversely impair the benefits of participants with outstanding
awards. Our shareholders must approve any amendment if such
approval is required under applicable law or stock exchange
requirements. Our shareholders also must approve any amendment
that materially increases the benefits accruing to participants
under the Equity Incentive Plan, materially increases the
aggregate number of common shares that may be issued under the
Equity Incentive Plan or materially modifies the requirements as
to eligibility for participation in the Equity Incentive Plan.
Unless terminated sooner by our board of trustees or extended
with shareholder approval, the Equity Incentive Plan will
terminate on the day before the tenth anniversary of the date
our board of trustees adopted the Equity Incentive Plan.
81
Employment
Arrangements
Jeffrey H. Fisher. Our employment agreement with
Mr. Fisher has an initial term of three years and will
renew for one-year terms thereafter unless terminated by written
notice delivered at least 30 days before the end of the
then-current term. The employment agreement provides for an
annual base salary to Mr. Fisher of $300,000, subject to
increase in the discretion of the Board or its Compensation
Committee.
Under his employment agreement, Mr. Fisher is eligible to
earn an annual cash bonus at the discretion of the Compensation
Committee or to the extent that prescribed individual and
corporate goals established by the Committee are achieved.
Mr. Fishers employment agreement entitles him to
customary fringe benefits, including vacation and the right to
participate in any other benefits or plans in which other
executive-level employees participate (including but not limited
to retirement, pension, profit-sharing, insurance (including
life insurance) or hospital plans).
Mr. Fishers employment agreement provides for certain
payments in the event that his employment ends upon termination
by us for cause, his resignation without good
reason (as defined below), his death or disability or any
reason other than a termination by us without cause
or his resignation with good reason. The agreement
defines cause as (1) a failure to perform a
material duty or a material breach of an obligation set forth in
Mr. Fishers employment agreement or a breach of a
material and written policy other than by reason of mental or
physical illness or injury, (2) a breach of
Mr. Fishers fiduciary duties, (3) conduct that
demonstrably and materially injures us monetarily or otherwise
or (4) a conviction of, or plea of nolo contendere to, a
felony or crime involving moral turpitude or fraud or dishonesty
involving our assets, and that in each case is not cured, to the
Boards reasonable satisfaction, within 30 days after
written notice. In any such event, Mr. Fishers
employment agreement provides for the payment to him of any
earned but unpaid compensation up to the date of his termination
and any benefits due to him under the terms of any of our
employee benefit plans.
Mr. Fishers employment agreement provides for certain
severance payments in the event that his employment ends upon
termination by us without cause or his resignation
for good reason. The agreement defines good
reason as (1) our material breach of the terms of
Mr. Fishers employment agreement or a direction from
the Board that he act or refrain from acting in a manner
unlawful or contrary to a material and written policy,
(2) a material diminution in Mr. Fishers duties,
functions and responsibilities without his consent or our
preventing him from fulfilling or exercising his material
duties, functions and responsibilities without his consent,
(3) a material reduction in Mr. Fishers base
salary or annual bonus opportunity or (4) a requirement
that Mr. Fisher relocate more than 50 miles from the
current location of his principal office without his consent, in
each case provided that Mr. Fisher has given written notice
to the Board within 30 days after he knows of the
circumstances constituting good reason, the
circumstances constituting good reason are not cured
within 30 days of such notice and Mr. Fisher resigns
within 30 days after the expiration of the cure period. In
any such event, Mr. Fisher is entitled to receive any
earned but unpaid compensation up to the date of his termination
and any benefits due to him under the terms of our employee
benefit plans. If Mr. Fisher signs a general release of
claims, then any outstanding options, restricted shares and
other equity awards shall be vested and exercisable as of the
date of termination and outstanding options shall remain
exercisable thereafter until their stated expiration date as if
Mr. Fishers employment had not terminated.
Mr. Fisher shall also be entitled to receive, subject to
Mr. Fisher signing a general release of claims, an amount
equal to three times his base salary in effect at the time of
termination, an amount equal to three times the highest annual
bonus paid to him for the three fiscal years ended immediately
before the date of termination, a pro-rated bonus for the
then-current fiscal year based on his annual bonus for the
fiscal year ended prior to his termination and an amount equal
to three times the annual premium or cost paid by us for
Mr. Fishers health, dental, vision, disability and
life insurance coverage in effect on his termination date.
82
Mr. Fisher owns IHM, a hotel management company that
currently manages five of our hotels and that we may engage to
manage certain additional hotels we acquire in the future
pursuant to management agreements with our TRS Lessees. In order
to permit IHM to qualify as an eligible independent
contractor as required by applicable tax law,
Mr. Fishers employment agreement permits him to be
the principal owner and serve as a director of entities engaged
in the hotel management business, and to devote business time to
those companies, so long as (1) such activities do not
interfere with the performance of his duties to us and
(2) he does not serve as an officer or employee of, or
receive compensation for service as a director of, any such
entity providing hotel management services to us or our
affiliates.
Peter Willis and Dennis M. Craven. Our employment
agreements with Mr. Willis and Mr. Craven have an
initial term of three years and will renew for one-year terms
thereafter unless terminated by written notice delivered at
least 30 days before the end of the then-current term. The
employment agreements provide for annual base salaries to each
of Mr. Willis and Mr. Craven of $285,000, subject to
increase in the discretion of the Board or its Compensation
Committee. The employment agreements entitle each of
Mr. Willis and Mr. Craven to fringe benefits
substantially similar to those afforded to Mr. Fisher, as
described above.
Under their employment agreements, Mr. Willis and
Mr. Craven are eligible to earn annual cash bonuses at the
discretion of the Compensation Committee or to the extent that
prescribed individual and corporate goals established by the
Committee are achieved.
Mr. Williss and Mr. Cravens employment
agreements provide for certain payments in the event of
termination by us for cause, resignation without
good reason, death or disability or any reason other
than a termination by us without cause or
resignation with good reason. The definitions of
cause and good reason in
Mr. Williss and Mr. Cravens employment
agreements are the same as those in Mr. Fishers
employment agreement, as described above. In any such event,
Mr. Williss and Mr. Cravens employment
agreements provide for the payment of any earned but unpaid
compensation up to the date of termination and any benefits due
under the terms of any of our employee benefit plans.
Mr. Williss and Mr. Cravens employment
agreements provide for certain severance payments in the event
of termination by us without cause or resignation
for good reason. In any such event, Mr. Willis
or Mr. Craven, as applicable, would be entitled to receive
any earned but unpaid compensation up to the date of his
termination and any benefits due to him under the terms of our
employee benefit plans. In addition, subject to his signing a
general release of claims, any outstanding options, restricted
shares and other equity awards held by Mr. Willis or
Mr. Craven, as applicable, shall be vested and exercisable
as of the date of termination and outstanding options shall
remain exercisable thereafter until their stated expiration date
as if employment had not terminated, provided that
Mr. Craven will only become entitled to such accelerated
vesting and extended exercisability if he is subject to a
qualifying termination after September 8, 2011. Each of
Mr. Willis and Mr. Craven, as applicable, shall also
be entitled to receive, subject to his signing a general release
of claims, an amount equal to his base salary at the time of
termination, an amount equal to the highest annual bonus paid to
him for the three fiscal years ended immediately before the date
of termination, a
pro-rated
bonus for the then-current fiscal year based on his annual bonus
for the fiscal year ended prior to his termination and an amount
equal to the annual premium or cost paid by us for his health,
dental, vision, disability and life insurance coverage in effect
on his termination date.
Mr. Williss and Mr. Cravens employment
agreements provide for higher severance payments in the event of
termination by us without cause no more than ninety
days before a change in control or on or after a change in
control or upon resignation for good reason on or
after a change in control. The agreement defines change in
control as (1) a person becoming the beneficial owner
of 50% or more of our voting shares, (2) a transfer of 50%
or more of our total assets, (3) our merger, consolidation
or statutory share exchange, except where our shareholders
immediately before the transaction own more than 50% of the
outstanding voting securities of the surviving entity,
(4) the
83
date members of the Board at the time of completion of our IPO,
which includes our initial independent trustees (or members of
the Board whose nomination or election to the Board was approved
by a majority of such members), cease to constitute a majority
of the Board or (5) our complete liquidation or
dissolution. In any such event, each of Mr. Willis and
Mr. Craven is entitled to receive any earned but unpaid
compensation up to the date of his termination and any benefits
due to him under the terms of our employee benefit plans. In
addition, subject to his signing a general release of claims,
all outstanding options, restricted shares and other equity
awards shall be vested and exercisable as of the date of
termination and outstanding options held by Mr. Willis or
Mr. Craven, as applicable, shall remain exercisable
thereafter until their stated expiration date as if
Mr. Williss or Mr. Cravens employment, as
applicable, had not terminated. Each of Mr. Willis and
Mr. Craven shall also be entitled to receive, subject to
his signing a general release of claims, an amount equal to two
times his base salary at the time of termination, an amount
equal to two times the highest annual bonus paid to him for the
three fiscal years ended immediately before the date of
termination, a pro-rated bonus for the then-current fiscal year
based on his annual bonus for the fiscal year ended prior to his
termination and an amount equal to two times the annual premium
or cost paid by us for his health, dental, vision, disability
and life insurance coverage in effect on his termination date.
Potential
Payments upon Termination or Change of Control
The following table and accompanying footnotes reflect the
estimated potential amounts payable to Messrs. Fisher,
Willis and Craven under their employment agreements and the
Companys compensation and benefit plans and arrangements
in the event the executives employment is terminated under
various scenarios, including involuntary termination without
cause, voluntary or involuntary termination with cause,
voluntary resignation with good reason, involuntary or good
reason termination in connection with a change in control and
termination due to death and disability. The amounts shown below
are estimates of the amounts that would be paid to
Messrs. Fisher, Willis and Craven upon termination of their
employment assuming that such termination was effective on
December 31, 2010. Actual amounts payable will depend upon
compensation levels at the time of
84
termination, the amount of future equity awards and other
factors, and will likely be greater than amounts shown in this
table.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment in Lieu of
|
|
|
|
|
|
|
|
|
|
|
Medical/Welfare
|
|
Acceleration and
|
|
|
|
Total
|
|
|
|
|
Benefits
|
|
Continuation of
|
|
Excise Tax
|
|
Termination
|
|
|
Cash Severance
|
|
(present value)
|
|
Equity Awards
|
|
Gross-up
|
|
Benefits
|
|
|
Payment ($)
|
|
($)(5)
|
|
($)(6)
|
|
($)(7)
|
|
($)
|
|
Jeffrey H.
Fisher(1),(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination Without
Cause(3)
|
|
$
|
900,000
|
|
|
$
|
35,000
|
|
|
$
|
3,701,678
|
|
|
$
|
0
|
|
|
$
|
4,636,678
|
|
Voluntary Termination or Involuntary
Termination with Cause
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Change in Control (No Termination)
|
|
|
0
|
|
|
|
0
|
|
|
|
3,701,678
|
|
|
|
0
|
|
|
|
3,701,678
|
|
Involuntary or Good Reason Termination
in Connection With Change In
Control(4)
|
|
|
900,000
|
|
|
|
105,000
|
|
|
|
3,701,678
|
|
|
|
0
|
|
|
|
4,706,678
|
|
Death or Disability
|
|
|
0
|
|
|
|
0
|
|
|
|
3,701,678
|
|
|
|
0
|
|
|
|
3,701,678
|
|
Peter
Willis(1),(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination Without
Cause(3)
|
|
$
|
285,000
|
|
|
$
|
20,000
|
|
|
$
|
742,354
|
|
|
$
|
0
|
|
|
$
|
1,047,354
|
|
Voluntary Termination or Involuntary
Termination with Cause
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Change in Control (No Termination)
|
|
|
0
|
|
|
|
0
|
|
|
|
742,354
|
|
|
|
0
|
|
|
|
742,354
|
|
Involuntary or Good Reason Termination
in Connection With Change In
Control(4)
|
|
|
570,000
|
|
|
|
40,000
|
|
|
|
742,354
|
|
|
|
0
|
|
|
|
1,352,354
|
|
Death or Disability
|
|
|
0
|
|
|
|
0
|
|
|
|
742,354
|
|
|
|
0
|
|
|
|
742,354
|
|
Dennis M.
Craven(1),(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination Without
Cause(3)
|
|
$
|
285,000
|
|
|
$
|
20,000
|
|
|
$
|
633,075
|
|
|
$
|
0
|
|
|
$
|
938,075
|
|
Voluntary Termination or Involuntary
Termination with Cause
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Change in Control (No Termination)
|
|
|
0
|
|
|
|
0
|
|
|
|
633,075
|
|
|
|
0
|
|
|
|
633,075
|
|
Involuntary or Good Reason Termination
in Connection With Change In
Control(4)
|
|
|
570,000
|
|
|
|
40,000
|
|
|
|
633,075
|
|
|
|
0
|
|
|
|
1,243,075
|
|
Death or Disability
|
|
|
0
|
|
|
|
0
|
|
|
|
633,075
|
|
|
|
0
|
|
|
|
633,075
|
|
|
|
|
(1) |
|
The amounts shown in the table do not include accrued salary,
earned but unpaid bonuses, accrued but unused vacation pay or
the distribution of benefits from any tax-qualified retirement
or 401(k) plan. Those amounts are payable to
Messrs. Fisher, Willis and Craven upon any termination of
employment, including an involuntary termination with cause and
a resignation without good reason. |
|
(2) |
|
A termination of employment due to death or disability entitles
Messrs. Fisher, Willis and Craven to benefits under the
Companys life insurance and disability insurance plans. In
addition, outstanding restricted share awards and LTIP awards
immediately vest upon a termination of employment due to death
or disability. |
|
|
|
(3) |
|
Mr. Fishers employment agreement provides for the
payment of a cash severance benefit upon an involuntary
termination without cause or a resignation with good reason
(without distinction for terminations before or after a change
in control). The cash severance benefit, which is payable in a
single payment, is equal to the sum of (a) three times
Mr. Fishers annual base salary, (b) three times
the highest annual bonus paid to Mr. Fisher for the three
prior fiscal years and (c) one times the amount of the
annual bonus paid to Mr. Fisher for the prior fiscal year,
pro rated based on the number of days of employment in the year
of termination. As of December 31, 2010, no severance
benefit is payable with respect to the amounts described in
clause (b) and clause (c) of the preceding sentence
because Mr. Fisher has not received an annual bonus with respect
to 2010 (or with respect to 2009, the year of the Companys
formation). Consequently, the cash severance benefit shown for
Mr. Fisher is three times his annual base salary as in
effect on the completion of this offering. |
|
|
|
|
|
Mr. Fishers employment agreement also provides for
the payment of a single sum cash payment upon an involuntary
termination without cause or a resignation with good reason
(without distinction for terminations before or after a change
in control). The payment is in lieu of continued participation
in the Companys health and welfare benefit plans (although
Mr. Fisher may elect to pay for continuation coverage
mandated by law). The payment is equal to three times the annual
premium or portion of the annual premium paid by the Company for
(a) health, |
85
|
|
|
|
|
dental and vision insurance coverage for Mr. Fisher and his
eligible dependents and (b) life insurance and disability
insurance coverage for Mr. Fisher. |
|
|
|
|
|
The employment agreements with Messrs. Willis and Craven
provide for the payment of a cash severance benefit upon an
involuntary termination without cause or a resignation with good
reason and not in connection with a change in control. The cash
severance benefit for each of Messrs. Willis and Craven is
equal to the sum of (a) one times the executives
annual base salary, (b) one times the highest annual bonus
paid to the executive for the three prior fiscal years and
(c) the amount of the annual bonus paid to the executive
for the prior fiscal year, pro rated based on the number of days
of employment in the year of termination. As of
December 31, 2010, no severance benefit is payable with
respect to the amounts described in clause (b) and
clause (c) of the preceding sentence because neither Mr.
Willis nor Mr. Craven received an annual bonus with respect to
2010 (or with respect to 2009, the year of the Companys
formation). Consequently, the cash severance benefit shown for
Messrs. Willis and Craven is one times the executives
annual base salary as in effect on the completion of this
offering. |
|
|
|
|
|
The employment agreements with Messrs. Willis and Craven
also provide for the payment of a single sum cash payment upon
an involuntary termination without cause or a resignation with
good reason and not in connection with a change in control. The
payment is in lieu of continued participation in the
Companys health and welfare benefit plans (although
Messrs. Willis and Craven may elect to pay for continuation
coverage mandated by law). The payment is equal to one times the
annual premium or portion of the annual premium paid by the
company for (a) health, dental and vision insurance
coverage for Messrs. Willis and Craven and their eligible
dependents and (b) life insurance and disability insurance
coverage for Messrs. Willis and Craven. |
|
(4) |
|
The severance and other benefit payable to Mr. Fisher on
account of an involuntary termination without cause or a
resignation with good reason in connection with a change in
control are the same as described in note (3) above. |
|
|
|
The employment agreements with Messrs. Willis and Craven
provide for the payment of benefits upon an involuntary
termination without cause or a resignation with good reason in
connection with a change of control. (A termination in either
case is in connection with a change in control if it
occurs on or after a change in control or, in the case of an
involuntary termination without cause, during the ninety day
period before a change in control.) In those events, the
severance and other benefits payable to Messrs. Willis and
Craven are the same as described in note (3) above, except
that two times is substituted for one
times each time it appears in note (3). |
|
(5) |
|
The amounts shown in this column are estimates of the annual
premiums to be paid by the Company for health care, insurance
and other benefits expected to be provided to
Messrs. Fisher, Willis and Craven. |
|
|
|
(6) |
|
The amounts shown in this column represent the compensation to
Messrs. Fisher, Willis and Craven due to accelerated
vesting of LTIP awards and restricted share awards that were
part of our 2010 compensation program, in each case based on the
fair market value of our common shares as of December 31,
2010 ($17.25 per share). Outstanding LTIP awards and restricted
share awards not previously vested are forfeited upon
termination of employment unless employment ends on account of
death, disability, an involuntary termination without cause or a
resignation with good reason (in which case the restricted share
awards and LTIP awards will accelerate and fully vest). With
respect to Mr. Craven, restricted share awards and LTIP
awards will accelerate and fully vest upon an involuntary
termination without cause or a resignation with good reason that
occurs after September 8, 2011. Outstanding restricted
share awards and LTIP awards also will accelerate and fully vest
upon a change in control. |
|
|
|
|
|
Amounts reflecting accelerated vesting of equity awards in the
rows Change In Control (No Termination) and
Involuntary or Good Reason Termination in Connection With
Change In Control will be paid upon only one of the
specified triggering events (not both) and will not be
duplicated in the event that the executive incurs a qualifying
termination following a change in control event that has
previously resulted in acceleration. |
|
(7) |
|
The employment agreements with Messrs. Fisher, Willis and
Craven do not provide an indemnification or
gross-up
payment for the parachute payment excise tax under
Sections 280G and 4999 of the Code. The employment
agreements instead provide that the severance and any other
payments or benefits that are treated as parachute payments
under the Code will be reduced to the maximum amount that can be
paid without an excise tax liability. The parachute payments
will not be reduced, however, if the executive will receive
greater after-tax benefits by receiving the total or unreduced
benefits (after taking into account any excise tax liability
payable by the executive). The amounts shown in the table assume
that Messrs. Fisher, Willis and Craven will receive the
total or unreduced benefits. |
86
Trustee
Compensation
The following table sets forth information with respect to the
compensation of our independent trustees as of December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
|
Name(1)
|
|
Paid in Cash
($)(2)
|
|
|
Share Awards
($)(3)
|
|
|
Total
|
|
|
Miles Berger
|
|
|
33,645
|
|
|
|
125,974
|
|
|
|
159,619
|
|
Thomas J. Crocker
|
|
|
30,104
|
|
|
|
125,974
|
|
|
|
156,078
|
|
Jack P. DeBoer
|
|
|
26,562
|
|
|
|
125,974
|
|
|
|
152,536
|
|
Glen R. Gilbert
|
|
|
33,645
|
|
|
|
125,974
|
|
|
|
159,619
|
|
C. Gerald Goldsmith
|
|
|
31,875
|
|
|
|
125,974
|
|
|
|
157,849
|
|
Robert Perlmutter
|
|
|
26,562
|
|
|
|
125,974
|
|
|
|
152,536
|
|
Rolf E. Ruhfus
|
|
|
26,562
|
|
|
|
125,974
|
|
|
|
152,536
|
|
Joel F. Zemans
|
|
|
26,562
|
|
|
|
125,974
|
|
|
|
152,536
|
|
|
|
|
(1) |
|
Mr. Fisher, our Chairman, President and Chief Executive
Officer, is not included in this table as he is an employee of
the Company and does not receive additional compensation for his
service as a trustee. All of the compensation paid to
Mr. Fisher for the services he provides to us is reflected
in the Summary Compensation Table. |
|
|
|
(2) |
|
Reflects cash payments of $37,500 to each of our independent
trustees as one-half of the annual trustees retainer fee,
as well as additional cash fees of (i) $10,000 to our lead
independent trustee (Mr. Berger), (ii) $10,000 to the
chairman of our Audit Committee (Mr. Gilbert),
(iii) $7,500 to the chairman of our Compensation Committee
(Mr. Goldsmith) and (iv) $5,000 to the chairman of our
Nominating and Corporate Governance Committee
(Mr. Crocker). See Trustee Compensation above. |
|
|
|
(3) |
|
Amounts reflect the full grant date fair value of restricted
common shares or common shares granted during 2010, calculated
in accordance with ASC 718. As part of our 2010
compensation plan, we granted (i) 5,000 restricted common
shares to each of our independent trustees in connection with
the completion of our IPO and (ii) 1,513 common shares to
each of our independent trustees as one-half of the annual
trustees retainer fee. There can be no assurance that
restricted shares will vest. See Trustee
Compensation above. |
Narrative
Disclosure to Trustee Compensation Table
Our compensation policies and practices for our independent
trustees are described above under Trustee
Compensation.
Equity
Compensation Plan Information
The following table provides information, as of
December 31, 2010, relating to our Equity Incentive Plan
pursuant to which grants of common share options, share awards,
share appreciation rights, performance units and other
equity-based awards options may be granted from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities to be
|
|
|
Weighted-Average
|
|
|
Remaining Available
|
|
|
|
Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
for Future Issuance under
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Equity Compensation
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Plans
|
|
|
Equity compensation plans approved by security
holders(1)
|
|
|
|
|
|
|
|
|
|
|
211,730
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
211,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our Equity Incentive Plan was approved by our companys
sole trustee and our companys sole shareholder prior to
completion of our IPO. |
87
INVESTMENT
POLICIES AND POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES
The following is a discussion of our investment policies and our
policies with respect to certain other activities, including
financing matters and conflicts of interest. These policies may
be amended or revised from time to time at the discretion of our
board of trustees, without a vote of our shareholders. Any
change to any of these policies by our board of trustees,
however, would be made only after a thorough review and analysis
of that change, in light of then-existing business and other
circumstances, and then only if, in the exercise of its business
judgment, our board of trustees believes that it is advisable to
do so in our and our shareholders best interests. Any such
change will be disclosed in our periodic or other filings with
the SEC. We cannot assure you that our investment objectives
will be attained.
Investments in
Real Estate or Interests in Real Estate
We invest principally in hotel properties. Our senior executive
officers identify and negotiate acquisition opportunities. For
information concerning the investing experience of these
individuals, please see the section entitled
Management.
We conduct substantially all of our investment activities
through our operating partnership and its subsidiaries. Our
primary investment objectives are to enhance shareholder value
over time by generating strong returns on invested capital,
paying distributions to our shareholders and achieving long-term
appreciation in the value of our hotel properties.
There are no limitations on the amount or percentage of our
total assets that may be invested in any one property.
Additionally, no limits have been set on the concentration of
investments in any one location or facility type.
Investments in
Securities of or Interests in Persons Primarily Engaged in Real
Estate Activities and Other Issuers
Generally speaking, we have not and do not expect to engage in
any significant investment activities with other entities,
although we may consider joint venture investments with other
investors. We may also invest in the securities of other issuers
in connection with acquisitions of indirect interests in
properties. We may in the future acquire some, all or
substantially all of the securities or assets of other REITs or
similar entities where that investment would be consistent with
our investment policies and the REIT qualification requirements.
There are no limitations on the amount or percentage of our
total assets that may be invested in any one issuer, other than
those imposed by the gross income and asset tests that we must
satisfy to qualify as a REIT. However, we do not anticipate
investing in other issuers of securities for the purpose of
exercising control or acquiring any investments primarily for
sale in the ordinary course of business or holding any
investments with a view to making short-term profits from their
sale. In any event, we do not intend that our investments in
securities will cause us or any of our subsidiaries to become an
investment company within the meaning of that term
under the Investment Company Act of 1940, as amended. Therefore
we will not be required to register as an investment
company under the Investment Company Act of 1940, as
amended, and we intend to divest securities before becoming an
investment company, and thus before any registration would be
required.
We do not intend to engage in trading, underwriting, agency
distribution or sales of securities of other issuers.
Disposition
Policy
Although we have no current plans to dispose of any of the hotel
properties we acquire, we will consider doing so, subject to
REIT qualification and prohibited transaction rules under the
Code, if our management determines that a sale of a property
would be in our interests based on the price being offered for
the hotel, the operating performance of the hotel, the tax
consequences of the sale and other factors and circumstances
surrounding the proposed sale. See Risk
Factors Risks Related to Our Business.
88
Financing
Policies
We plan to maintain a prudent capital structure and intend to
limit our consolidated indebtedness, net of cash, to not more
than 35% of our investment in hotel properties at cost (defined
as our initial acquisition price plus the gross amount of any
subsequent capital investment and excluding any impairment
charges). However, this policy does not constitute a limit on
the amount of debt that we may incur and we are not subject to
any such limitations in our governing documents or existing
agreements. Our board of trustees will periodically review this
policy and may modify or eliminate it without the approval of
our shareholders. We intend to use our credit facility for
general business purposes, which may include the following:
|
|
|
|
|
funding of investments (following investment of the net proceeds
of this offering);
|
|
|
|
payment of declared distributions to shareholders;
|
|
|
|
working capital needs;
|
|
|
|
payment of corporate taxes by our TRS lessees; or
|
|
|
|
any other payments deemed necessary or desirable by senior
management and approved by the lender.
|
Going forward, we will consider a number of factors when
evaluating our level of indebtedness and making financial
decisions, including, among others, the following:
|
|
|
|
|
the interest rate of the proposed financing;
|
|
|
|
the extent to which the financing impacts the flexibility with
which we asset manage our properties;
|
|
|
|
prepayment penalties and restrictions on refinancing;
|
|
|
|
the purchase price of properties we acquire with debt financing;
|
|
|
|
our long-term objectives with respect to the financing;
|
|
|
|
our target investment returns;
|
|
|
|
the ability of particular properties, and our company as a
whole, to generate cash flow sufficient to cover expected debt
service payments;
|
|
|
|
overall level of consolidated indebtedness;
|
|
|
|
timing of debt and lease maturities;
|
|
|
|
provisions that require recourse and cross-collateralization;
|
|
|
|
corporate credit ratios, including debt service or fixed charge
coverage, debt to earnings before interest, taxes, depreciation
and amortization, or EBITDA, debt to total market capitalization
and debt to undepreciated assets; and
|
|
|
|
the overall ratio of fixed- and variable-rate debt.
|
Equity Capital
Policies
Subject to applicable law and the requirements for listed
companies on the NYSE, our board of trustees has the authority,
without further shareholder approval, to issue additional
authorized common shares and preferred shares or otherwise raise
capital, including through the issuance of senior securities, in
any manner and on the terms and for the consideration it deems
appropriate, including in exchange for property. Existing
shareholders will have no preemptive right to additional shares
issued in any offering, and any offering might cause a dilution
of investment. We may in the future issue common shares in
connection with acquisitions. We also may issue limited
partnership interests in our operating partnership in connection
with acquisitions of property.
89
Our board of trustees may authorize the issuance of preferred
shares with terms and conditions that could have the effect of
delaying, deterring or preventing a transaction or a change in
control of our company that might involve a premium price for
holders of our common shares or otherwise might be in their best
interests. Additionally, preferred shares could have
distribution, voting, liquidation and other rights and
preferences that are senior to those of our common shares.
We may, under certain circumstances, purchase common or
preferred shares in the open market or in private transactions
with our shareholders, if those purchases are approved by our
board of trustees. Our board of trustees has no present
intention of causing us to repurchase any shares, and any action
would only be taken in conformity with applicable federal and
state laws and the applicable requirements for qualifying as a
REIT.
In the future, we may institute a dividend reinvestment plan, or
DRIP, which would allow our shareholders to acquire additional
common shares by automatically reinvesting their cash dividends.
Shares would be acquired pursuant to the plan at a price equal
to the then prevailing market price, without payment of
brokerage commissions or service charges. Shareholders who do
not participate in the plan will continue to receive cash
distributions as declared.
Conflict of
Interest Policy
We have adopted a policy that any transaction, agreement or
relationship in which any of our trustees, officers or employees
has a direct or indirect pecuniary interest must be approved by
a majority of our disinterested trustees. The policy does not
contain any further restrictions and procedures related to the
ability of our trustees, officers, shareholders and affiliates
to (i) retain a direct or indirect pecuniary interest in
assets which we are proposing to acquire or dispose of and
(ii) engage for their own account in business activities
similar to ours. Mr. Fishers employment agreement
with us provides that he may continue to own an interest in and
serve as a director on hotel management companies that may
manage our hotels, so long as he does not serve as an executive
officer, or receive any compensation for serving as a director,
of any of the companies, and so long as his involvement with
these companies does not interfere with his duties as our
chairman, president and chief executive officer. However, we
cannot assure you that these policies will be successful in
eliminating the influence of these conflicts. See Risk
Factors.
Reporting
Policies
Generally, we intend to make available to our shareholders
audited annual financial statements and annual reports. We are
subject to the information reporting requirements of the
Exchange Act. Pursuant to these requirements, we file periodic
reports, proxy statements and other information, including
audited financial statements, with the SEC.
90
PRINCIPAL
SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of common shares by (i) each of our
trustees, (ii) each of our executive officers,
(iii) each holder of 5% or more of each class of our shares
and (iv) all of our trustees and executive officers as a
group. Unless otherwise indicated, all shares are owned directly
and the indicated person has sole voting and investment power.
In accordance with SEC rules, each listed persons
beneficial ownership includes:
|
|
|
|
|
all shares the person actually owns beneficially or of record;
|
|
|
|
all shares over which the person has or shares voting or
dispositive control (such as in the capacity as a general
partner of an investment fund); and
|
|
|
|
all shares the person has the right to acquire within
60 days (such as restricted common shares that are
currently vested or which are scheduled to vest within
60 days).
|
Unless otherwise indicated, the address of each named person is
50 Cocoanut Row, Suite 216, Palm Beach, Florida 33480. No
shares beneficially owned by any executive officer or trustee
have been pledged as security.
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Name of beneficial owner
|
|
Beneficially
Owned(1)
|
|
Percent of Class
|
|
Wells Fargo and Company
|
|
|
1,062,136
|
(2)
|
|
|
11.52
|
%
|
Prudential Financial, Inc.
|
|
|
784,420
|
(3)
|
|
|
8.51
|
%
|
Jennison Associates LLC
|
|
|
837,700
|
(4)
|
|
|
9.08
|
%
|
Perennial Investment Partners Limited
|
|
|
510,000
|
(5)
|
|
|
5.53
|
%
|
Jeffrey H. Fisher
|
|
|
528,950
|
(6)
|
|
|
5.74
|
%
|
Peter Willis
|
|
|
11,650
|
(7)
|
|
|
*
|
|
Dennis M. Craven
|
|
|
11,650
|
(8)
|
|
|
*
|
|
Miles Berger
|
|
|
9,013
|
|
|
|
*
|
|
Thomas J. Crocker
|
|
|
6,513
|
|
|
|
*
|
|
Jack P. DeBoer
|
|
|
10,013
|
|
|
|
*
|
|
Glen R. Gilbert
|
|
|
6,513
|
|
|
|
*
|
|
C. Gerald Goldsmith
|
|
|
6,513
|
|
|
|
*
|
|
Robert Perlmutter
|
|
|
9,013
|
|
|
|
*
|
|
Rolf E. Ruhfus
|
|
|
6,513
|
|
|
|
*
|
|
Joel F. Zemans
|
|
|
9,013
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and trustees as a group
|
|
|
615,354
|
|
|
|
6.67
|
%
|
|
|
|
*
|
|
Represents less than 1% of our
common shares outstanding.
|
|
|
|
(1) |
|
The number of common shares
beneficially owned is reported on the basis of regulations of
the SEC governing the determination of beneficial ownership of
securities. The number of common shares held by the shareholders
who filed statements on Schedule 13G as described in other
footnotes to this table is current as of the date of the filing
of their Schedules 13G. The number of common shares held by our
trustees and executive officers are as of, and all of the
percentages shown in this table are calculated as of,
February 1, 2011, 2010, based on 9,220,854 shares
outstanding.
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|
|
|
(2) |
|
The number of common shares in the
table above and the information in this footnote are based on a
statement on Schedule 13G jointly filed with the SEC on
January 20, 2011 by Wells Fargo and Company, a Delaware
corporation and parent holding company, or Wells Fargo, and the
following subsidiaries: Peregrine Capital Management, Inc.,
Wells Capital Management Incorporated and Wells Fargo Funds
Management, LLC, each of which is classified as an investment
adviser registered under Section 203 of the Investment
Advisers Act of 1940, and Wells Fargo Bank, N.A., classified as
a bank in accordance with Regulation 13d-1(b)(1)(ii)(B). Wells
Fargo has sole voting power over 945,853 shares, shared
voting power over 825 shares, sole dispositive power over
546,811 shares and shared dispositive power over no shares.
Wells Fargo has its principal business office at: 420 Montgomery
Street, San Francisco, California 94104.
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|
|
|
(3) |
|
The number of common shares in the
table above and the information in this footnote are based on a
statement on Schedule 13G filed with the SEC on
January 31, 2011 by Prudential Financial, Inc., a New
Jersey corporation and parent holding company, or Prudential.
Prudential has sole voting power over 108,752 shares,
shared voting power over 26,100 shares, sole dispositive
power over 108,752 shares and shared dispositive power over
675,668 shares. Prudential has its principal business
office at: 751 Broad Street, Newark, New Jersey
07102-3777.
|
|
|
|
(4) |
|
The number of common shares in the
table above and the information in this footnote are based on a
statement on Schedule 13G filed with the SEC on
May 10, 2010 by Jennison Associates LLC, a Delaware limited
|
91
|
|
|
|
|
liability company, or Jennison.
Jennison has sole voting power over 810,600 shares, shared
voting power over no shares, sole dispositive power over no
shares and shared dispositive power over 837,700 shares.
Prudential Financial, Inc. (Prudential) indirectly
owns 100% of equity interests of Jennison. As a result,
Prudential may be deemed to have the power to exercise or to
direct the exercise of such voting and/or dispositive power that
Jennison may have with respect to the Companys common
stock held by the portfolios managed by Jennison. Jennison does
not file jointly with Prudential, as such, shares of the
Companys common stock reported on Jennisons 13G may
be included in the shares reported on the 13G filed by
Prudential. Jennison has its principal business office at: 466
Lexington Avenue, New York, New York 10017.
|
|
(5) |
|
The number of common shares in the
table above and the information in this footnote are based on a
statement on Schedule 13G filed with the SEC on May 7,
2010 by Perennial Investment Partners Limited, an Australian
partnership, or Perennial. Perennial has sole voting power over
510,000 shares, shared voting power over no shares, sole
dispositive power over 510,000 shares and shared
dispositive power over no shares. Perennial has its principal
business office at: Level 29, 303 Collins Street, Melbourne
VIC 3000, Australia.
|
|
(6) |
|
This amount includes 100 common
shares owned by Jeffrey Fisher Marital Trust. Mr. Fisher
disclaims beneficial ownership of those shares. This amount does
not include 198,940 LTIP units held by Mr. Fisher.
|
|
(7) |
|
This amount does not include 32,585
LTIP units held by Mr. Willis.
|
|
(8) |
|
This amount does not include 26,250
LTIP units held by Mr. Craven.
|
92
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Concurrently with the completion of our IPO, in a separate
private placement, we sold an aggregate of 500,000 common shares
(representing approximately 5.5% of the common shares
outstanding upon completion of the IPO, including common shares
sold pursuant to the underwriters over-allotment option)
to Mr. Fisher, our chairman, president and chief executive
officer, at a price per share equal to the initial public
offering price per share and without payment of any underwriting
discount or commission by us. We used approximately
$3.2 million of the net proceeds from the IPO to reimburse
Mr. Fisher for out-of pocket expenses he incurred in
connection with our formation and the IPO, including
$2.5 million he funded as earnest money deposits for the
acquisition of our initial six hotels. We also used $10,000 of
the net proceeds from the IPO to repurchase the shares
Mr. Fisher acquired in connection with our formation and
initial capitalization.
Upon completion of our IPO, our operating partnership issued
246,960 LTIP units to Mr. Fisher, 32,585 LTIP units to
Mr. Willis and 15,435 LTIP units to Mr. Morales. Upon
Mr. Craven joining our company in September 2010, our
operating partnership issued 26,250 LTIP units to
Mr. Craven. These LTIP units will vest ratably on each of
the first five anniversaries of the date of grant. LTIP units,
whether vested or not, will receive the same
per-unit
profit distributions as common units in our operating
partnership, which distributions generally will equal per share
distributions on our common shares.
On May 20, 2010, we granted 15,650 restricted shares to
Mr. Fisher, 10,450 restricted shares to Mr. Willis,
and 10,450 shares to Mr. Morales, having aggregate
values of $295,159, $197,087, and $197,087, respectively, based
upon the closing price for our common shares on the NYSE on
May 19, 2010 of $18.86. On September 9, 2010, we
granted 10,450 restricted shares to Mr. Craven, having an
aggregate value of $176,292, based upon the closing price for
our common shares on the NYSE on September 8, 2010 of
$16.87. Distributions will be paid on these and any other
restricted common shares, whether vested or not, when
distributions are declared and paid on our common shares.
We entered into employment agreements with each of
Messrs. Fisher, Willis and Craven that provide for payments
and other benefits to Messrs. Fisher, Willis and Craven if
their employment with us is terminated under certain
circumstances. See Compensation Discussion and
Analysis Employment Arrangements.
We have also entered into indemnification agreements with our
trustees and our executive officers providing for procedures for
indemnification by us to the fullest extent permitted by law and
advancements by us of certain expenses and costs relating to
claims, suits or proceedings arising from their service to us.
We have entered into indemnification agreements with our
trustees and our executive officers providing for procedures for
indemnification by us to the fullest extent permitted by law and
advancements by us of certain expenses and costs relating to
claims, suits or proceedings arising from their service to us.
Certain of our hotels are (and the hotel we have under contract
to purchase will be) managed by IHM, which is 90% owned by
Mr. Fisher. The management agreements with IHM have an
initial term of five years and may be renewed for two
five-year
periods at the option of IHM by written notice to us no later
than 90 days prior to the termination date. The IHM
management agreements provide for early termination upon sale of
any IHM managed hotel for no termination fee, with six months
advance notice. The IHM management agreements can also be
terminated for cause. Additionally, if hotel operating
performance does not meet specified levels we will be able to
terminate any IHM management agreements at no cost. Management
agreements with IHM provide for a base management fee of 3% of
the hotels gross revenues, an accounting fee of $1,000 per
month per hotel and, if certain financial thresholds are met or
exceeded, an incentive management fee equal to 10% of the
hotels net operating income less fixed costs, base
management fees and a specified return threshold. The incentive
management fee is capped at 1% of gross hotel revenues. For the
nine
93
months ended September 30, 2010, we paid IHM an aggregate
of $69 thousand in management fees pursuant to these management
agreements.
Because Mr. Fisher is our Chairman, President and Chief
Executive Officer and controls IHM, conflicts of interest exist
between Mr. Fisher and us regarding:
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|
enforcement of the terms of any management agreements between us
and IHM;
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|
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|
whether and on what terms these management agreements will be
renewed upon the expiration;
|
|
|
|
whether and on what terms management contracts will be awarded
to IHM; and
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|
|
|
whether hotel properties will be sold.
|
Under the hotel management agreements, IHM generally is
responsible for complying with our various franchise agreements,
subject to us making sufficient funding available. Conflicts of
interest exist between us and Mr. Fisher regarding
IHMs compliance with franchise agreements, which could
result in:
|
|
|
|
|
the termination of those agreements and related substantial
penalties; or
|
|
|
|
other actions or failures to act by IHM that could result in
liability to us or our TRS lessees.
|
We share our corporate information technology infrastructure
with IHM. We and IHM have agreed to a cost sharing arrangement
under which we bear 5% of the total costs of operating and
maintaining the IT function (including depreciation taken by us
on the IT infrastructure).
IHM has obtained an employment practices liability insurance
policy that covers our employees. In addition, IHM is required
to maintain a health benefit plan in which our employees
participate. Our reimbursement of IHM is based on the number of
our employees participating in the plan and the coverage and
benefit levels selected by those employees.
Conflicts may arise between us and IHM with respect to whether
certain expenditures are classified as capital expenditures,
which are capitalized by us and do not immediately affect
earnings, or repairs and maintenance, which are expensed as
incurred and therefore reduce the amount available to be earned
by IHM as incentive management fees.
Other than the compensation arrangements described in this
prospectus, Mr. Fisher has not received any compensation or
other consideration as promoter or otherwise in connection with
the formation of our company and this offering.
From time to time in connection with certain acquisitions and
dispositions or other transactions, we may engage a brokerage
firm with which Mr. Fishers daughter is employed.
94
DESCRIPTION OF
SHARES OF BENEFICIAL INTEREST
Although the following summary describes the material terms of
our shares of beneficial interest, it is not a complete
description of the Maryland REIT Law, or the MRL, the Maryland
General Corporate Law, or the MGCL, provisions applicable to a
Maryland real estate investment trust or our declaration of
trust and bylaws, copies of which are filed as exhibits to the
registration statement of which this prospectus is a part. See
Where You Can Find More Information.
General
Our declaration of trust provides that we may issue up to
500,000,000 common shares, $0.01 par value per share, and
100,000,000 preferred shares of beneficial interest,
$0.01 par value per share, or preferred shares. Our
declaration of trust authorizes our board of trustees to amend
our declaration of trust to increase or decrease the aggregate
number of authorized shares or the number of shares of any class
or series without shareholder approval. Upon completion of this
offering, 13,220,854 common shares will be issued and
outstanding on a fully diluted basis, or 13,820,854 common
shares if the underwriters
over-allotment
option is exercised in full, and no preferred shares will be
issued and outstanding.
Under Maryland law, shareholders are not personally liable for
the obligations of a REIT solely as a result of their status as
shareholders.
Common
Shares
All of the common shares offered in this offering will be duly
authorized, fully paid and nonassessable. Subject to the
preferential rights, if any, of holders of any other class or
series of shares of beneficial interest and to the provisions of
our declaration of trust regarding the restrictions on ownership
and transfer of shares of beneficial interest, holders of our
common shares are entitled to receive distributions on such
shares of beneficial interest out of assets legally available
therefor if, as and when authorized by our board of trustees and
declared by us, and the holders of our common shares are
entitled to share ratably in our assets legally available for
distribution to our shareholders in the event of our
liquidation, dissolution or winding up after payment of or
adequate provision for all of our known debts and liabilities.
Subject to the provisions of our declaration of trust regarding
the restrictions on ownership and transfer of common shares of
beneficial interest and except as may otherwise be specified in
the terms of any class or series of common shares, each
outstanding common share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the
election of trustees, and, except as provided with respect to
any other class or series of shares of beneficial interest, the
holders of such common shares will possess the exclusive voting
power. There is no cumulative voting in the election of our
trustees, which means that the shareholders entitled to cast a
majority of the votes entitled to be cast in the election of
trustees can elect all of the trustees then standing for
election, and the remaining shareholders will not be able to
elect any trustees.
Holders of common shares have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any of our securities.
Subject to the restrictions on ownership and transfer of shares
contained in our declaration of trust and the terms of any other
class or series of common shares, all of our common shares have
equal dividend, liquidation and other rights.
Power to
Reclassify Our Unissued Shares of Beneficial Interest
Our declaration of trust authorizes our board of trustees to
classify and reclassify any unissued common or preferred shares
into other classes or series of shares of beneficial interest.
Prior to the issuance of shares of each class or series, our
board of trustees is required by Maryland law and by our
declaration of trust to set, subject to the provisions of our
declaration of trust regarding the restrictions on ownership and
transfer of shares of beneficial interest, the preferences,
conversion or other rights,
95
voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of
redemption for each class or series. Therefore, our board of
trustees could authorize the issuance of common shares or
preferred shares that have priority over our common shares as to
voting rights, dividends or upon liquidation or with terms and
conditions that could have the effect of delaying, deferring or
preventing a change in control or other transaction that might
involve a premium price for our common shares or otherwise be in
the best interests of our shareholders. No preferred shares are
presently outstanding, and we have no present plans to issue any
preferred shares.
Power to Increase
or Decrease Authorized Shares of Beneficial Interest and Issue
Additional Common Shares and Preferred Shares
We believe that the power of our board of trustees to amend our
declaration of trust to increase or decrease the number of
authorized shares of beneficial interest, to authorize us to
issue additional authorized but unissued common shares or
preferred shares and to classify or reclassify unissued common
shares or preferred shares and thereafter to issue such
classified or reclassified shares of beneficial interest will
provide us with increased flexibility in structuring possible
future financings and acquisitions and in meeting other needs
that might arise. The additional classes or series, as well as
the common shares, will be available for issuance without
further action by our shareholders, unless such action is
required by applicable law or the rules of any stock exchange or
automated quotation system on which our securities may be listed
or traded. Although our board of trustees does not intend to do
so, it could authorize us to issue a class or series that could,
depending upon the terms of the particular class or series,
delay, defer or prevent a change in control or other transaction
that might involve a premium price for our common shares or
otherwise be in the best interests of our shareholders.
Restrictions on
Ownership and Transfer
For us to qualify as a REIT under the Code, our shares of
beneficial interest must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of
12 months (other than the first year for which an election
to be a REIT has been made) or during a proportionate part of a
shorter taxable year. Also, not more than 50% of the value of
our outstanding shares of beneficial interest may be owned,
directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of
a taxable year (other than the first year for which an election
to be a REIT has been made).
Because our board of trustees believes it is essential for us to
qualify as a REIT, our declaration of trust, subject to certain
exceptions, restricts the amount of our shares of beneficial
interest that a person may beneficially or constructively own.
Our declaration of trust provides that, subject to certain
exceptions, no person may beneficially or constructively own
more than 9.8% in value or in number of shares, whichever is
more restrictive, of the outstanding shares of any class or
series of our shares of beneficial interest.
Our declaration of trust also prohibits any person from
(i) beneficially owning shares of beneficial interest to
the extent that such beneficial ownership would result in our
being closely held within the meaning of
Section 856(h) of the Code (without regard to whether the
ownership interest is held during the last half of the taxable
year), (ii) transferring our shares of beneficial interest
to the extent that such transfer would result in our shares of
beneficial interest being beneficially owned by less than
100 persons (determined under the principles of
Section 856(a)(5) of the Code), (iii) beneficially or
constructively owning our shares of beneficial interest to the
extent such beneficial or constructive ownership would cause us
to constructively own ten percent or more of the ownership
interests in a tenant (other than a TRS) of our real property
within the meaning of Section 856(d)(2)(B) of the Code or
(iv) beneficially or constructively owning or transferring
our shares of beneficial interest if such ownership or transfer
would otherwise cause us to fail to qualify as a REIT under the
Code, including, but not limited to, as a result of any hotel
management companies failing to qualify as eligible
independent contractors under the REIT rules. Any person
who acquires or attempts or
96
intends to acquire beneficial or constructive ownership of our
shares of beneficial interest that will or may violate any of
the foregoing restrictions on transferability and ownership, or
any person who would have owned our shares of beneficial
interest that resulted in a transfer of shares to a charitable
trust, is required to give written notice immediately to us, or
in the case of a proposed or attempted transaction, to give at
least 15 days prior written notice, and provide us
with such other information as we may request in order to
determine the effect of such transfer on our status as a REIT.
The foregoing restrictions on transferability and ownership will
not apply if our board of trustees determines that it is no
longer in our best interests to attempt to qualify, or to
continue to qualify, as a REIT.
Our board of trustees, in its sole discretion, may prospectively
or retroactively exempt a person from certain of the limits
described in the paragraph above and may establish or increase
an excepted holder percentage limit for such person. The person
seeking an exemption must provide to our board of trustees any
such representations, covenants and undertakings as our board of
trustees may deem appropriate in order to conclude that granting
the exemption will not cause us to lose our status as a REIT.
Our board of trustees may not grant such an exemption to any
person if such exemption would result in our failing to qualify
as a REIT. Our board of trustees may require a ruling from the
IRS or an opinion of counsel, in either case in form and
substance satisfactory to our board of trustees, in its sole
discretion, in order to determine or ensure our status as a REIT.
Any attempted transfer of our shares of beneficial interest
which, if effective, would violate any of the restrictions
described above will result in the number of shares causing the
violation (rounded up to the nearest whole share) to be
automatically transferred to a trust for the exclusive benefit
of one or more charitable beneficiaries, except that any
transfer that results in the violation of the restriction
relating to our shares of beneficial interest being beneficially
owned by fewer than 100 persons will be void ab initio. In
either case, the proposed transferee will not acquire any rights
in such shares. The automatic transfer will be deemed to be
effective as of the close of business on the business day prior
to the date of the purported transfer or other event that
results in the transfer to the trust. Shares held in the trust
will be issued and outstanding shares. The proposed transferee
will not benefit economically from ownership of any shares held
in the trust, will have no rights to dividends or other
distributions and will have no rights to vote or other rights
attributable to the shares held in the trust. The trustee of the
trust will have all voting rights and rights to dividends or
other distributions with respect to shares held in the trust.
These rights will be exercised for the exclusive benefit of the
charitable beneficiary. Any dividend or other distribution paid
prior to our discovery that shares have been transferred to the
trust will be paid by the recipient to the trustee upon demand.
Any distribution authorized but unpaid will be paid when due to
the trustee. Any dividend or other distribution paid to the
trustee will be held in trust for the charitable beneficiary.
Subject to Maryland law, the trustee will have the authority
(i) to rescind as void any vote cast by the proposed
transferee prior to our discovery that the shares have been
transferred to the trust and (ii) to recast the vote in
accordance with the desires of the trustee acting for the
benefit of the charitable beneficiary. However, if we have
already taken irreversible corporate action, then the trustee
will not have the authority to rescind and recast the vote.
Within 20 days of receiving notice from us that shares of
beneficial interest have been transferred to the trust, the
trustee will sell the shares to a person designated by the
trustee, whose ownership of the shares will not violate the
above ownership and transfer limitations. Upon the sale, the
interest of the charitable beneficiary in the shares sold will
terminate and the trustee will distribute the net proceeds of
the sale to the proposed transferee and to the charitable
beneficiary as follows. The proposed transferee will receive the
lesser of (i) the price paid by the proposed transferee for
the shares or, if the proposed transferee did not give value for
the shares in connection with the event causing the shares to be
held in the trust (e.g., a gift, devise or other similar
transaction), the market price (as defined in our declaration of
trust) of the shares on the day of the event causing the shares
to be held in the trust and (ii) the price received by the
trustee (net of any commission and other expenses of sale) from
the sale or other disposition of the shares. The trustee may
reduce the amount
97
payable to the proposed transferee by the amount of dividends or
other distributions paid to the proposed transferee and owed by
the proposed transferee to the trustee. Any net sale proceeds in
excess of the amount payable to the proposed transferee will be
paid immediately to the charitable beneficiary. If, prior to our
discovery that our shares have been transferred to the trust,
the shares are sold by the proposed transferee, then
(i) the shares shall be deemed to have been sold on behalf
of the trust and (ii) to the extent that the proposed
transferee received an amount for the shares that exceeds the
amount he or she was entitled to receive, the excess shall be
paid to the trustee upon demand.
In addition, shares of beneficial interest held in the trust
will be deemed to have been offered for sale to us, or our
designee, at a price per share equal to the lesser of
(i) the price per share in the transaction that resulted in
the transfer to the trust (or, in the case of a devise or gift,
the market price at the time of the devise or gift) and
(ii) the market price on the date we, or our designee,
accept the offer, which we may reduce by the amount of dividends
and distributions paid to the proposed transferee and owed by
the proposed transferee to the trustee. We will have the right
to accept the offer until the trustee has sold the shares. Upon
a sale to us, the interest of the charitable beneficiary in the
shares sold will terminate and the trustee will distribute the
net proceeds of the sale to the proposed transferee.
If a transfer to a charitable trust, as described above, would
be ineffective for any reason to prevent a violation of a
restriction, the transfer that would have resulted in such
violation will be void ab initio, and the proposed transferee
shall acquire no rights in such shares.
Every owner of more than 5% (or such lower percentage as
required by the Code or the regulations promulgated thereunder)
of our shares of beneficial interest, within 30 days after
the end of each taxable year, is required to give us written
notice, stating his or her name and address, the number of
shares of each class and series of our shares of beneficial
interest that he or she beneficially owns and a description of
the manner in which the shares are held. Each such owner will
provide us with such additional information as we may request in
order to determine the effect, if any, of his or her beneficial
ownership on our status as a REIT and to ensure compliance with
the ownership limits. In addition, each shareholder will upon
demand be required to provide us with such information as we may
request in good faith in order to determine our status as a REIT
and to comply with the requirements of any taxing authority or
governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a
transaction or a change in control that might involve a premium
price for our common shares or otherwise be in the best interest
of our shareholders.
Stock Exchange
Listing
Our common shares are listed on the NYSE under the symbol
CLDT.
Transfer Agent
and Registrar
The transfer agent and registrar for our common shares is Wells
Fargo Bank, National Association.
98
SHARES ELIGIBLE
FOR FUTURE SALE
We cannot predict the effect, if any, that sales of common
shares or the availability of shares for sale will have on the
market price of our common shares prevailing from time to time.
Sales of substantial amounts of our common shares in the public
market, or the perception that such sales could occur, could
adversely affect the prevailing market price of our common
shares.
Upon completion of this offering, we will have 13,220,854 common
shares outstanding, or an aggregate of 13,820,854 common shares
outstanding if the underwriters over-allotment option is
exercised in full.
No prediction can be made as to the effect, if any, that future
issuances of common shares or the availability of common shares
for future issuances will have on the market price of our common
shares prevailing from time to time, issuances of substantial
amounts of common shares, or the perception that such issuances
could occur, may affect adversely the prevailing market price of
our common shares. See Risk Factors Risks
Related to Our Organization and Structure.
The common shares sold in this offering will be freely tradable
without restriction or further registration under the Securities
Act of 1933, as amended, or the Securities Act, unless the
shares are held by any of our affiliates, as that
term is defined in Rule 144 under the Securities Act. As
defined in Rule 144, an affiliate of an issuer
is a person that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common
control with the issuer.
Rule 144
We issued 500,000 common shares to Mr. Fisher in a private
placement at the time of closing of our IPO. The shares issued
to Mr. Fisher are restricted shares as defined in
Rule 144.
In general, Rule 144 provides that if (i) one year has
elapsed since the date of acquisition of common shares from us
or any of our affiliates and (ii) the holder is not, and
has not been, an affiliate of ours at any time during the three
months preceding the proposed sale, such holder may sell such
common shares in the public market under Rule 144(b)(1)
without regard to the volume limitations, manner of sale
provisions, public information requirements or notice
requirements under such rule. In general, Rule 144 also
provides that if (i) six months have elapsed since the date
of acquisition of common shares from us or any of our
affiliates, (ii) we have been a reporting company under the
Exchange Act for at least 90 days and (iii) the holder
is not, and has not been, an affiliate of ours at any time
during the three months preceding the proposed sale, such holder
may sell such common shares in the public market under
Rule 144(b)(1) subject to satisfaction of
Rule 144s public information requirements, but
without regard to the volume limitations, manner of sale
provisions or notice requirements under such rule.
In addition, under Rule 144, if (i) one year (or,
subject to us being a reporting company under the Exchange Act
for at least the preceding 90 days, six months) has elapsed
since the date of acquisition of common shares from us or any of
our affiliates and (ii) the holder is, or has been, an
affiliate of ours at any time during the three months preceding
the proposed sale, such holder may sell such common shares in
the public market under Rule 144(b)(1) subject to
satisfaction of Rule 144s volume limitations, manner
of sale provisions, public information requirements and notice
requirements.
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned restricted shares for at least
one year would be entitled to sell, within any three-month
period, that number of shares that does not exceed the greater
of:
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1% of the common shares outstanding, which will equal
approximately 132,209 common shares immediately after this
offering; or
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the average weekly trading volume of our common shares on the
NYSE during the four calendar weeks preceding the date on which
notice of the sale is filed with the SEC.
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We have filed a registration statement on
Form S-8
registering the total number of common shares that may be issued
under our Equity Incentive Plan.
Lock-Up
Agreements
In addition to the limitations placed on the sale of our common
shares by operation of the Securities Act, we and all of our
trustees and executive officers have agreed with the
underwriters, subject to certain exceptions, not to sell or
otherwise transfer their shares, or any securities convertible
into our common shares, for a period of 90 days after the
date of this prospectus without Barclays Capital Inc.s
prior written consent (or without Barclays Capital Inc.s
and UBS Securities LLCs prior written consent, in the case
of such sales or transfers by the Company). The
lock-up
agreements signed by us, our trustees and executive officers
cover approximately 615,354 common shares.
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CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF
TRUST AND BYLAWS
Although the following summary describes certain provisions of
Maryland law and of our declaration of trust and bylaws, it is
not a complete description of Maryland law and our declaration
of trust and bylaws, copies of which are available from us upon
request. See Where You Can Find More Information.
Number of
Trustees; Vacancies
Our declaration of trust and bylaws provide that the number of
our trustees may be established by our board of trustees but may
not be more than 15. Our declaration of trust also includes our
election to be subject to the provision of Subtitle 8 of
Title 3 of the MGCL regarding the filling of vacancies on
our board of trustees. Accordingly, except as may be provided by
our board of trustees in setting the terms of any class or
series of shares, any and all vacancies on our board of trustees
may be filled only by the affirmative vote of a majority of the
remaining trustees in office, even if the remaining trustees do
not constitute a quorum, and any individual elected to fill such
vacancy will serve for the remainder of the full term of the
class in which the vacancy occurred and until a successor is
duly elected and qualifies.
Each of our trustees is elected by our shareholders to serve for
a one-year term and until his or her successor is duly elected
and qualifies. A plurality of all votes cast on the matter at a
meeting of shareholders at which a quorum is present is
sufficient to elect a trustee. The presence in person or by
proxy of shareholders entitled to cast a majority of all the
votes entitled to be cast at a meeting constitutes a quorum.
Removal of
Trustees
Our declaration of trust provides that, subject to the rights of
holders of any series of preferred shares, a trustee may be
removed only for cause, and then only by the
affirmative vote of at least two-thirds of the votes entitled to
be cast generally in the election of trustees. For this purpose,
cause means, with respect to any particular trustee,
conviction of a felony or a final judgment of a court of
competent jurisdiction holding that such trustee caused
demonstrable, material harm to us through bad faith or active
and deliberate dishonesty. These provisions, when coupled with
the exclusive power of our board of trustees to fill vacancies
on our board of trustees, generally precludes shareholders from
removing incumbent trustees except for cause and
with a substantial affirmative vote and filling the vacancies
created by such removal with their own nominees.
Policy on
Majority Voting
Our board of trustees has adopted a policy regarding the
election of trustees in uncontested elections. Pursuant to such
policy, in an uncontested election of trustees, any nominee who
receives a greater number of votes affirmatively withheld from
his or her election than votes for his or her election will,
within two weeks following certification of the shareholder vote
by our company, submit a written resignation offer to our board
of trustees for consideration by our Nominating and Corporate
Governance Committee. Our Nominating and Corporate Governance
Committee will consider the resignation offer and, within
60 days following certification by our company of the
shareholder vote with respect to such election, will make a
recommendation to our board of trustees concerning the
acceptance or rejection of the resignation offer. Our board of
trustees will take formal action on the recommendation no later
than 90 days following certification of the shareholder
vote by our company. We will publicly disclose the decision of
our board of trustees. Our board of trustees will also provide
an explanation of the process by which the decision was made
and, if applicable, its reason or reasons for rejecting the
tendered resignation.
Business
Combinations
Under certain provisions of the MGCL applicable to Maryland real
estate investment trusts, certain business
combinations, including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities, between a
Maryland
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real estate investment trust and an interested
shareholder or, generally, any person who beneficially
owns 10% or more of the voting power of the trusts
outstanding voting shares or an affiliate or associate of the
trust who, at any time within the two-year period prior to the
date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding voting shares of beneficial
interest of the trust, or an affiliate of such an interested
shareholder, are prohibited for five years after the most recent
date on which the interested shareholder becomes an interested
shareholder. Thereafter, any such business combination must be
recommended by the board of trustees of such real estate
investment trust and approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of beneficial interest of the trust
and (b) two-thirds of the votes entitled to be cast by
holders of voting shares of beneficial interest of the trust
other than shares held by the interested shareholder with whom
(or with whose affiliate) the business combination is to be
effected or held by an affiliate or associate of the interested
shareholder, unless, among other conditions, the trusts
shareholders receive a minimum price (as defined in the MGCL)
for their shares and the consideration is received in cash or in
the same form as previously paid by the interested shareholder
for its shares. Under the MGCL, a person is not an
interested shareholder if the board of trustees
approved in advance the transaction by which the person
otherwise would have become an interested shareholder. A real
estate investment trusts board of trustees may provide
that its approval is subject to compliance with any terms and
conditions determined by it.
These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by a board of
trustees prior to the time that the interested shareholder
becomes an interested shareholder. Pursuant to the statute, our
board of trustees has by resolution exempted business
combinations between us and any other person from these
provisions of the MGCL, provided that the business combination
is first approved by our board of trustees, including a majority
of trustees who are not affiliates or associates of such person,
and, consequently, the five year prohibition and the
supermajority vote requirements will not apply to such business
combinations. As a result, any person may be able to enter into
business combinations with us that may not be in the best
interests of our shareholders without compliance by us with the
supermajority vote requirements and other provisions of the
statute. This resolution, however, may be altered or repealed in
whole or in part at any time. If this resolution is repealed, or
our board of trustees does not otherwise approve a business
combination, the statute may discourage others from trying to
acquire control of us and increase the difficulty of
consummating any offer.
Control Share
Acquisitions
The MGCL provides that control shares of a Maryland
real estate investment trust acquired in a control share
acquisition have no voting rights except to the extent
approved by the affirmative vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of
beneficial interest in a real estate investment trust in respect
of which any of the following persons is entitled to exercise or
direct the exercise of the voting power of such shares in the
election of trustees: (1) a person who makes or proposes to
make a control share acquisition, (2) an officer of the
trust or (3) an employee of the trust who is also a trustee
of the trust. Control shares are voting shares
which, if aggregated with all other such shares owned by the
acquirer, or in respect of which the acquirer is able to
exercise or direct the exercise of voting power (except solely
by virtue of a revocable proxy), would entitle the acquirer to
exercise voting power in electing trustees within one of the
following ranges of voting power: (A) one-tenth or more but
less than one-third, (B) one-third or more but less than a
majority or (C) a majority or more of all voting power.
Control shares do not include shares that the acquirer is then
entitled to vote as a result of having previously obtained
shareholder approval. A control share acquisition
means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses), may compel our board of
trustees to call a special meeting of shareholders to be held
within 50 days of demand to consider the voting
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rights of the shares. If no request for a meeting is made, the
real estate investment trust may itself present the question at
any shareholders meeting.
If voting rights are not approved at the meeting or if the
acquirer does not deliver an acquiring person statement as
required by the statute, then, subject to certain conditions and
limitations, the trust may redeem any or all of the control
shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquirer or of any
meeting of shareholders at which the voting rights of such
shares are considered and not approved. If voting rights for
control shares are approved at a shareholders meeting and
the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes
of such appraisal rights may not be less than the highest price
per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to
(a) shares acquired in a merger, consolidation or share
exchange if the trust is a party to the transaction or
(b) acquisitions approved or exempted by the declaration of
trust or bylaws of the trust.
Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of
our shares. There is no assurance that such provision will not
be amended or eliminated at any time in the future.
Subtitle
8
Subtitle 8 of Title 3 of the MGCL permits a Maryland real
estate investment trust with a class of equity securities
registered under the Exchange Act and at least three independent
trustees to elect to be subject, by provision in its declaration
of trust or bylaws or a resolution of its board of trustees and
notwithstanding any contrary provision in the declaration of
trust or bylaws, to any or all of five provisions:
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a classified board;
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a two-thirds vote requirement for removing a trustee;
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a requirement that the number of trustees be fixed only by vote
of the trustees;
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a requirement that a vacancy on the board be filled only by the
remaining trustees and for the remainder of the full term of the
class of trustees in which the vacancy occurred; and
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a majority requirement for the calling of a special meeting of
shareholders.
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Our declaration of trust provides includes our election to be
subject to the provision of Subtitle 8 that requires that
vacancies on our board may be filled only by the remaining
trustees and for the remainder of the full term of the
trusteeship in which the vacancy occurred. Through provisions in
our declaration of trust and bylaws unrelated to Subtitle 8, we
(1) require the affirmative vote of the holders of not less
than two-thirds of all of the votes entitled to be cast on the
matter for the removal of any trustee from the board, which
removal will be allowed only for cause and (2) vest in the
board the exclusive power to fix the number of trusteeships.
Meetings of
Shareholders
Pursuant to our declaration of trust and bylaws, a meeting of
our shareholders for the purpose of the election of trustees and
the transaction of any business will be held annually on a date
and at the time and place set by our board of trustees. In
addition, our chairman, chief executive officer, president or
board of trustees may call a special meeting of our shareholders.
Mergers;
Extraordinary Transactions
Under the MRL, a Maryland real estate investment trust generally
cannot merge with another entity unless advised by its board of
trustees and approved by the affirmative vote of shareholders
holding at least two-thirds of the shares entitled to vote on
the matter unless a lesser percentage (but
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not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the trusts declaration of
trust. Our declaration of trust provides that these mergers may
be approved by the affirmative vote of a majority of all of the
votes entitled to be cast on the matter. Our declaration of
trust also provides that we may sell or transfer all or
substantially all of our assets if advised by our board of
trustees and approved by the affirmative vote of a majority of
all the votes entitled to be cast on the matter. However, many
of our operating assets are held by our subsidiaries, and these
subsidiaries may be able to sell all or substantially all of
their assets or merge with another entity without the approval
of our shareholders.
Amendment to Our
Declaration of Trust and Bylaws
Under the MRL, a Maryland real estate investment trust generally
cannot amend its declaration of trust unless advised by its
board of trustees and approved by the affirmative vote of
shareholders entitled to cast at least two-thirds of the votes
entitled to be cast on the matter unless a different percentage
(but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the trusts declaration
of trust.
Except for amendments to the provisions of our declaration of
trust related to the removal of trustees and the vote required
to amend the provision regarding amendments to the removal
provisions itself (each of which require the affirmative vote of
the holders of not less than two-thirds of all the votes
entitled to be cast on the matter) and certain amendments
described in our declaration of trust that require only approval
by our board of trustees, our declaration of trust may be
amended only if advised by our board of trustees and approved by
the affirmative vote of at least a majority of all of the votes
entitled to be cast on the matter.
Our board of trustees has the exclusive power to adopt, alter or
repeal any provision of our bylaws and to make new bylaws.
Our
Termination
Our declaration of trust provides for us to have a perpetual
existence. Our termination must be approved by a majority of our
entire board of trustees and the affirmative vote of the holders
of not less than a majority of all of the votes entitled to be
cast on the matter.
Advance Notice of
Trustee Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of
shareholders, nominations of individuals for election to our
board of trustees at an annual meeting and the proposal of
business to be considered by shareholders may be made only
(1) pursuant to our notice of the meeting, (2) by or
at the direction of our board of trustees or (3) by a
shareholder of record both at the time of giving notice and at
the time of the annual meeting who is entitled to vote at the
meeting and has complied with the advance notice provisions set
forth in our bylaws. Our bylaws currently require the
shareholder generally to provide notice to the secretary
containing the information required by our bylaws not less than
120 days nor more than 150 days prior to the first
anniversary of the date of our proxy statement for the
solicitation of proxies for election of trustees at the
preceding years annual meeting, or with respect to our
first annual meeting as a public company, April 30, 2011.
With respect to special meetings of shareholders, only the
business specified in our notice of meeting may be brought
before the meeting. Nominations of individuals for election to
our board of trustees at a special meeting may be made only
(1) by or at the direction of our board of trustees or
(2) provided that our board of trustees has determined that
trustees will be elected at such meeting, by a shareholder of
record at the time of giving notice and who is entitled to vote
at the meeting in the election of each individual so nominated
and has complied with the advance notice provisions set forth in
our bylaws. Such shareholder may nominate one or more
individuals, as the case may be, for election as a trustee if
the shareholders notice containing the information
required by our bylaws is delivered to the secretary not earlier
than the 120th day prior to such special meeting and not
later than 5:00 p.m., eastern time, on the later of
(1) the 90th day prior to such special meeting or
(2) the
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tenth day following the day on which public announcement is
first made of the date of the special meeting and the proposed
nominees of our board of trustees to be elected at the meeting.
Anti-takeover
Effect of Certain Provisions of Maryland Law and of Our
Declaration of Trust and Bylaws
If the applicable exemption in our bylaws is repealed and the
applicable resolution of our board of trustees is repealed, the
control share acquisition provisions and the business
combination provisions of the MGCL, respectively, as well as the
provisions in our declaration of trust and bylaws, as
applicable, on removal of trustees and the filling of trustee
vacancies and the restrictions on ownership and transfer of
shares of beneficial interest, together with the advance notice
and shareholder-requested special meeting provisions of our
bylaws, alone or in combination, could serve to delay, deter or
prevent a transaction or a change in our control that might
involve a premium price for holders of our common shares or
otherwise be in their best interests.
Indemnification
and Limitation of Trustees and Officers
Liability
Maryland law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the
liability of its trustees and officers to the trust and its
shareholders for money damages except for liability resulting
from:
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actual receipt of an improper benefit in money, property or
services, or
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active or deliberate dishonesty established by a final judgment
as being material to the cause of action.
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Our declaration of trust contains a provision which limits the
liability of our trustees and officers to the maximum extent
permitted by Maryland law.
Our declaration of trust also authorizes us, and our bylaws
require us, to the maximum extent permitted by Maryland law, to
indemnify (i) any present or former trustee or officer or
(ii) any individual who, while serving as our trustee or
officer and at our request, serves or has served as a trustee,
director, officer, partner, member, manager, employee or agent
of another real estate investment trust, corporation,
partnership, limited liability company, joint venture, trust,
employee benefit plan or any other enterprise from and against
any claim or liability to which such person may become subject
or which such person may incur by reason of his or her service
in such capacity or capacities, and to pay or reimburse his or
her reasonable expenses in advance of final disposition of such
a proceeding. Upon completion of this offering, we expect to
enter into indemnification agreements with each of our trustees
and executive officers that provide for indemnification to the
maximum extent permitted by Maryland law and advancements by us
of certain expenses and costs relating to claims, suits or
proceedings arising from their service to us.
REIT
Qualification
Our declaration of trust provides that our board of trustees may
revoke or otherwise terminate our REIT election, without
approval of our shareholders, if it determines that it is no
longer in our best interest to continue to qualify as a REIT.
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OUR OPERATING
PARTNERSHIP AND THE PARTNERSHIP AGREEMENT
The following summary of the terms of the agreement of limited
partnership of our operating partnership does not purport to be
complete and is subject to and qualified in its entirety by
reference to the Agreement of Limited Partnership of Chatham
Lodging, L.P., a copy of which is an exhibit to the registration
statement of which this prospectus is a part. See Where
You Can Find More Information.
Management
We are the sole general partner of our operating partnership,
which is organized as a Delaware limited partnership. We conduct
substantially all of our operations and make substantially all
of our investments through the operating partnership. Pursuant
to the partnership agreement, we have full, exclusive and
complete responsibility and discretion in the management and
control of the operating partnership, including the ability to
cause the operating partnership to enter into certain major
transactions including acquisitions, dispositions, refinancings
and selection of lessees, make distributions to partners, and to
cause changes in the operating partnerships business
activities.
Transferability
of Interests
We may not voluntarily withdraw from the operating partnership
or transfer or assign our interest in the operating partnership
or engage in any merger, consolidation or other combination, or
sale of all or substantially all of our assets in a transaction
which results in a change of control of our company unless:
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we receive the consent of limited partners holding more than 50%
of the partnership interests of the limited partners (other than
those held by our company or its subsidiaries);
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as a result of such transaction, all limited partners will
receive for each partnership unit an amount of cash, securities
or other property equal in value to the greatest amount of cash,
securities or other property paid in the transaction to a holder
of one of our common shares, provided that if, in connection
with the transaction, a purchase, tender or exchange offer shall
have been made to and accepted by the holders of more than 50%
of the outstanding common shares, each holder of partnership
units shall be given the option to exchange its partnership
units for the greatest amount of cash, securities or other
property that a limited partner would have received had it
(A) exercised its redemption right (described below) and
(B) sold, tendered or exchanged pursuant to the offer
common shares received upon exercise of the redemption right
immediately prior to the expiration of the offer; or
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we are the surviving entity in the transaction and either
(A) our shareholders do not receive cash, securities or
other property in the transaction or (B) all limited
partners (other than our company or our subsidiaries) receive
for each partnership unit an amount of cash, securities or other
property having a value that is no less than the greatest amount
of cash, securities or other property received in the
transaction by our shareholders.
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We also may merge with or into or consolidate with another
entity if immediately after such merger or consolidation
(i) substantially all of the assets of the successor or
surviving entity, other than partnership units held by us, are
contributed, directly or indirectly, to the partnership as a
capital contribution in exchange for partnership units with a
fair market value equal to the value of the assets so
contributed as determined by the survivor in good faith and
(ii) the survivor expressly agrees to assume all of our
obligations under the partnership agreement and the partnership
agreement shall be amended after any such merger or
consolidation so as to arrive at a new method of calculating the
amounts payable upon exercise of the redemption right that
approximates the existing method for such calculation as closely
as reasonably possible.
We also may (i) transfer all or any portion of our general
partnership interest to (A) a wholly owned subsidiary or
(B) a parent company, and following such transfer may
withdraw as the general
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partner and (ii) engage in a transaction required by law or
by the rules of any national securities exchange on which our
common shares are listed.
Capital
Contribution
We will contribute, directly, to our operating partnership
substantially all of the net proceeds of this offering in
exchange for limited partnership interests in our operating
partnership. The partnership agreement provides that if the
operating partnership requires additional funds at any time in
excess of funds available to the operating partnership from
borrowing or capital contributions, we may borrow such funds
from a financial institution or other lender and lend such funds
to the operating partnership on the same terms and conditions as
are applicable to our borrowing of such funds. Under the
partnership agreement, we are obligated to contribute the net
proceeds of any future offering of shares as additional capital
to the operating partnership. If we contribute additional
capital to the operating partnership, we will receive additional
partnership units and our percentage interest will be increased
on a proportionate basis based upon the amount of such
additional capital contributions and the value of the operating
partnership at the time of such contributions. Conversely, the
percentage interests of the limited partners will be decreased
on a proportionate basis in the event of additional capital
contributions by us. In addition, if we contribute additional
capital to the operating partnership, we will revalue the
property of the operating partnership to its fair market value
(as determined by us) and the capital accounts of the partners
will be adjusted to reflect the manner in which the unrealized
gain or loss inherent in such property (that has not been
reflected in the capital accounts previously) would be allocated
among the partners under the terms of the partnership agreement
if there were a taxable disposition of such property for its
fair market value (as determined by us) on the date of the
revaluation. The operating partnership may issue preferred
partnership interests, in connection with acquisitions of
property or otherwise, which could have priority over common
partnership interests with respect to distributions from the
operating partnership, including the partnership interests we
own as the general partner.
Redemption Rights
Pursuant to the partnership agreement, any future limited
partners, other than us, will receive redemption rights, which
will enable them to cause the operating partnership to redeem
their limited partnership interests in exchange for cash or, at
our option, common shares on a
one-for-one
basis. The cash redemption amount per unit is based on the
market price of our common shares at the time of redemption. The
number of common shares issuable upon redemption of limited
partnership interests held by limited partners may be adjusted
upon the occurrence of certain events such as share dividends,
share subdivisions or combinations. We expect to fund any cash
redemptions out of available cash or borrowings. Notwithstanding
the foregoing, a limited partner will not be entitled to
exercise its redemption rights if the delivery of common shares
to the redeeming limited partner would:
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result in any person owning, directly or indirectly, common
shares in excess of the share ownership limit in our declaration
of trust;
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result in our common shares being owned by fewer than
100 persons (determined without reference to any rules of
attribution);
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result in our being closely held within the meaning
of Section 856(h) of the Code;
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cause us to own, actually or constructively, 10% or more of the
ownership interests in a tenant (other than a TRS) of ours, the
operating partnerships or a subsidiary partnerships
real property, within the meaning of Section 856(d)(2)(B)
of the Code;
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cause us to fail to qualify as a REIT under the Code, including,
but not limited to, as a result of any hotel management company
failing to qualify as an eligible independent contractor under
the Code; or
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cause the acquisition of common shares by such redeeming limited
partner to be integrated with any other distribution
of common shares for purposes of complying with the registration
provisions of the Securities Act.
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We may, in our sole and absolute discretion, waive any of these
restrictions.
The partnership agreement requires that the operating
partnership be operated in a manner that enables us to satisfy
the requirements for being classified as a REIT, to avoid any
federal income or excise tax liability imposed by the Code
(other than any federal income tax liability associated with our
retained capital gains) and to ensure that the partnership will
not be classified as a publicly traded partnership
taxable as a corporation under Section 7704 of the Code.
In addition to the administrative and operating costs and
expenses incurred by the operating partnership, the operating
partnership generally will pay all of our administrative costs
and expenses, including:
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all expenses relating to our continuity of existence and our
subsidiaries operations;
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all expenses relating to offerings and registration of
securities;
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all expenses associated with the preparation and filing of any
of our periodic or other reports and communications under
federal, state or local laws or regulations;
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all expenses associated with our compliance with laws, rules and
regulations promulgated by any regulatory body; and
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all of our other operating or administrative costs incurred in
the ordinary course of business on behalf of the operating
partnership.
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These expenses, however, do not include any of our
administrative and operating costs and expenses incurred that
are attributable to hotel properties that are owned by us
directly rather than by the operating partnership or its
subsidiaries.
Fiduciary
Responsibilities
Our trustees and officers have duties under applicable Maryland
law to manage us in a manner consistent with the best interests
of our company. At the same time, we, as the general partner of
our operating partnership, have fiduciary duties to manage our
operating partnership in a manner beneficial to our operating
partnership and its partners. Our duties, as general partner to
our operating partnership and its limited partners, therefore,
may come into conflict with the duties of our trustees and
officers to our shareholders. We will be under no obligation to
give priority to the separate interests of the limited partners
of our operating partnership or our shareholders in deciding
whether to cause the operating partnership to take or decline to
take any actions.
The limited partners of our operating partnership have expressly
acknowledged that as the general partner of our operating
partnership, we are acting for the benefit of the operating
partnership, the limited partners and our shareholders
collectively.
Distributions
The partnership agreement provides that the operating
partnership will distribute cash from operations (including net
sale or refinancing proceeds, but excluding net proceeds from
the sale of the operating partnerships property in
connection with the liquidation of the operating partnership) at
such time and in such amounts as determined by us in our sole
discretion, to us and the limited partners in accordance with
their respective percentage interests in the operating
partnership.
Upon liquidation of the operating partnership, after payment of,
or adequate provision for, debts and obligations of the
partnership, including any partner loans, any remaining assets
of the partnership will be distributed to us and the limited
partners with positive capital accounts in accordance with their
respective positive capital account balances.
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LTIP
Units
Upon completion of our IPO, we caused our operating partnership
to issue an aggregate of 246,960 LTIP units to certain of our
officers. Subsequently, 15,435 of those LTIP units were
forfeited when an executive officer left the company. On
September 9, 2010, we caused our operating partnership to
grant 26,250 LTIP units to Mr. Craven in connection with
the commencement of his employment with our company. All of the
non-forfeited LTIP units will vest ratably over the first five
anniversaries of the date of grant. In general, LTIP units are a
class of partnership units in our operating partnership and will
receive the same quarterly per unit profit distributions as the
other outstanding units in our operating partnership. Initially,
LTIP units will not have full parity with other outstanding
units with respect to liquidating distributions. We expect that
under the terms of the LTIP units, our operating
partnership will revalue its assets upon the occurrence of
certain specified events, and any increase in valuation from the
time of grant until such event will be allocated first to the
LTIP unit holders to equalize the capital accounts of such
holders with the capital accounts of holders of our other
outstanding partnership units. Upon equalization of the capital
accounts of the LTIP unit holders with the capital accounts of
the other holders of our operating partnership units, the LTIP
units will achieve full parity with our other operating
partnership units for all purposes, including with respect to
liquidating distributions. If such parity is reached, vested
LTIP units may be converted into an equal number of operating
partnership units at any time, and thereafter enjoy all the
rights of such units, including redemption rights. However,
there are circumstances under which such parity would not be
reached. Until and unless such parity is reached, the value for
a given number of vested LTIP units will be less than the value
of an equal number of our common shares.
Allocations
Profits and losses of the partnership (including depreciation
and amortization deductions) for each fiscal year generally will
be allocated to us and the other limited partners in accordance
with the respective percentage interests in the partnership.
Notwithstanding the foregoing, upon the occurrence of certain
specified events, our operating partnership will allocate gain
on the disposition of its assets first to holders of LTIP units,
and will revalue its assets with any net increase in valuation
allocated first to the LTIP units, in each case to equalize the
capital accounts of such holders with the capital accounts of
the holders of the other outstanding units in our operating
partnership. All of the foregoing allocations are subject to
compliance with the provisions of Sections 704(b) and
704(c) of the Code and Treasury regulations promulgated
thereunder. To the extent Treasury regulations promulgated
pursuant to Section 704(c) of the Code permit, we, as the
general partner, shall have the authority to elect the method to
be used by the operating partnership for allocating items with
respect to contributed property acquired in connection with this
offering for which fair market value differs from the adjusted
tax basis at the time of contribution, and such election shall
be binding on all partners.
Term
The operating partnership will continue indefinitely, or until
sooner dissolved upon:
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our bankruptcy, dissolution, removal or withdrawal (unless the
limited partners elect to continue the partnership);
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the passage of 90 days after the sale or other disposition
of all or substantially all of the assets of the partnership;
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the redemption of all partnership units (other than those held
by us, if any); or
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an election by us in our capacity as the general partner.
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Tax
Matters
Our partnership agreement provides that we, as the sole general
partner of the operating partnership, are the tax matters
partner of the operating partnership and, as such, have
authority to handle tax audits and to make tax elections under
the Code on behalf of the operating partnership.
109
MATERIAL U.S.
FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material federal income tax
considerations that you, as a shareholder, may consider
relevant. Hunton & Williams LLP has acted as our
counsel, has reviewed this summary, and is of the opinion that
the discussion contained herein is accurate in all material
respects. Because this section is a summary, it does not address
all aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders that are
subject to special treatment under the federal income tax laws,
such as:
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insurance companies;
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tax-exempt organizations (except to the limited extent discussed
in Taxation of Tax-Exempt Shareholders
below);
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financial institutions or broker-dealers;
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non-U.S. individuals
and foreign corporations (except to the limited extent discussed
in Taxation of
Non-U.S. Shareholders
below);
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U.S. expatriates;
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persons who
mark-to-market
our common shares;
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subchapter S corporations;
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U.S. shareholders (as defined below) whose functional
currency is not the U.S. dollar;
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regulated investment companies and REITs;
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trusts and estates;
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holders who receive our common shares through the exercise of
employee share options or otherwise as compensation;
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persons holding our common shares as part of a
straddle, hedge, conversion
transaction, synthetic security or other
integrated investment;
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persons subject to the alternative minimum tax provisions of the
Code; and
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persons holding our common shares through a partnership or
similar pass-through entity.
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This summary assumes that shareholders hold shares as capital
assets for federal income tax purposes, which generally means
property held for investment.
The statements in this section are based on the current federal
income tax laws, are for general information purposes only and
are not tax advice. We cannot assure you that new laws,
interpretations of law, or court decisions, any of which may
take effect retroactively, will not cause any statement in this
section to be inaccurate.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND
SALE OF OUR COMMON SHARES AND OF OUR ELECTION TO BE TAXED
AS A REIT. SPECIFICALLY, YOU ARE URGED TO CONSULT YOUR OWN TAX
ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION,
AND REGARDING POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of Our
Company
We intend to elect to be taxed as a REIT for federal income tax
purposes commencing with our short taxable year ended
December 31, 2010 upon the filing of our federal income tax
return for that year. We believe that, commencing with such
short taxable year, we have been organized and have operated in
such a manner as to qualify for taxation as a REIT under the
federal income tax laws, and we intend to continue to operate in
such a manner, but no assurances can be given that we will
operate in a manner so as to qualify or remain qualified as a
REIT. This section discusses the laws governing the federal
income tax treatment of a REIT and its shareholders. These laws
are highly technical and complex.
110
In connection with this offering, Hunton & Williams
LLP is rendering an opinion that, commencing with our short
taxable year ended on December 31, 2010, we have been
organized in conformity with the requirements for qualification
and taxation as a REIT under the federal income tax laws, and
our current and proposed method of operations will enable us to
satisfy the requirements for qualification and taxation as a
REIT under the federal income tax laws. Investors should be
aware that Hunton & Williams LLPs opinion is
based upon customary assumptions, will be conditioned upon
certain representations made by us as to factual matters,
including representations regarding the nature of our assets and
the conduct of our business, is not binding upon the IRS, or any
court, and speaks as of the date issued. In addition,
Hunton & Williams LLPs opinion will be based on
existing federal income tax law governing qualification as a
REIT, which is subject to change either prospectively or
retroactively. Moreover, our qualification and taxation as a
REIT depend upon our ability to meet on a continuing basis,
through actual annual operating results, certain qualification
tests set forth in the federal tax laws. Those qualification
tests involve the percentage of income that we earn from
specified sources, the percentage of our assets that falls
within specified categories, the diversity of ownership of our
shares of beneficial interest, and the percentage of our
earnings that we distribute. Hunton & Williams LLP
will not review our compliance with those tests on a continuing
basis. Accordingly, no assurance can be given that our actual
results of operations for any particular taxable year will
satisfy such requirements. Hunton & Williams
LLPs opinion does not foreclose the possibility that we
may have to use one or more of the REIT savings provisions
described below, which would require us to pay an excise or
penalty tax (which could be material) in order to maintain our
REIT qualification. For a discussion of the tax consequences of
our failure to qualify as a REIT, see
Failure to Qualify.
If we qualify as a REIT, we generally will not be subject to
federal income tax on the taxable income that we distribute to
our shareholders. The benefit of that tax treatment is that it
avoids the double taxation, or taxation at both the
corporate and shareholder levels, that generally results from
owning stock in a corporation. However, we will be subject to
federal tax in the following circumstances:
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We will pay federal income tax on any taxable income, including
undistributed net capital gain, that we do not distribute to
shareholders during, or within a specified time period after,
the calendar year in which the income is earned.
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We may be subject to the alternative minimum tax on
any items of tax preference including any deductions of net
operating losses.
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We will pay income tax at the highest corporate rate on:
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net income from the sale or other disposition of property
acquired through foreclosure or after a default on a lease of
the property (foreclosure property) that we hold
primarily for sale to customers in the ordinary course of
business, and
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other non-qualifying income from foreclosure property.
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We will pay a 100% tax on net income from sales or other
dispositions of property, other than foreclosure property, that
we hold primarily for sale to customers in the ordinary course
of business.
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If we fail to satisfy one or both of the 75% gross income test
or the 95% gross income test, as described below under
Gross Income Tests, and nonetheless
continue to qualify as a REIT because we meet other
requirements, we will pay a 100% tax on:
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the gross income attributable to the greater of the amount by
which we fail the 75% gross income test or the 95% gross income
test, in either case, multiplied by
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a fraction intended to reflect our profitability.
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If we fail to distribute during a calendar year at least the sum
of (1) 85% of our REIT ordinary income for the year,
(2) 95% of our REIT capital gain net income for the year,
and (3) any undistributed taxable income required to be
distributed from earlier periods,
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we will pay a 4% nondeductible excise tax on the excess of the
required distribution over the amount we actually distributed.
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We may elect to retain and pay income tax on our net long-term
capital gain. In that case, a U.S. shareholder would be
taxed on its proportionate share of our undistributed long-term
capital gain (to the extent that we made a timely designation of
such gain to the shareholders) and would receive a credit or
refund for its proportionate share of the tax we paid.
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We will be subject to a 100% excise tax on transactions with a
TRS that are not conducted on an arms-length basis.
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In the event of a failure of any of the asset tests, other than
a de minimis failure of the 5% asset test or the 10% vote or
value test, as described below under Asset
Tests, as long as the failure was due to reasonable cause
and not to willful neglect, we file a description of each asset
that caused such failure with the IRS, and we dispose of the
assets or otherwise comply with the asset tests within six
months after the last day of the quarter in which we identify
such failure, we will pay a tax equal to the greater of $50,000
or the highest federal income tax rate then applicable to
U.S. corporations (currently 35%) on the net income from
the nonqualifying assets during the period in which we failed to
satisfy the asset tests.
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In the event we fail to satisfy one or more requirements for
REIT qualification, other than the gross income tests and the
asset tests, and such failure is due to reasonable cause and not
to willful neglect, we will be required to pay a penalty of
$50,000 for each such failure.
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If we acquire any asset from a C corporation, or a corporation
that generally is subject to full corporate-level tax, in a
merger or other transaction in which we acquire a basis in the
asset that is determined by reference either to the C
corporations basis in the asset or to another asset, we
will pay tax at the highest regular corporate rate applicable if
we recognize gain on the sale or disposition of the asset during
the 10-year
period (or, in the case of asset sales in tax years beginning in
2011, the
5-year
period) after we acquire the asset provided no election is made
for the transaction to be taxable on a current basis. The amount
of gain on which we will pay tax is the lesser of:
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the amount of gain that we recognize at the time of the sale or
disposition, and
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the amount of gain that we would have recognized if we had sold
the asset at the time we acquired it.
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We may be required to pay monetary penalties to the IRS in
certain circumstances, including if we fail to meet
record-keeping requirements intended to monitor our compliance
with rules relating to the composition of a REITs
shareholders, as described below in
Recordkeeping Requirements.
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The earnings of our lower-tier entities that are subchapter C
corporations, including TRSs, will be subject to federal
corporate income tax.
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In addition, notwithstanding our status as a REIT, we may also
have to pay certain state and local income taxes, because not
all states and localities treat REITs in the same manner that
they are treated for federal income tax purposes. Moreover, as
further described below, TRSs will be subject to federal, state
and local corporate income tax on their taxable income.
Requirements for
Qualification
A REIT is a corporation, trust, or association that meets each
of the following requirements:
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1.
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It is managed by one or more directors or trustees.
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2.
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Its beneficial ownership is evidenced by transferable shares, or
by transferable certificates of beneficial interest.
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3.
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It would be taxable as a domestic corporation, but for the REIT
provisions of the federal income tax laws.
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4.
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It is neither a financial institution nor an insurance company
subject to special provisions of the federal income tax laws.
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5.
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At least 100 persons are beneficial owners of its shares or
ownership certificates.
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6.
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Not more than 50% in value of its outstanding shares or
ownership certificates is owned, directly or indirectly, by five
or fewer individuals, which the Code defines to include certain
entities, during the last half of any taxable year.
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7.
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It elects to be a REIT, or has made such election for a previous
taxable year, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be
met to elect and maintain REIT status.
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8.
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It meets certain other qualification tests, described below,
regarding the nature of its income and assets and the amount of
its distributions to shareholders.
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It uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the federal
income tax laws.
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We must meet requirements 1 through 4, 7, 8 and 9 during our
entire taxable year and must meet requirement 5 during at least
335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than
12 months. Requirements 5 and 6 will apply to us beginning
with our 2011 taxable year. If we comply with all the
requirements for ascertaining the ownership of our outstanding
shares in a taxable year and have no reason to know that we
violated requirement 6, we will be deemed to have satisfied
requirement 6 for that taxable year. For purposes of determining
share ownership under requirement 6, an individual
generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable
purposes. An individual, however, generally does not
include a trust that is a qualified employee pension or profit
sharing trust under the Code, and beneficiaries of such a trust
will be treated as holding our shares in proportion to their
actuarial interests in the trust for purposes of requirement 6.
Our declaration of trust provides restrictions regarding the
transfer and ownership of our shares of beneficial interest. See
Description of Shares of Beneficial Interest
Restrictions on Ownership and Transfer. We believe that we
have issued sufficient shares of beneficial interest with
sufficient diversity of ownership to allow us to satisfy
requirements 5 and 6 above. The restrictions in our declaration
of trust are intended (among other things) to assist us in
continuing to satisfy requirements 5 and 6 described above.
These restrictions, however, may not ensure that we will, in all
cases, be able to satisfy such share ownership requirements. If
we fail to satisfy these share ownership requirements, our
qualification as a REIT may terminate.
In addition, we must satisfy all relevant filing and other
administrative requirements established by the IRS that must be
met to elect and maintain REIT status and comply with the
record-keeping requirements of the Code and regulations
promulgated thereunder.
Qualified REIT Subsidiaries. A corporation
that is a qualified REIT subsidiary is not treated
as a corporation separate from its parent REIT. All assets,
liabilities, and items of income, deduction, and credit of a
qualified REIT subsidiary are treated as assets,
liabilities, and items of income, deduction, and credit of the
REIT. A qualified REIT subsidiary is a corporation,
other than a TRS, all of the stock of which is owned by the
REIT. Thus, in applying the requirements described herein, any
qualified REIT subsidiary that we own will be
ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiary will be treated as our
assets, liabilities, and items of income, deduction, and credit.
Other Disregarded Entities and
Partnerships. An unincorporated domestic entity,
such as a partnership or limited liability company that has a
single owner, generally is not treated as an entity separate
from its parent for federal income tax purposes. An
unincorporated domestic entity with two or more owners is
generally treated as a partnership for federal income tax
purposes. In the case of a
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REIT that is a partner in a partnership that has other partners,
the REIT is treated as owning its proportionate share of the
assets of the partnership and as earning its allocable share of
the gross income of the partnership for purposes of the
applicable REIT qualification tests. Our proportionate share for
purposes of the 10% value test (see Asset
Tests) is based on our proportionate interest in the
equity interests and certain debt securities issued by the
partnership. For all of the other asset and income tests, our
proportionate share is based on our proportionate interest in
the capital interests in the partnership. Our proportionate
share of the assets, liabilities, and items of income of any
partnership, joint venture, or limited liability company that is
treated as a partnership for federal income tax purposes in
which we acquire an equity interest, directly or indirectly, are
treated as our assets and gross income for purposes of applying
the various REIT qualification requirements.
Taxable REIT Subsidiaries. A REIT may own up
to 100% of the capital stock of one or more TRSs. A TRS is a
fully taxable corporation that may earn income that would not be
qualifying income if earned directly by the parent REIT. The
subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of
the stock will automatically be treated as a TRS. However, an
entity will not qualify as a TRS if it directly or indirectly
operates or manages a lodging or health care facility or,
generally, provides to another person under a franchise,
license, or otherwise, rights to any brand name under which any
lodging facility or health care facility is operated, unless
such rights are provided to an eligible independent
contractor (as defined below under Gross
Income Tests Rents from Real Property) to
operate or manage a lodging facility or health care facility and
such lodging facility or health care facility is either owned by
the TRS or leased to the TRS by its parent REIT. Additionally, a
TRS that employs individuals working at a qualified lodging
facility located outside the United States will not be
considered to operate or manage a qualified lodging facility as
long as an eligible independent contractor is
responsible for the daily supervision and direction of such
individuals on behalf of the TRS pursuant to a management
agreement or similar service contract.
We are not treated as holding the assets of a TRS or as
receiving any income that the subsidiary earns. Rather, the
stock issued by a TRS to us is an asset in our hands, and we
treat the distributions paid to us from such taxable subsidiary,
if any, as dividend income. This treatment can affect our
compliance with the gross income and asset tests. Because we do
not include the assets and income of our TRSs in determining our
compliance with the REIT requirements, we may use such entities
to undertake indirectly activities that the REIT rules might
otherwise preclude us from doing directly or through
pass-through subsidiaries. Overall, no more than 25% of the
value of a REITs assets may consist of stock or securities
of one or more TRSs.
A TRS will pay income tax at regular corporate rates on any
income that it earns. In addition, the TRS rules limit the
deductibility of interest paid or accrued by a TRS to its parent
REIT to assure that the TRS is subject to an appropriate level
of corporate taxation. Further, the rules impose a 100% excise
tax on transactions between a TRS and its parent REIT or the
REITs tenants that are not conducted on an
arms-length basis. We have formed two TRSs, Chatham TRS
Holding, Inc. and Chatham TRS Holding II, Inc., whose wholly
owned subsidiaries are the lessees of our hotel properties. We
will not be able to use income and gain recognized by Chatham
TRS Holding, Inc. to offset losses recognized by Chatham TRS
Holding II, Inc., and vice versa, which may result in a higher
tax liability than would be the case if all of our hotel
properties were leased by TRS lessees of the same TRS.
Gross Income
Tests
We must satisfy two gross income tests annually to maintain our
qualification as a REIT. First, at least 75% of our gross income
for each taxable year must consist of defined types of income
that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or
qualified temporary investment income. Qualifying income for
purposes of that 75% gross income test generally includes:
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rents from real property;
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interest on debt secured by mortgages on real property, or on
interests in real property;
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dividends or other distributions on, and gain from the sale of,
shares in other REITs;
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gain from the sale of real estate assets; and
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income derived from the temporary investment in stock and debt
investments purchased with the proceeds from the issuance of our
shares of beneficial interest or a public offering of our debt
with a maturity date of at least five years and that we receive
during the one-year period beginning on the date on which we
received such new capital.
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Second, in general, at least 95% of our gross income for each
taxable year must consist of income that is qualifying income
for purposes of the 75% gross income test, other types of
interest and dividends, gain from the sale or disposition of
shares or securities, or any combination of these. Gross income
from our sale of property that we hold primarily for sale to
customers in the ordinary course of business is excluded from
both the numerator and the denominator in both gross income
tests. In addition, income and gain from hedging
transactions that we enter into to hedge indebtedness
incurred or to be incurred to acquire or carry real estate
assets and that are clearly and timely identified as such will
be excluded from both the numerator and the denominator for
purposes of the 75% and 95% gross income tests. In addition,
certain foreign currency gains will be excluded from gross
income for purposes of one or both of the gross income tests.
See Foreign Currency Gain below. The
following paragraphs discuss the specific application of the
gross income tests to us.
Rents from Real Property. Rent that we receive
from our real property will qualify as rents from real
property, which is qualifying income for purposes of the
75% and 95% gross income tests, only if the following conditions
are met:
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First, the rent must not be based, in whole or in part, on the
income or profits of any person, but may be based on a fixed
percentage or percentages of receipts or sales.
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Second, neither we nor a direct or indirect owner of 10% or more
of our shares of beneficial interest may own, actually or
constructively, 10% or more of a tenant from whom we receive
rent, other than a TRS. If the tenant is a TRS and the property
is a qualified lodging facility, such TRS may not
directly or indirectly operate or manage such property. Instead,
the property must be operated on behalf of the TRS by a person
who qualifies as an independent contractor and who
is, or is related to a person who is, actively engaged in the
trade or business of operating lodging facilities for any person
unrelated to us and the TRS.
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Third, if the rent attributable to personal property leased in
connection with a lease of real property is 15% or less of the
total rent received under the lease, then the rent attributable
to personal property will qualify as rents from real property.
However, if the 15% threshold is exceeded, the rent attributable
to personal property will not qualify as rents from real
property.
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Fourth, we generally must not operate or manage our real
property or furnish or render services to our tenants, other
than certain customary services provided to tenants through an
independent contractor who is adequately compensated
and from whom we do not derive revenue. Furthermore, we may own
up to 100% of the stock of a TRS which may provide customary and
noncustomary services to our tenants without tainting our rental
income for the related properties. We need not provide services
through an independent contractor or a TRS, but
instead may provide services directly to our tenants, if the
services are usually or customarily rendered in
connection with the rental of space for occupancy only and are
not considered to be provided for the tenants convenience.
In addition, we may provide a minimal amount of services not
described in the prior sentence to the tenants of a property,
other than through an independent contractor or a TRS, as long
as our income from the services (valued at not less than 150% of
our direct cost of performing such services) does not exceed 1%
of our income from the related property.
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Our TRS lessees lease from our operating partnership and its
subsidiaries the land, buildings, improvements, furnishings and
equipment comprising our hotel properties. In order for the rent
paid under the leases to constitute rents from real
property, the leases must be respected as true leases for
federal income tax purposes and not treated as service
contracts, joint ventures or some other type of arrangement. The
determination of whether our leases are true leases depends on
an analysis of all the surrounding facts and circumstances. In
making such a determination, courts have considered a variety of
factors, including the following:
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the intent of the parties;
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the form of the agreement;
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the degree of control over the property that is retained by the
property owner (for example, whether the lessee has substantial
control over the operation of the property or whether the lessee
was required simply to use its best efforts to perform its
obligations under the agreement); and
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the extent to which the property owner retains the risk of loss
with respect to the property (for example, whether the lessee
bears the risk of increases in operating expenses or the risk of
damage to the property) or the potential for economic gain with
respect to the property.
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In addition, the federal income tax law provides that a contract
that purports to be a service contract or a partnership
agreement is treated instead as a lease of property if the
contract is properly treated as such, taking into account all
relevant factors. Since the determination of whether a service
contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive
in every case.
We believe that our leases are structured so that they qualify
as true leases for federal income tax purposes. Our belief is
based on the following with respect to each lease:
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our operating partnership and the lessee intend for their
relationship to be that of a lessor and lessee, and such
relationship is documented by a lease agreement;
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the lessee has the right to exclusive possession and use and
quiet enjoyment of the hotels covered by the lease during the
term of the lease;
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the lessee bears the cost of, and is responsible for,
day-to-day
maintenance and repair of the hotels other than the cost of
certain capital expenditures, and dictates through hotel
managers that are eligible independent contractors, who will
work for the lessee during the terms of the lease, how the
hotels are operated and maintained;
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the lessee bears all of the costs and expenses of operating the
hotels, including the cost of any inventory used in their
operation, during the term of the lease, other than real estate
and personal property taxes and the cost of certain furniture,
fixtures and equipment, and certain capital expenditures;
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the lessee benefits from any savings and bears the burdens of
any increases in the costs of operating the hotels during the
term of the lease;
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in the event of damage or destruction to a hotel, the lessee is
at economic risk because it bears the economic burden of the
loss in income from operation of the hotels subject to the
right, in certain circumstances, to terminate the lease if the
lessor does not restore the hotel to its prior condition;
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the lessee generally indemnifies the lessor against all
liabilities imposed on the lessor during the term of the lease
by reason of (A) injury to persons or damage to property
occurring at the hotels or (B) the lessees use,
management, maintenance or repair of the hotels;
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the lessee is obligated to pay, at a minimum, substantial base
rent for the period of use of the hotels under the lease;
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the lessee stands to incur substantial losses or reap
substantial gains depending on how successfully it, through the
hotel managers, who work for the lessees during the terms of the
leases, operates the hotels;
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each lease that we have entered into, at the time we entered
into it (or at any time that any such lease is subsequently
renewed or extended) enables the tenant to derive a meaningful
profit, after expenses and taking into account the risks
associated with the lease, from the operation of the hotels
during the term of its leases; and
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upon termination of each lease, the applicable hotel is expected
to have a substantial remaining useful life and substantial
remaining fair market value.
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We expect that the leases we enter into in the future with our
TRS lessees will have similar features.
Investors should be aware that there are no controlling Treasury
regulations, published rulings or judicial decisions involving
leases with terms substantially the same as our leases that
discuss whether such leases constitute true leases for federal
income tax purposes. If our leases are characterized as service
contracts or partnership agreements, rather than as true leases,
part or all of the payments that our operating partnership and
its subsidiaries receive from the TRS lessees may not be
considered rent or may not otherwise satisfy the various
requirements for qualification as rents from real
property. In that case, we likely would not be able to
satisfy either the 75% or 95% gross income test and, as a
result, would fail to qualify as a REIT unless we qualify for
relief, as described below under Failure to
Satisfy Gross Income Tests.
As described above, in order for the rent that we receive to
constitute rents from real property, several other
requirements must be satisfied. One requirement is that
percentage rent must not be based in whole or in part on the
income or profits of any person. Percentage rent, however, will
qualify as rents from real property if it is based
on percentages of receipts or sales and the percentages:
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are fixed at the time the percentage leases are entered into;
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are not renegotiated during the term of the percentage leases in
a manner that has the effect of basing percentage rent on income
or profits; and
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conform with normal business practice.
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More generally, percentage rent will not qualify as rents
from real property if, considering the leases and all the
surrounding circumstances, the arrangement does not conform with
normal business practice, but is in reality used as a means of
basing the percentage rent on income or profits.
Second, we must not own, actually or constructively, 10% or more
of the shares or the assets or net profits of any lessee (a
related party tenant), other than a TRS. The
constructive ownership rules generally provide that, if 10% or
more in value of our shares of beneficial interest is owned,
directly or indirectly, by or for any person, we are considered
as owning the shares owned, directly or indirectly, by or for
such person. We anticipate that all of our hotels will be leased
to TRSs. In addition, our declaration of trust prohibits
transfers of our shares of beneficial interest that would cause
us to own actually or constructively, 10% or more of the
ownership interests in any non-TRS lessee. Based on the
foregoing, we should never own, actually or constructively, 10%
or more of any lessee other than a TRS. However, because the
constructive ownership rules are broad and it is not possible to
monitor continually direct and indirect transfers of our shares
of beneficial interest, no absolute assurance can be given that
such transfers or other events of which we have no knowledge
will not cause us to own constructively 10% or more of a lessee
(or a subtenant, in which case only rent attributable to the
subtenant is disqualified) other than a TRS at some future date.
As described above, we may own up to 100% of the capital stock
of one or more TRSs. A TRS is a fully taxable corporation that
generally may engage in any business, including the provision of
customary or noncustomary services to tenants of its parent
REIT, except that a TRS may not directly or indirectly operate
or manage any lodging facilities or health care facilities or
provide rights to any
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brand name under which any lodging or health care facility is
operated, unless such rights are provided to an eligible
independent contractor to operate or manage a lodging or
health care facility if such rights are held by the TRS as a
franchisee, licensee, or in a similar capacity and such hotel is
either owned by the TRS or leased to the TRS by its parent REIT.
A TRS will not be considered to operate or manage a qualified
lodging facility solely because the TRS directly or indirectly
possesses a license, permit, or similar instrument enabling it
to do so. Additionally, a TRS that employs individuals working
at a qualified lodging facility outside the United States will
not be considered to operate or manage a qualified lodging
facility located outside of the United States, as long as an
eligible independent contractor is responsible for
the daily supervision and direction of such individuals on
behalf of the TRS pursuant to a management agreement or similar
service contract. However, rent that we receive from a TRS with
respect to any property will qualify as rents from real
property as long as the property is a qualified
lodging facility and such property is operated on behalf
of the TRS by a person from whom we derive no income who is
adequately compensated, who does not, directly or through its
shareholders, own more than 35% of our shares, taking into
account certain ownership attribution rules, and who is, or is
related to a person who is, actively engaged in the trade or
business of operating qualified lodging facilities
for any person unrelated to us and the TRS lessee (an
eligible independent contractor). A qualified
lodging facility is a hotel, motel, or other establishment
more than one-half of the dwelling units in which are used on a
transient basis, unless wagering activities are conducted at or
in connection with such facility by any person who is engaged in
the business of accepting wagers and who is legally authorized
to engage in such business at or in connection with such
facility. A qualified lodging facility includes
customary amenities and facilities operated as part of, or
associated with, the lodging facility as long as such amenities
and facilities are customary for other properties of a
comparable size and class owned by other unrelated owners.
Our TRS lessees lease our hotel properties, which we believe
constitute qualified lodging facilities. Our TRS lessees engage
independent third-party hotel managers, such as IHM and Hilton
Worldwide and its affiliates, that qualify as eligible
independent contractors, to operate the related hotels on
behalf of such TRS lessees.
Third, the rent attributable to the personal property leased in
connection with the lease of a hotel must not be greater than
15% of the total rent received under the lease. The rent
attributable to the personal property contained in a hotel is
the amount that bears the same ratio to total rent for the
taxable year as the average of the fair market values of the
personal property at the beginning and at the end of the taxable
year bears to the average of the aggregate fair market values of
both the real and personal property contained in the hotel at
the beginning and at the end of such taxable year (the
personal property ratio). To comply with this
limitation, a TRS lessee may acquire furnishings, equipment and
other personal property. With respect to each hotel in which the
TRS lessee does not own the personal property, we believe either
that the personal property ratio is less than 15% or that any
rent attributable to excess personal property will not
jeopardize our ability to qualify as a REIT. There can be no
assurance, however, that the IRS would not challenge our
calculation of a personal property ratio, or that a court would
not uphold such assertion. If such a challenge were successfully
asserted, we could fail to satisfy the 75% or 95% gross income
test and thus potentially lose our REIT status.
Fourth, we generally cannot furnish or render services to the
tenants of our hotels, or manage or operate our properties,
other than through an independent contractor who is adequately
compensated and from whom we do not derive or receive any
income. Furthermore, our TRSs may provide customary and
noncustomary services to our tenants without tainting our rental
income from such properties. However, we need not provide
services through an independent contractor or TRS
but instead may provide services directly to our tenants, if the
services are usually or customarily rendered in
connection with the rental of space for occupancy only and are
not considered to be provided for the tenants convenience.
In addition, we may provide a minimal amount of
noncustomary services to the tenants of a property,
other than through an independent contractor or a TRS, as long
as our income from the services does not exceed 1% of our income
from the related property. We will not perform any services
other than customary ones for our lessees, unless such
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services are provided through independent contractors or TRSs or
would not otherwise jeopardize our tax status as a REIT.
If a portion of the rent that we receive from a hotel does not
qualify as rents from real property because the rent
attributable to personal property exceeds 15% of the total rent
for a taxable year, the portion of the rent that is attributable
to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if such rent
attributable to personal property, plus any other income that is
nonqualifying income for purposes of the 95% gross income test,
during a taxable year exceeds 5% of our gross income during the
year, we would lose our REIT qualification. If, however, the
rent from a particular hotel does not qualify as rents
from real property because either (1) the percentage
rent is considered based on the income or profits of the related
lessee, (2) the lessee either is a related party tenant or
fails to qualify for the exception to the related party tenant
rule for qualifying TRSs or (3) we furnish noncustomary
services to the tenants of the hotel, or manage or operate the
hotel, other than through a qualifying independent contractor or
a TRS, none of the rent from that hotel would qualify as
rents from real property. In that case, we might
lose our REIT qualification because we might be unable to
satisfy either the 75% or 95% gross income test. In addition to
the rent, the lessees will be required to pay certain additional
charges. To the extent that such additional charges represent
either (1) reimbursements of amounts that we are obligated
to pay to third parties, such as a lessees proportionate
share of a propertys operational or capital expenses, or
(2) penalties for nonpayment or late payment of such
amounts, such charges should qualify as rents from real
property. However, to the extent that such charges do not
qualify as rents from real property, they instead
may be treated as interest that qualifies for the 95% gross
income test, but not the 75% gross income test, or they may be
treated as nonqualifying income for purposes of both gross
income tests. We believe that we have structured our leases in a
manner that will enable us to satisfy the REIT gross income
tests.
Interest. The term interest
generally does not include any amount received or accrued,
directly or indirectly, if the determination of such amount
depends in whole or in part on the income or profits of any
person. However, interest generally includes the following:
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an amount that is based on a fixed percentage or percentages of
receipts or sales; and
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an amount that is based on the income or profits of a debtor, as
long as the debtor derives substantially all of its income from
the real property securing the debt from leasing substantially
all of its interest in the property, and only to the extent that
the amounts received by the debtor would be qualifying
rents from real property if received directly by a
REIT.
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If a loan contains a provision that entitles a REIT to a
percentage of the borrowers gain upon the sale of the real
property securing the loan or a percentage of the appreciation
in the propertys value as of a specific date, income
attributable to that loan provision will be treated as gain from
the sale of the property securing the loan, which generally is
qualifying income for purposes of both gross income tests.
We may invest opportunistically from time to time in mortgage
debt and mezzanine loans when we believe our investment will
allow us to acquire control of the related real estate. Interest
on debt secured by a mortgage on real property or on interests
in real property, including, for this purpose, discount points,
prepayment penalties, loan assumption fees, and late payment
charges that are not compensation for services, generally is
qualifying income for purposes of the 75% gross income test.
However, if a loan is secured by real property and other
property and the highest principal amount of a loan outstanding
during a taxable year exceeds the fair market value of the real
property securing the loan as of the date the REIT agreed to
acquire the loan or on the date we modify the loan (if the
modification is treated as significant for tax
purposes), a portion of the interest income from such loan will
not be qualifying income for purposes of the 75% gross income
test, but will be qualifying income for purposes of the 95%
gross income test. The portion of the interest income that will
not be qualifying income for purposes of the 75% gross income
test will be equal to the portion of the principal amount of the
loan that is not secured by real property that is,
the amount by which
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the loan exceeds the value of the real estate that is security
for the loan. For purposes of this paragraph, however, under
recently issued IRS guidance we do not need to redetermine the
fair market value of the real property in connection with a loan
modification that is occasioned by a borrower default or made at
a time when we reasonably believe the modification to the loan
will substantially reduce a significant risk of default on the
original loan.
Mezzanine loans are loans secured by equity interests in an
entity that directly or indirectly owns real property, rather
than by a direct mortgage of the real property. IRS Revenue
Procedure
2003-65
provides a safe harbor pursuant to which a mezzanine loan, if it
meets each of the requirements contained in the Revenue
Procedure, will be treated by the IRS as a real estate asset for
purposes of the REIT asset tests described below, and interest
derived from it will be treated as qualifying mortgage interest
for purposes of the 75% gross income test. Although the Revenue
Procedure provides a safe harbor on which taxpayers may rely, it
does not prescribe rules of substantive tax law. Moreover, we
anticipate that the mezzanine loans we will acquire typically
will not meet all of the requirements for reliance on this safe
harbor. We intend to invest in mezzanine loans in manner that
will enable us to continue to satisfy the gross income and asset
tests.
Dividends. Our share of any dividends received
from any corporation (including any TRS, but excluding any REIT)
in which we own an equity interest will qualify for purposes of
the 95% gross income test but not for purposes of the 75% gross
income test. Our share of any dividends received from any other
REIT in which we own an equity interest, if any, will be
qualifying income for purposes of both gross income tests.
Prohibited Transactions. A REIT will incur a
100% tax on the net income (including foreign currency gain)
derived from any sale or other disposition of property, other
than foreclosure property, that the REIT holds primarily for
sale to customers in the ordinary course of a trade or business.
We believe that none of our assets will be held primarily for
sale to customers and that a sale of any of our assets will not
be in the ordinary course of our business. Whether a REIT holds
an asset primarily for sale to customers in the ordinary
course of a trade or business depends, however, on the
facts and circumstances in effect from time to time, including
those related to a particular asset. A safe harbor to the
characterization of the sale of property by a REIT as a
prohibited transaction and the 100% prohibited transaction tax
is available if the following requirements are met:
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the REIT has held the property for not less than two years;
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the aggregate expenditures made by the REIT, or any partner of
the REIT, during the two-year period preceding the date of the
sale that are includable in the basis of the property do not
exceed 30% of the selling price of the property;
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either (1) during the year in question, the REIT did not
make more than seven sales of property other than foreclosure
property or sales to which Section 1033 of the Code
applies, (2) the aggregate adjusted bases of all such
properties sold by the REIT during the year did not exceed 10%
of the aggregate bases of all of the assets of the REIT at the
beginning of the year or (3) the aggregate fair market
value of all such properties sold by the REIT during the year
did not exceed 10% of the aggregate fair market value of all of
the assets of the REIT at the beginning of the year;
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in the case of property not acquired through foreclosure or
lease termination, the REIT has held the property for at least
two years for the production of rental income; and
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if the REIT has made more than seven sales of non-foreclosure
property during the taxable year, substantially all of the
marketing and development expenditures with respect to the
property were made through an independent contractor from whom
the REIT derives no income.
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We will attempt to comply with the terms of safe-harbor
provision in the federal income tax laws prescribing when an
asset sale will not be characterized as a prohibited
transaction. We cannot assure you, however, that we can comply
with the safe-harbor provision or that we will avoid owning
property that may be characterized as property that we hold
primarily for sale to customers in the
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ordinary course of a trade or business. The 100% tax will
not apply to gains from the sale of property that is held
through a TRS or other taxable corporation, although such income
will be taxed to the corporation at regular corporate income tax
rates.
Foreclosure Property. We will be subject to
tax at the maximum corporate rate on any income from foreclosure
property, which includes certain foreign currency gains and
related deductions, other than income that otherwise would be
qualifying income for purposes of the 75% gross income test,
less expenses directly connected with the production of that
income. However, gross income from foreclosure property will
qualify under the 75% and 95% gross income tests. Foreclosure
property is any real property, including interests in real
property, and any personal property incident to such real
property:
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that is acquired by a REIT as the result of the REIT having bid
on such property at foreclosure, or having otherwise reduced
such property to ownership or possession by agreement or process
of law, after there was a default or default was imminent on a
lease of such property or on indebtedness that such property
secured;
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for which the related loan was acquired by the REIT at a time
when the default was not imminent or anticipated; and
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for which the REIT makes a proper election to treat the property
as foreclosure property.
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A REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a
mortgagee-in-possession
and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Property generally ceases to be
foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the
property, or longer if an extension is granted by the Secretary
of the Treasury. However, this grace period terminates and
foreclosure property ceases to be foreclosure property on the
first day:
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on which a lease is entered into for the property that, by its
terms, will give rise to income that does not qualify for
purposes of the 75% gross income test, or any amount is received
or accrued, directly or indirectly, pursuant to a lease entered
into on or after such day that will give rise to income that
does not qualify for purposes of the 75% gross income test;
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on which any construction takes place on the property, other
than completion of a building or any other improvement, where
more than 10% of the construction was completed before default
became imminent; or
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which is more than 90 days after the day on which the REIT
acquired the property and the property is used in a trade or
business which is conducted by the REIT, other than through an
independent contractor from whom the REIT itself does not derive
or receive any income.
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Hedging Transactions. From time to time, we or
our operating partnership may enter into hedging transactions
with respect to one or more of our assets or liabilities. Our
hedging activities may include entering into interest rate
swaps, caps, and floors, options to purchase such items, and
futures and forward contracts. Income and gain from
hedging transactions will be excluded from gross
income for purposes of both the 75% and 95% gross income tests.
A hedging transaction means either (1) any
transaction entered into in the normal course of our or our
operating partnerships trade or business primarily to
manage the risk of interest rate changes, price changes, or
currency fluctuations with respect to borrowings made or to be
made, or ordinary obligations incurred or to be incurred, to
acquire or carry real estate assets and (2) any transaction
entered into primarily to manage the risk of currency
fluctuations with respect to any item of income or gain that
would be qualifying income under the 75% or 95% gross income
test (or any property which generates such income or gain). We
are required to clearly identify any such hedging transaction
before the close of the day on which it was acquired or entered
into and to satisfy other identification requirements. We intend
to structure any hedging transactions in a manner that does not
jeopardize our qualification as a REIT.
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Foreign Currency Gain. Certain foreign
currency gains will be excluded from gross income for purposes
of one or both of the gross income tests. Real estate
foreign exchange gain will be excluded from gross income
for purposes of the 75% gross income test. Real estate foreign
exchange gain generally includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 75% gross income test, foreign
currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations secured by
mortgages on real property or on interests in real property and
certain foreign currency gain attributable to certain
qualified business units of a REIT. Passive
foreign exchange gain will be excluded from gross income
for purposes of the 95% gross income test. Passive foreign
exchange gain generally includes real estate foreign exchange
gain as described above, and also includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 95% gross income test and foreign
currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations. Because
passive foreign exchange gain includes real estate foreign
exchange gain, real estate foreign exchange gain is excluded
from gross income for purposes of both the 75% and 95% gross
income tests. These exclusions for real estate foreign exchange
gain and passive foreign exchange gain do not apply to any
certain foreign currency gain derived from dealing, or engaging
in substantial and regular trading, in securities. Such gain is
treated as nonqualifying income for purposes of both the 75% and
95% gross income tests.
Failure to Satisfy Gross Income Tests. If we
fail to satisfy one or both of the gross income tests for any
taxable year, we nevertheless may qualify as a REIT for that
year if we qualify for relief under certain provisions of the
federal income tax laws. Those relief provisions are available
if:
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our failure to meet those tests is due to reasonable cause and
not to willful neglect; and
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following such failure for any taxable year, we file a schedule
of the sources of our income in accordance with regulations
prescribed by the Secretary of the U.S. Treasury.
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We cannot predict, however, whether in all circumstances we
would qualify for the relief provisions. In addition, as
discussed above in Taxation of Our
Company, even if the relief provisions apply, we would
incur a 100% tax on the gross income attributable to the greater
of the amount by which we fail the 75% gross income test or the
95% gross income test multiplied, in either case, by a fraction
intended to reflect our profitability.
Asset
Tests
To qualify as a REIT, we also must satisfy the following asset
tests at the end of each quarter of each taxable year.
First, at least 75% of the value of our total assets must
consist of:
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cash or cash items, including certain receivables and, in
certain circumstances, foreign currencies;
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government securities;
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interests in real property, including leaseholds and options to
acquire real property and leaseholds;
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interests in mortgages loans secured by real property;
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stock in other REITs; and
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investments in stock or debt instruments during the one-year
period following our receipt of new capital that we raise
through equity offerings or public offerings of debt with at
least a five-year term.
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Second, of our investments not included in the 75% asset class,
the value of our interest in any one issuers securities
may not exceed 5% of the value of our total assets, or the 5%
asset test.
Third, of our investments not included in the 75% asset class,
we may not own more than 10% of the voting power of any one
issuers outstanding securities or 10% of the value of any
one issuers outstanding securities, or the 10% vote test
or the 10% value test, respectively.
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Fourth, no more than 25% of the value of our total assets may
consist of the securities of one or more TRSs.
Fifth, no more than 25% of the value of our total assets may
consist of the securities of TRSs and other non-TRS taxable
subsidiaries and other assets that are not qualifying assets for
purposes of the 75% asset test, or the 25% securities test.
For purposes of the 5% asset test, the 10% vote test and the 10%
value test, the term securities does not include
shares in another REIT, equity or debt securities of a qualified
REIT subsidiary or TRS, mortgage loans that constitute real
estate assets, or equity interests in a partnership. The term
securities, however, generally includes debt
securities issued by a partnership or another REIT, except that
for purposes of the 10% value test, the term
securities does not include:
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Straight debt securities, which is defined as a
written unconditional promise to pay on demand or on a specified
date a sum certain in money if (i) the debt is not
convertible, directly or indirectly, into equity, and
(ii) the interest rate and interest payment dates are not
contingent on profits, the borrowers discretion, or
similar factors. Straight debt securities do not
include any securities issued by a partnership or a corporation
in which we or any controlled TRS (i.e., a TRS in which we own
directly or indirectly more than 50% of the voting power or
value of the stock) hold non-straight debt
securities that have an aggregate value of more than 1% of the
issuers outstanding securities. However, straight
debt securities include debt subject to the following
contingencies:
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a contingency relating to the time of payment of interest or
principal, as long as either (i) there is no change to the
effective yield of the debt obligation, other than a change to
the annual yield that does not exceed the greater of 0.25% or 5%
of the annual yield, or (ii) neither the aggregate issue
price nor the aggregate face amount of the issuers debt
obligations held by us exceeds $1 million and no more than
12 months of unaccrued interest on the debt obligations can
be required to be prepaid; and
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a contingency relating to the time or amount of payment upon a
default or prepayment of a debt obligation, as long as the
contingency is consistent with customary commercial practice;
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Any loan to an individual or an estate;
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Any section 467 rental agreement, other
than an agreement with a related party tenant;
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Any obligation to pay rents from real property;
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Certain securities issued by governmental entities;
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Any security issued by a REIT;
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Any debt instrument issued by an entity treated as a partnership
for federal income tax purposes in which we are a partner to the
extent of our proportionate interest in the equity and debt
securities of the partnership; and
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Any debt instrument issued by an entity treated as a partnership
for federal income tax purposes not described in the preceding
bullet points if at least 75% of the partnerships gross
income, excluding income from prohibited transactions, is
qualifying income for purposes of the 75% gross income test
described above in Gross Income Tests.
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For purposes of the 10% value test, our proportionate share of
the assets of a partnership is our proportionate interest in any
securities issued by the partnership, without regard to the
securities described in the last two bullet points above.
As described above, we may, on a select basis, invest in
mortgage debt and mezzanine loans. Although we expect that our
investments in mezzanine loans will generally be treated as real
estate assets, we anticipate that the mezzanine loans in which
we invest will not meet all the requirements of the safe harbor
in IRS Revenue Procedure
2003-65.
Thus no assurance can be provided that the IRS
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will not challenge our treatment of mezzanine loans as real
estate assets. Additionally, we expect that any investments in
mortgage loans will generally be treated as real estate assets.
However, for purposes of the asset tests, if the outstanding
principal balance of a mortgage loan exceeds the fair market
value of the real property securing the loan, a portion of such
loan likely will not be a qualifying real estate asset. Under
current law, it is not clear how to determine what portion of
such a loan will be treated as a real estate asset. Under
recently issued guidance, the IRS has stated that it will not
challenge a REITs treatment of a loan as being, in part, a
real estate asset for purposes of the 75% asset test if the REIT
treats the loan as being a qualifying real estate asset in an
amount equal to the lesser of (1) the fair market value of
the real property securing the loan on the date the REIT
acquires the loan or (2) the fair market value of the loan.
We intend to invest in mortgage debt and mezzanine loans in a
manner that will enable us to continue to satisfy the asset and
gross income test requirements.
We will monitor the status of our assets for purposes of the
various asset tests and will manage our portfolio in order to
comply at all times with such tests. If we fail to satisfy the
asset tests at the end of a calendar quarter, we will not lose
our REIT qualification if:
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we satisfied the asset tests at the end of the preceding
calendar quarter; and
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the discrepancy between the value of our assets and the asset
test requirements arose from changes in the market values of our
assets and was not wholly or partly caused by the acquisition of
one or more non-qualifying assets.
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If we did not satisfy the condition described in the second
item, above, we still could avoid disqualification by
eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
In the event that we violate the 5% asset test, the 10% vote
test or the 10% value test described above, we will not lose our
REIT qualification if (1) the failure is de minimis (up to
the lesser of 1% of our assets or $10 million) and
(2) we dispose of assets or otherwise comply with the asset
tests within six months after the last day of the quarter in
which we identify such failure. In the event of a failure of any
of the asset tests (other than de minimis failures described in
the preceding sentence), as long as the failure was due to
reasonable cause and not to willful neglect, we will not lose
our REIT status if we (1) dispose of assets or otherwise
comply with the asset tests within six months after the last day
of the quarter in which we identify the failure, (2) we
file a description of each asset causing the failure with the
IRS and (3) pay a tax equal to the greater of $50,000 or
the highest corporate tax rate multiplied by the net income from
the nonqualifying assets during the period in which we failed to
satisfy the asset tests.
We believe that the assets that we hold will satisfy the
foregoing asset test requirements. However, we have not obtained
and will not obtain independent appraisals to support our
conclusions as to the value of our assets and securities, or the
real estate collateral for the mortgage or mezzanine loans that
support our investments. Moreover, the values of some assets may
not be susceptible to a precise determination. As a result,
there can be no assurance that the IRS will not contend that our
ownership of securities and other assets violates one or more of
the asset tests applicable to REITs.
Distribution
Requirements
Each taxable year, we must distribute dividends, other than
capital gain dividends and deemed distributions of retained
capital gain, to our shareholders in an aggregate amount at
least equal to:
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90% of our REIT taxable income, computed without
regard to the dividends paid deduction and our net capital gain
or loss; and
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90% of our after-tax net income, if any, from foreclosure
property, minus
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the excess of the sum of certain items of non-cash income over
5% of our REIT taxable income.
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We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if either (a) we
declare the distribution before we timely file our federal
income tax return for the year and pay the distribution on or
before the first regular dividend payment date after such
declaration or (b) we declare the distribution in October,
November or December of the taxable year, payable to
shareholders of record on a specified day in any such month, and
we actually pay the dividend before the end of January of the
following year. The distributions under clause (a) are
taxable to the shareholders in the year in which paid, and the
distributions in clause (b) are treated as paid on
December 31st of the prior taxable year. In both
instances, these distributions relate to our prior taxable year
for purposes of the 90% distribution requirement.
We will pay federal income tax on taxable income, including net
capital gain, that we do not distribute to shareholders.
Furthermore, if we fail to distribute during a calendar year, or
by the end of January following the calendar year in the case of
distributions with declaration and record dates falling in the
last three months of the calendar year, at least the sum of:
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85% of our REIT ordinary income for such year,
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95% of our REIT capital gain income for such year, and
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any undistributed taxable income from prior periods,
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we will incur a 4% nondeductible excise tax on the excess of
such required distribution over the amounts we actually
distribute.
We may elect to retain and pay income tax on the net long-term
capital gain we receive in a taxable year. If we so elect, we
will be treated as having distributed any such retained amount
for purposes of the 4% nondeductible excise tax described above.
We intend to make timely distributions sufficient to satisfy the
annual distribution requirements and to avoid corporate income
tax and the 4% nondeductible excise tax.
It is possible that, from time to time, we may experience timing
differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of that income
and deduction of such expenses in arriving at our REIT taxable
income. For example, we may not deduct recognized capital losses
from our REIT taxable income. Further, it is
possible that, from time to time, we may be allocated a share of
net capital gain attributable to the sale of depreciated
property that exceeds our allocable share of cash attributable
to that sale. As a result of the foregoing, we may have less
cash than is necessary to distribute taxable income sufficient
to avoid corporate income tax and the excise tax imposed on
certain undistributed income or even to meet the 90%
distribution requirement. In such a situation, we may need to
borrow funds or, if possible, pay taxable dividends of our
shares of beneficial interest or debt securities.
Pursuant to Revenue Procedure
2010-12, the
IRS has indicated that it will treat distributions from publicly
traded REITs that are paid partly in cash and partly in shares
of beneficial interest as dividends that would satisfy the REIT
annual distribution requirements and qualify for the dividends
paid deduction for federal income tax purposes. In order to
qualify for such treatment, Revenue Procedure
2010-12
requires that at least 10% of the total distribution be payable
in cash and that each shareholder have a right to elect to
receive its entire distribution in cash. If too many
shareholders elect to receive cash, each shareholder electing to
receive cash must receive a proportionate share of the cash to
be distributed (although no shareholder electing to receive cash
may receive less than 10% of such shareholders
distribution in cash). Revenue Procedure
2010-12
applies to distributions declared on or before December 31,
2012 with respect to taxable years ending on or before
December 31, 2011. We have no current intention of paying
dividends in shares of beneficial interest.
Under certain circumstances, we may be able to correct a failure
to meet the distribution requirement for a year by paying
deficiency dividends to our shareholders in a later
year. We may include such deficiency dividends in our deduction
for dividends paid for the earlier year. Although we may be able
to avoid income tax on amounts distributed as deficiency
dividends, we will be required to pay interest to the IRS based
upon the amount of any deduction we take for deficiency
dividends.
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Recordkeeping
Requirements
We must maintain certain records in order to qualify as a REIT.
In addition, to avoid a monetary penalty, we must request on an
annual basis information from our shareholders designed to
disclose the actual ownership of our outstanding shares of
beneficial interest. We intend to comply with these requirements.
Failure to
Qualify
If we fail to satisfy one or more requirements for REIT
qualification, other than the gross income tests and the asset
tests (for which the cure provisions are described above), we
could avoid disqualification if our failure is due to reasonable
cause and not to willful neglect and we pay a penalty of $50,000
for each such failure. In addition, there are relief provisions
for a failure of the gross income tests and asset tests, as
described in Gross Income Tests and
Asset Tests.
If we fail to qualify as a REIT in any taxable year, and no
relief provision applies, we would be subject to federal income
tax and any applicable alternative minimum tax on our taxable
income at regular corporate rates. In calculating our taxable
income in a year in which we fail to qualify as a REIT, we would
not be able to deduct amounts paid out to shareholders. In fact,
we would not be required to distribute any amounts to
shareholders in that year. In such event, to the extent of our
current and accumulated earnings and profits, all distributions
to shareholders would be taxable as dividend income. Subject to
certain limitations, corporate shareholders might be eligible
for the dividends received deduction and shareholders taxed at
individual rates may be eligible for the reduced federal income
tax rate of 15% through 2012 on such dividends. Unless we
qualified for relief under specific statutory provisions, we
also would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to
qualify as a REIT. We cannot predict whether in all
circumstances we would qualify for such statutory relief.
Taxation of
Taxable U.S. Shareholders
As used herein, the term U.S. shareholder means
a holder of our common shares that for U.S. federal income
tax purposes is:
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a citizen or resident of the United States;
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a corporation (including an entity treated as a corporation for
federal income tax purposes) created or organized in or under
the laws of the United States, any of its states or the District
of Columbia;
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an estate whose income is subject to federal income taxation
regardless of its source; or
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any trust if (1) a U.S. court is able to exercise
primary supervision over the administration of such trust and
one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) it has a valid
election in place to be treated as a U.S. person.
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If a partnership, entity or arrangement treated as a partnership
for federal income tax purposes holds our common shares, the
federal income tax treatment of a partner in the partnership
will generally depend on the status of the partner and the
activities of the partnership. If you are a partner in a
partnership holding our common shares, you are urged to consult
your tax advisor regarding the consequences of the ownership and
disposition of our common shares by the partnership.
As long as we qualify as a REIT, a taxable U.S. shareholder
must generally take into account as ordinary income
distributions made out of our current or accumulated earnings
and profits that we do not designate as capital gain dividends
or retained long-term capital gain. A U.S. shareholder will
not qualify for the dividends received deduction generally
available to corporations. In addition, dividends paid to a
U.S. shareholder generally will not qualify for the 15% tax
rate for qualified dividend income. The maximum tax
rate for qualified dividend income received by
U.S. shareholders taxed at individual rates is 15% through
2012. The maximum tax rate on qualified dividend income is lower
than the maximum tax rate on ordinary income, which is 35%
through 2012. Qualified dividend income generally includes
dividends paid to U.S. shareholders taxed at individual
rates by domestic C
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corporations and certain qualified foreign corporations. Because
we are not generally subject to federal income tax on the
portion of our REIT taxable income distributed to our
shareholders (see Taxation of Our
Company above), our dividends generally will not be
eligible for the 15% rate on qualified dividend income. As a
result, our ordinary REIT dividends will be taxed at the higher
tax rate applicable to ordinary income. However, the 15% tax
rate for qualified dividend income will apply to our ordinary
REIT dividends (i) attributable to dividends received by us
from non-REIT corporations, such as our TRS, and (ii) to
the extent attributable to income upon which we have paid
corporate income tax (e.g., to the extent that we distribute
less than 100% of our taxable income). In general, to qualify
for the reduced tax rate on qualified dividend income, a
shareholder must hold our common shares for more than
60 days during the
121-day
period beginning on the date that is 60 days before the
date on which our common shares becomes ex-dividend. In
addition, for taxable years beginning after December 31,
2012, dividends paid to certain individuals, trusts and estates
may be subject to a 3.8% Medicare tax.
A U.S. shareholder generally will take into account as
long-term capital gain any distributions that we designate as
capital gain dividends without regard to the period for which
the U.S. shareholder has held our common shares. We
generally will designate our capital gain dividends as either
15% or 25% rate distributions. See Capital
Gains and Losses. A corporate U.S. shareholder,
however, may be required to treat up to 20% of certain capital
gain dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term
capital gain that we receive in a taxable year. In that case, to
the extent that we designate such amount in a timely notice to
such shareholder, a U.S. shareholder would be taxed on its
proportionate share of our undistributed
long-term
capital gain. The U.S. shareholder would receive a credit
for its proportionate share of the tax we paid. The
U.S. shareholder would increase the basis in its shares of
beneficial interest by the amount of its proportionate share of
our undistributed long-term capital gain, minus its share of the
tax we paid.
A U.S. shareholder will not incur tax on a distribution in
excess of our current and accumulated earnings and profits if
the distribution does not exceed the adjusted basis of the
U.S. shareholders common shares. Instead, the
distribution will reduce the adjusted basis of such shares of
beneficial interest. A U.S. shareholder will recognize a
distribution in excess of both our current and accumulated
earnings and profits and the U.S. shareholders
adjusted basis in his or her shares of beneficial interest as
long-term capital gain, or short-term capital gain if the shares
of beneficial interest have been held for one year or less,
assuming the shares of beneficial interest are a capital asset
in the hands of the U.S. shareholder. In addition, if we
declare a distribution in October, November, or December of any
year that is payable to a U.S. shareholder of record on a
specified date in any such month, such distribution shall be
treated as both paid by us and received by the
U.S. shareholder on December 31 of such year, provided that
we actually pay the distribution during January of the following
calendar year.
Shareholders may not include in their individual income tax
returns any of our net operating losses or capital losses.
Instead, these losses are generally carried over by us for
potential offset against our future income. Taxable
distributions from us and gain from the disposition of our
common shares will not be treated as passive activity income
and, therefore, shareholders generally will not be able to apply
any passive activity losses, such as losses from
certain types of limited partnerships in which the shareholder
is a limited partner, against such income. In addition, taxable
distributions from us and gain from the disposition of our
common shares generally will be treated as investment income for
purposes of the investment interest limitations. We will notify
shareholders after the close of our taxable year as to the
portions of the distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
Taxation of U.S.
Shareholders on the Disposition of Common Shares
A U.S. shareholder who is not a dealer in securities must
generally treat any gain or loss realized upon a taxable
disposition of our common shares as long-term capital gain or
loss if the U.S. shareholder has held our common shares for
more than one year and otherwise as short-term
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capital gain or loss. In general, a U.S. shareholder will
realize gain or loss in an amount equal to the difference
between the sum of the fair market value of any property and the
amount of cash received in such disposition and the
U.S. shareholders adjusted tax basis. A
shareholders adjusted tax basis generally will equal the
U.S. shareholders acquisition cost, increased by the
excess of net capital gains deemed distributed to the
U.S. shareholder (discussed above) less tax deemed paid on
such gains and reduced by any returns of capital. However, a
U.S. shareholder must treat any loss upon a sale or
exchange of common shares held by such shareholder for six
months or less as a long-term capital loss to the extent of
capital gain dividends and any other actual or deemed
distributions from us that such U.S. shareholder treats as
long-term capital gain. All or a portion of any loss that a
U.S. shareholder realizes upon a taxable disposition of our
common shares may be disallowed if the U.S. shareholder
purchases other common shares within 30 days before or
after the disposition.
Capital Gains and
Losses
A taxpayer generally must hold a capital asset for more than one
year for gain or loss derived from its sale or exchange to be
treated as long-term capital gain or loss. The highest marginal
individual income tax rate currently is 35% (which rate, absent
additional congressional action, will apply until
December 31, 2012). The maximum tax rate on long-term
capital gain applicable to taxpayers taxed at individual rates
is 15% for sales and exchanges of assets held for more than one
year occurring through December 31, 2012. The maximum tax
rate on long-term capital gain from the sale or exchange of
Section 1250 property, or depreciable real
property, is 25%, which applies to the lesser of the total
amount of the gain or the accumulated depreciation on the
Section 1250 property. In addition, for taxable years
beginning after December 31, 2012, capital gains recognized
by certain shareholders that are individuals, estates or trusts
may be subject to a 3.8% Medicare tax.
With respect to distributions that we designate as capital gain
dividends and any retained capital gain that we are deemed to
distribute, we generally may designate whether such a
distribution is taxable to our shareholders taxed at individual
rates at a 15% or 25% rate. Thus, the tax rate differential
between capital gain and ordinary income for those taxpayers may
be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate
taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer may deduct
capital losses only to the extent of capital gains, with unused
losses being carried back three years and forward five years.
Taxation of
Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts,
generally are exempt from federal income taxation. However, they
are subject to taxation on their unrelated business taxable
income, or UBTI. Although many investments in real estate
generate UBTI, the IRS has issued a ruling that dividend
distributions from a REIT to an exempt employee pension trust do
not constitute UBTI so long as the exempt employee pension trust
does not otherwise use the shares of beneficial interest in the
REIT in an unrelated trade or business of the pension trust.
Based on that ruling, amounts that we distribute to tax-exempt
shareholders generally should not constitute UBTI. However, if a
tax-exempt shareholder were to finance its acquisition of common
shares with debt, a portion of the income that it receives from
us would constitute UBTI pursuant to the debt-financed
property rules. Moreover, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts
and qualified group legal services plans that are exempt from
taxation under special provisions of the federal income tax laws
are subject to different UBTI rules, which generally will
require them to characterize distributions that they receive
from us as UBTI. Finally, in certain circumstances, a qualified
employee pension or profit sharing trust that owns more than 10%
of our shares of beneficial interest must treat a percentage of
the dividends that it receives from us as UBTI. Such percentage
is equal to the gross income we derive from an unrelated trade
or business, determined as if we were a pension trust, divided
by our total
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gross income for the year in which we pay the dividends. That
rule applies to a pension trust holding more than 10% of our
shares of beneficial interest only if:
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the percentage of our dividends that the tax-exempt trust must
treat as UBTI is at least 5%;
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we qualify as a REIT by reason of the modification of the rule
requiring that no more than 50% of our shares of beneficial
interest be owned by five or fewer individuals that allows the
beneficiaries of the pension trust to be treated as holding our
shares of beneficial interest in proportion to their actuarial
interests in the pension trust; and
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either:
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one pension trust owns more than 25% of the value of our shares
of beneficial interest; or
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a group of pension trusts individually holding more than 10% of
the value of our shares of beneficial interest collectively owns
more than 50% of the value of our shares of beneficial interest.
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Taxation of
Non-U.S.
Shareholders
The term
non-U.S. shareholder
means a holder of our common shares that is not a
U.S. shareholder or a partnership (or entity treated as a
partnership for federal income tax purposes). The rules
governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and
other foreign shareholders are complex. This section is only a
summary of such rules. We urge
non-U.S. shareholders
to consult their own tax advisors to determine the impact of
federal, state, and local income tax laws on the purchase,
ownership and sale of our common shares, including any reporting
requirements.
A
non-U.S. shareholder
that receives a distribution that is not attributable to gain
from our sale or exchange of a United States real property
interest, or USRPI, as defined below, and that we do not
designate as a capital gain dividend or retained capital gain
will recognize ordinary income to the extent that we pay such
distribution out of our current or accumulated earnings and
profits. A withholding tax equal to 30% of the gross amount of
the distribution ordinarily will apply to such distribution
unless an applicable tax treaty reduces or eliminates the tax.
However, if a distribution is treated as effectively connected
with the
non-U.S. shareholders
conduct of a U.S. trade or business (conducted through a
United States permanent establishment, where applicable), the
non-U.S. shareholder
generally will be subject to federal income tax on the
distribution at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such
distribution, and a
non-U.S. shareholder
that is a corporation also may be subject to the 30% branch
profits tax with respect to that distribution. Except with
respect to certain distributions attributable to the sale of
USRPIs described below, we plan to withhold U.S. income tax
at the rate of 30% on the gross amount of any such distribution
paid to a
non-U.S. shareholder
unless either:
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a lower treaty rate applies and the
non-U.S. shareholder
files an IRS
Form W-8BEN
evidencing eligibility for that reduced rate with us; or
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the
non-U.S. shareholder
files an IRS
Form W-8ECI
with us claiming that the distribution is effectively connected
income.
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A
non-U.S. shareholder
will not incur tax on a distribution in excess of our current
and accumulated earnings and profits if the excess portion of
such distribution does not exceed the adjusted basis of its
common shares. Instead, the excess portion of such distribution
will reduce the adjusted basis of such shares of beneficial
interest. A
non-U.S. shareholder
will be subject to tax on a distribution that exceeds both our
current and accumulated earnings and profits and the adjusted
basis of its common shares, if the
non-U.S. shareholder
otherwise would be subject to tax on gain from the sale or
disposition of its common shares, as described below. Because we
generally cannot determine at the time we make a distribution
whether the distribution will exceed our current and accumulated
earnings and profits, we normally will withhold tax on the
entire amount of any
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distribution at the same rate as we would withhold on a
dividend. However, a
non-U.S. shareholder
may claim a refund of amounts that we withhold if we later
determine that a distribution in fact exceeded our current and
accumulated earnings and profits. We must withhold 10% of any
distribution that exceeds our current and accumulated earnings
and profits. Consequently, although we intend to withhold at a
rate of 30% on the entire amount of any distribution, to the
extent that we do not do so, we will withhold at a rate of 10%
on any portion of a distribution not subject to withholding at a
rate of 30%.
For any year in which we qualify as a REIT, a
non-U.S. shareholder
will incur tax on distributions that are attributable to gain
from our sale or exchange of a USRPI under the Foreign
Investment in Real Property Act of 1980, or FIRPTA. A USRPI
includes certain interests in real property and stock in certain
corporations at least 50% of whose assets consist of USRPIs.
Under FIRPTA, a
non-U.S. shareholder
is taxed on distributions attributable to gain from sales of
USRPIs as if such gain were effectively connected with a
U.S. business of the
non-U.S. shareholder.
A
non-U.S. shareholder
thus would be taxed on such a distribution at the normal capital
gains rates applicable to U.S. shareholders, subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual. A
non-U.S. corporate
shareholder not entitled to treaty relief or exemption also may
be subject to the 30% branch profits tax on such a distribution.
We would be required to withhold 35% of any distribution that we
could designate as a capital gain dividend. A
non-U.S. shareholder
may receive a credit against its tax liability for the amount we
withhold.
However, if our common shares continue to be regularly traded on
an established securities market in the United States, capital
gain distributions on our common shares that are attributable to
our sale of real property will be treated as ordinary dividends
rather than as gain from the sale of a USRPI, as long as the
non-U.S. shareholder
did not own more than 5% of our common shares at any time during
the one-year period preceding the distribution. As a result,
non-U.S. shareholders
owning 5% or less of our common shares generally will be subject
to withholding tax on such capital gain distributions in the
same manner as they are subject to withholding tax on ordinary
dividends. If our common shares cease to be regularly traded on
an established securities market in the United States or the
non-U.S. shareholder
owned more than 5% of our common shares at any time during the
one-year
period preceding the distribution, capital gain distributions
that are attributable to our sale of real property would be
subject to tax under FIRPTA, as described in the preceding
paragraph. Moreover, if a
non-U.S. shareholder
disposes of our common shares during the
30-day
period preceding the ex-dividend date of a dividend, and such
non-U.S. shareholder
(or a person related to such
non-U.S. shareholder)
acquires or enters into a contract or option to acquire our
common shares within 61 days of the first day of the
30-day
period described above, and any portion of such dividend payment
would, but for the disposition, be treated as a USRPI capital
gain to such
non-U.S. shareholder,
then such
non-U.S. shareholder
shall be treated as having USRPI capital gain in an amount that,
but for the disposition, would have been treated as USRPI
capital gain.
Although the law is not clear on the matter, it appears that
amounts we designate as retained capital gains in respect of the
common shares held by U.S. shareholders generally should be
treated with respect to
non-U.S. shareholders
in the same manner as actual distributions by us of capital gain
dividends. Under this approach, a
non-U.S. shareholder
would be able to offset as a credit against its United States
federal income tax liability resulting from its proportionate
share of the tax paid by us on such retained capital gains, and
to receive from the IRS a refund to the extent of the
non-U.S. shareholders
proportionate share of such tax paid by us exceeds its actual
United States federal income tax liability, provided that the
non-U.S. shareholder
furnishes required information to the IRS on a timely basis.
Non-U.S. shareholders
could incur tax under FIRPTA with respect to gain realized upon
a disposition of our common shares if we are a United States
real property holding corporation during a specified testing
period. If at least 50% of a REITs assets are USRPIs, then
the REIT will be a United States real property holding
corporation. We believe that we are and will continue to be a
United States real property holding corporation based on our
asset mix and investment strategy. However, despite our status
as a United States real property holding corporation, a
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non-U.S. shareholder
generally would not incur tax under FIRPTA on gain from the sale
of our common shares if we are a domestically controlled
qualified investment entity. A domestically controlled
qualified investment entity includes a REIT in which, at all
times during a specified testing period, less than 50% in value
of its shares are held directly or indirectly by
non-U.S. shareholders.
We cannot assure you that this test will be met. Because our
common shares are regularly traded on an established securities
market, an additional exception to the tax under FIRPTA is
available with respect to our common shares, even if we do not
qualify as a domestically controlled qualified investment entity
at the time the
non-U.S. shareholder
sells our common shares. Under that exception, the gain from
such a sale by such a
non-U.S. shareholder
will not be subject to tax under FIRPTA if:
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our common shares are treated as being regularly traded under
applicable U.S. Treasury regulations on an established
securities market; and
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the
non-U.S. shareholder
owned, actually or constructively, 5% or less of our common
shares at all times during a specified testing period.
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We expect that our common shares will continue to be regularly
traded on an established securities market following this
offering.
If the gain on the sale of our common shares were taxed under
FIRPTA, a
non-U.S. shareholder
would be taxed on that gain in the same manner as
U.S. shareholders, subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. Furthermore, a
non-U.S. shareholder
generally will incur tax on gain not subject to FIRPTA if:
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the gain is effectively connected with the
non-U.S. shareholders
U.S. trade or business, in which case the
non-U.S. shareholder
will be subject to the same treatment as U.S. shareholders
with respect to such gain; or
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the
non-U.S. shareholder
is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and
has a tax home in the United States, in which case
the
non-U.S. shareholder
will incur a 30% tax on his or her capital gains.
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For taxable years beginning after December 31, 2012, a
U.S. withholding tax at a 30% rate will be imposed on
dividends and proceeds of sale in respect of our common shares
received by certain
non-U.S. shareholders
if certain disclosure requirements related to U.S. accounts
or ownership are not satisfied. If payment of withholding taxes
is required,
non-U.S. shareholders
that are otherwise eligible for an exemption from, or reduction
of, U.S. withholding taxes with respect of such dividends
and proceeds will be required to seek a refund from the IRS to
obtain the benefit or such exemption or reduction. We will not
pay any additional amounts in respect of any amounts withheld.
Information
Reporting Requirements and Backup Withholding, Shares Held
Offshore
We will report to our shareholders and to the IRS the amount of
distributions we pay during each calendar year, and the amount
of tax we withhold, if any. Under the backup withholding rules,
a shareholder may be subject to backup withholding at a rate of
28% with respect to distributions unless the holder:
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is a corporation or qualifies for certain other exempt
categories and, when required, demonstrates this fact; or
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provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise
complies with the applicable requirements of the backup
withholding rules.
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A shareholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be
creditable against the shareholders income tax liability.
In addition, we may be required to withhold a portion of capital
gain distributions to any shareholders who fail to certify their
non-foreign status to us.
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Backup withholding will generally not apply to payments of
dividends made by us or our paying agents, in their capacities
as such, to a
non-U.S. shareholder
provided that the
non-U.S. shareholder
furnishes to us or our paying agent the required certification
as to its
non-U.S. status,
such as providing a valid IRS
Form W-8BEN
or W-8ECI,
or certain other requirements are met. Notwithstanding the
foregoing, backup withholding may apply if either we or our
paying agent has actual knowledge, or reason to know, that the
holder is a U.S. person that is not an exempt recipient.
Payments of the net proceeds from a disposition or a redemption
effected outside the U.S. by a
non-U.S. shareholder
made by or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding.
However, information reporting (but not backup withholding)
generally will apply to such a payment if the broker has certain
connections with the U.S. unless the broker has documentary
evidence in its records that the beneficial owner is a
non-U.S. shareholder
and specified conditions are met or an exemption is otherwise
established. Payment of the net proceeds from a disposition by a
non-U.S. shareholder
of common shares made by or through the U.S. office of a
broker is generally subject to information reporting and backup
withholding unless the
non-U.S. shareholder
certifies under penalties of perjury that it is not a
U.S. person and satisfies certain other requirements, or
otherwise establishes an exemption from information reporting
and backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be refunded or
credited against the shareholders federal income tax
liability if certain required information is furnished to the
IRS. Shareholders are urged consult their own tax advisors
regarding application of backup withholding to them and the
availability of, and procedure for obtaining an exemption from,
backup withholding.
For taxable years beginning after December 31, 2012, a
U.S. withholding tax at a 30% rate will be imposed on
dividends and proceeds of sale in respect of our common shares
received by U.S. shareholders who own their shares through
foreign accounts or foreign intermediaries if certain disclosure
requirements related to U.S. accounts or ownership are not
satisfied. We will not pay any additional amounts in respect of
any amounts withheld.
Other Tax
Consequences
Tax Aspects of
Our Investments in Our Operating Partnership and Subsidiary
Partnerships
The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments
in our operating partnership and any subsidiary partnerships or
limited liability companies that we form or acquire (each
individually a Partnership and, collectively, the
Partnerships). The discussion does not cover state
or local tax laws or any federal tax laws other than income tax
laws.
Classification as Partnerships. We are
entitled to include in our income our distributive share of each
Partnerships income and to deduct our distributive share
of each Partnerships losses only if such Partnership is
classified for federal income tax purposes as a partnership (or
an entity that is disregarded for federal income tax purposes if
the entity has only one owner or member) rather than as a
corporation or an association taxable as a corporation. An
unincorporated entity with at least two owners or members will
be classified as a partnership, rather than as a corporation,
for federal income tax purposes if it:
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is treated as a partnership under the Treasury regulations
relating to entity classification (the
check-the-box
regulations); and
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is not a publicly traded partnership.
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Under the
check-the-box
regulations, an unincorporated entity with at least two owners
or members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity
fails to make an election, it generally will be treated as a
partnership (or an entity that is disregarded for federal income
tax purposes if the entity has only one owner or member) for
federal income tax purposes. Each Partnership intends to be
classified as a partnership for
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federal income tax purposes and no Partnership will elect to be
treated as an association taxable as a corporation under the
check-the-box
regulations.
A publicly traded partnership is a partnership whose interests
are traded on an established securities market or are readily
tradable on a secondary market or the substantial equivalent
thereof. A publicly traded partnership will not, however, be
treated as a corporation for any taxable year if, for each
taxable year beginning after December 31, 1987 in which it
was classified as a publicly traded partnership, 90% or more of
the partnerships gross income for such year consists of
certain
passive-type
income, including real property rents, gains from the sale or
other disposition of real property, interest, and dividends (the
90% passive income exception). Treasury regulations
(the PTP regulations) provide limited safe harbors
from the definition of a publicly traded partnership. Pursuant
to one of those safe harbors (the private placement
exclusion), interests in a partnership will not be treated
as readily tradable on a secondary market or the substantial
equivalent thereof if (1) all interests in the partnership
were issued in a transaction or transactions that were not
required to be registered under the Securities Act and
(2) the partnership does not have more than 100 partners at
any time during the partnerships taxable year. In
determining the number of partners in a partnership, a person
owning an interest in a partnership, grantor trust, or
S corporation that owns an interest in the partnership is
treated as a partner in such partnership only if
(1) substantially all of the value of the owners
interest in the entity is attributable to the entitys
direct or indirect interest in the partnership and (2) a
principal purpose of the use of the entity is to permit the
partnership to satisfy the 100-partner limitation. Each
Partnership is expected to qualify for the private placement
exclusion in the foreseeable future. Additionally, if our
operating partnership were a publicly traded partnership, we
believe that our operating partnership would have sufficient
qualifying income to satisfy the 90% passive income exception
and thus would continue to be taxed as a partnership for federal
income tax purposes.
We have not requested, and do not intend to request, a ruling
from the IRS that the Partnerships will be classified as
partnerships for federal income tax purposes. If for any reason
a Partnership were taxable as a corporation, rather than as a
partnership, for federal income tax purposes, we likely would
not be able to qualify as a REIT unless we qualified for certain
relief provisions. See Gross Income
Tests and Asset Tests. In
addition, any change in a Partnerships status for tax
purposes might be treated as a taxable event, in which case we
might incur tax liability without any related cash distribution.
See Distribution Requirements. Further,
items of income and deduction of such Partnership would not pass
through to its partners, and its partners would be treated as
shareholders for tax purposes. Consequently, such Partnership
would be required to pay income tax at corporate rates on its
net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such
Partnerships taxable income.
Income Taxation
of the Partnerships and their Partners
Partners, Not the Partnerships, Subject to
Tax. A partnership is not a taxable entity for
federal income tax purposes. Rather, we are required to take
into account our allocable share of each Partnerships
income, gains, losses, deductions, and credits for any taxable
year of such Partnership ending within or with our taxable year,
without regard to whether we have received or will receive any
distribution from such Partnership.
Partnership Allocations. Although a
partnership agreement generally will determine the allocation of
income and losses among partners, such allocations will be
disregarded for tax purposes if they do not comply with the
provisions of the federal income tax laws governing partnership
allocations. If an allocation is not recognized for federal
income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners interests in
the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. Each
Partnerships allocations of taxable income, gain, and loss
are intended to comply with the requirements of the federal
income tax laws governing partnership allocations.
133
Tax Allocations With Respect to Our
Properties. Income, gain, loss, and deduction
attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss (built-in
gain or built-in loss) is generally equal to
the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis
of such property at the time of contribution (a book-tax
difference). Any property purchased by our operating
partnership for cash initially will have an adjusted tax basis
equal to its fair market value, resulting in no book-tax
difference. In the future, however, our operating partnership
may admit partners in exchange for a contribution of appreciated
or depreciated property, resulting in book-tax differences. Such
allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal
arrangements among the partners. The U.S. Treasury
Department has issued regulations requiring partnerships to use
a reasonable method for allocating items with
respect to which there is a book-tax difference and outlining
several reasonable allocation methods. Under certain available
methods, the carryover basis of contributed properties in the
hands of our operating partnership (i) could cause us to be
allocated lower amounts of depreciation deductions for tax
purposes than would be allocated to us if all contributed
properties were to have a tax basis equal to their fair market
value at the time of the contribution and (ii) in the event
of a sale of such properties, could cause us to be allocated
taxable gain in excess of the economic or book gain allocated to
us as a result of such sale, with a corresponding benefit to the
contributing partners. An allocation described in
(ii) above might cause us to recognize taxable income in
excess of cash proceeds in the event of a sale or other
disposition of property, which might adversely affect our
ability to comply with the REIT distribution requirements and
may result in a greater portion of our distributions being taxed
as dividends. We have not yet decided what method will be used
to account for book tax differences for properties that may be
acquired by our operating partnership in the future.
Basis in Partnership Interest. Our adjusted
tax basis in our partnership interest in our operating
partnership generally is equal to:
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the amount of cash and the basis of any other property
contributed by us to our operating partnership;
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increased by our allocable share of our operating
partnerships income and our allocable share of
indebtedness of our operating partnership; and
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reduced, but not below zero, by our allocable share of our
operating partnerships loss and the amount of cash
distributed to us, and by constructive distributions resulting
from a reduction in our share of indebtedness of our operating
partnership.
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If the allocation of our distributive share of our operating
partnerships loss would reduce the adjusted tax basis of
our partnership interest below zero, the recognition of such
loss will be deferred until such time as the recognition of such
loss would not reduce our adjusted tax basis below zero. To the
extent that our operating partnerships distributions, or
any decrease in our share of the indebtedness of our operating
partnership, which is considered a constructive cash
distribution to the partners, reduce our adjusted tax basis
below zero, such distributions will constitute taxable income to
us. Such distributions and constructive distributions normally
will be characterized as long-term capital gain.
Depreciation Deductions Available to Our Operating
Partnership. To the extent that our operating
partnership acquires its hotels in exchange for cash, its
initial basis in such hotels for federal income tax purposes
generally was or will be equal to the purchase price paid by our
operating partnership. Our operating partnerships initial
basis in hotels acquired in exchange for units in our operating
partnership should be the same as the transferors basis in
such hotels on the date of acquisition by our operating
partnership. Although the law is not entirely clear, our
operating partnership generally will depreciate such depreciable
hotel property for federal income tax purposes over the same
remaining useful lives and under the same methods used by the
transferors. Our
134
operating partnerships tax depreciation deductions will be
allocated among the partners in accordance with their respective
interests in our operating partnership, except to the extent
that our operating partnership is required under the federal
income tax laws governing partnership allocations to use a
method for allocating tax depreciation deductions attributable
to contributed properties that results in our receiving a
disproportionate share of such deductions.
Sale of a
Partnerships Property
Generally, any gain realized by a Partnership on the sale of
property held by the Partnership for more than one year will be
long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. Any gain
or loss recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners
of the Partnership who contributed such properties to the extent
of their built-in gain or loss on those properties for federal
income tax purposes. The partners built-in gain or loss on
such contributed properties will equal the difference between
the partners proportionate share of the book value of
those properties and the partners tax basis allocable to
those properties at the time of the contribution, subject to
certain adjustments. Any remaining gain or loss recognized by
the Partnership on the disposition of the contributed
properties, and any gain or loss recognized by the Partnership
on the disposition of the other properties, will be allocated
among the partners in accordance with their respective
percentage interests in the Partnership.
Our share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other
property held primarily for sale to customers in the ordinary
course of the Partnerships trade or business will be
treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income also
may have an adverse effect upon our ability to satisfy the
income tests for REIT status. See Gross Income
Tests. We do not presently intend to acquire or hold or to
allow any Partnership to acquire or hold any property that
represents inventory or other property held primarily for sale
to customers in the ordinary course of our or such
Partnerships trade or business.
Sunset of Reduced
Tax Rate Provisions
Several of the tax considerations described herein are subject
to a sunset provision. On December 17, 2010, the President
signed into law the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010, preventing an
expiration of current federal income tax rates on
December 31, 2010 by amending the sunset provisions such
that they will take effect on December 31, 2012. The
amended sunset provisions generally provide that for taxable
years beginning after December 31, 2012, certain provisions
that are currently in the Code will revert back to a prior
version of those provisions. These provisions include provisions
related to the reduced maximum income tax rate for long-term
capital gains of 15% (rather than 20%) for taxpayers taxed at
individual rates, the application of the 15% tax rate to
qualified dividend income, and certain other tax rate provisions
described herein. Prospective shareholders are urged to consult
their own tax advisors regarding the effect of sunset provisions
on an investment in our common shares.
State, Local and
Foreign Taxes
We and/or
you may be subject to taxation by various states, localities and
foreign jurisdictions, including those in which we or a
shareholder transacts business, owns property or resides. The
state, local and foreign tax treatment may differ from the
federal income tax treatment described above. Consequently, you
are urged to consult your own tax advisors regarding the effect
of state, local and foreign tax laws upon an investment in our
common shares.
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ERISA
CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement or other
employee benefit plan, or plan, subject to the Employee
Retirement Income Security Act of 1974, as amended, or ERISA,
should consider the fiduciary standards under ERISA in the
context of the plans particular circumstances before
authorizing an investment of a portion of such plans
assets in the common shares. Accordingly, such fiduciary should
consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of
ERISA, (ii) whether the investment is in accordance with
the documents and instruments governing the plan as required by
Section 404(a)(1)(D) of ERISA, and (iii) whether the
investment is prudent under ERISA. In addition to the imposition
of general fiduciary standards of investment prudence and
diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets
of the plan and persons who have certain specified relationships
to the plan (parties in interest within the meaning
of ERISA, disqualified persons within the meaning of
the Code). Thus, a plan fiduciary considering an investment in
our common shares also should consider whether the acquisition
or the continued holding of the shares might constitute or give
rise to a direct or indirect prohibited transaction that is not
subject to an exemption issued by the Department of Labor, or
the DOL. Similar restrictions apply to many governmental and
foreign plans which are not subject to ERISA. Thus, those
considering investing in the shares on behalf of such a plan
should consider whether the acquisition or the continued holding
of the shares might violate any such similar restrictions.
The DOL has issued final regulations, or the DOL Regulations, as
to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if a plan acquires an equity
interest in an entity, which interest is neither a
publicly offered security nor a security issued by
an investment company registered under the Investment Company
Act of 1940, as amended, the plans assets would include,
for purposes of the fiduciary responsibility provision of ERISA,
both the equity interest and an undivided interest in each of
the entitys underlying assets unless certain specified
exceptions apply. The DOL Regulations define a publicly offered
security as a security that is widely held,
freely transferable, and either part of a class of
securities registered under the Exchange Act, or sold pursuant
to an effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act
within 120 days after the end of the fiscal year of the
issuer during which the public offering occurred). The shares
are being sold in an offering registered under the Securities
Act and will be registered under the Exchange Act.
The DOL Regulations provide that a security is widely
held only if it is part of a class of securities that is
owned by 100 or more investors independent of the issuer and of
one another. A security will not fail to be widely
held because the number of independent investors falls
below 100 subsequent to the initial public offering as a result
of events beyond the issuers control. Following completion
of our IPO, our common shares are widely held.
The DOL Regulations provide that whether a security is
freely transferable is a factual question to be
determined on the basis of all relevant facts and circumstances.
The DOL Regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding
that such securities are freely transferable. We
believe that the restrictions imposed under our declaration of
trust on the transfer of our shares are limited to the
restrictions on transfer generally permitted under the DOL
Regulations and are not likely to result in the failure of the
common shares to be freely transferable. The DOL
Regulations only establish a presumption in favor of the finding
of free transferability, and, therefore, no assurance can be
given that the DOL will not reach a contrary conclusion.
Assuming that the common shares will be widely held
and freely transferable, we believe that our common
shares will be publicly offered securities for purposes of the
DOL Regulations and that our assets will not be deemed to be
plan assets of any plan that invests in our common
shares.
Each holder of our common shares will be deemed to have
represented and agreed that its purchase and holding of such
common shares (or any interest therein) will not constitute or
result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code.
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UNDERWRITING
Barclays Capital Inc. is acting as representative of the
underwriters in this offering. Under the terms of an
underwriting agreement filed as an exhibit to the registration
statement, each of the underwriters named below has severally
agreed to purchase from us the respective number of common
shares shown opposite its name below:
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Underwriters
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Number of Shares
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Barclays Capital Inc.
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UBS Securities LLC
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FBR Capital Markets & Co.
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Morgan Keegan & Company, Inc.
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Credit Agricole Securities (USA) Inc.
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Piper Jaffray & Co.
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Stifel, Nicolaus & Company, Incorporated
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JMP Securities LLC
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Total
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4,000,000
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The underwriting agreement provides that the underwriters
obligation to purchase common shares depends on the satisfaction
of the conditions contained in the underwriting agreement
including:
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the obligation to purchase all of the common shares offered
hereby (other than those common shares covered by their option
to purchase additional shares as described below), if any of the
shares are purchased;
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the representations and warranties made by us to the
underwriters are true;
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there is no material change in our business or the financial
markets; and
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we deliver customary closing documents to the underwriters.
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Commissions and
Expenses
The following table summarizes the underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares. The
underwriting fee is the difference between the initial price to
the public and the amount the underwriters pay to us for the
shares.
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No Exercise
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Full Exercise
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Per Share
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$
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$
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Total
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$
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$
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The representatives of the underwriters have advised us that the
underwriters propose to offer the common shares directly to the
public at the public offering price on the cover of this
prospectus and to selected dealers, which may include the
underwriters, at such offering price less a selling concession
not in excess of $ per share.
After the offering, the representatives may change the offering
price and other selling terms. Sales of shares made outside of
the United States may be made by affiliates of the underwriters.
The expenses of the offering that are payable by us are
estimated to be $ (excluding
underwriting discounts and commissions).
Option to
Purchase Additional Shares
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus, to purchase,
from time to time, in whole or in part, up to an aggregate of
600,000 common shares at the public offering price less
underwriting discounts and commissions. This option may be
exercised if the underwriters sell more than shares in
connection with this offering. To the extent that this
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option is exercised, each underwriter will be obligated, subject
to certain conditions, to purchase its pro rata portion of these
additional shares based on the underwriters underwriting
commitment in the offering as indicated in the table at the
beginning of this Underwriting Section.
Lock-Up
Agreements
We and our trustees and executive officers have agreed that we,
without the prior written consent of Barclays Capital Inc. and
UBS Securities LLC, and they, without the prior written consent
of Barclays Capital Inc., will not directly or indirectly,
(1) offer for sale, sell, pledge, or otherwise dispose of
(or enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at
any time in the future of) any common shares (including, without
limitation, common shares that may be deemed to be beneficially
owned by us or them in accordance with the rules and regulations
of the Securities and Exchange Commission and common shares that
may be issued upon exercise of any options or warrants) or
securities convertible into or exercisable or exchangeable for
common shares, (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any
of the economic consequences of ownership of the common shares,
(3) make any demand for or exercise any right or file or
cause to be filed a registration statement, including any
amendments thereto, with respect to the registration of any
common shares or securities convertible, exercisable or
exchangeable into common shares or any of our other securities,
or (4) publicly disclose the intention to do any of the
foregoing for a period of 90 days after the date of this
prospectus.
The 90-day
restricted period described in the preceding paragraph will be
extended if:
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during the last 17 days of the
90-day
restricted period we issue an earnings release or material news
or a material event relating to us occurs; or
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prior to the expiration of the
90-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
90-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or occurrence of material
event unless such extension is waived in writing by Barclays
Capital, Inc.
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Barclays Capital Inc. and UBS Securities LLC, as applicable, in
their sole discretion, may release the common shares and other
securities subject to the
lock-up
agreements described above in whole or in part at any time with
or without notice. When determining whether or not to release
common shares and other securities from
lock-up
agreements, Barclays Capital Inc. and UBS Securities LLC, as
applicable, will consider, among other factors, the
holders reasons for requesting the release, the number of
common shares and other securities for which the release is
being requested and market conditions at the time.
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and
to contribute to payments that the underwriters may be required
to make for these liabilities.
Stabilization,
Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of our common shares, in
accordance with Regulation M under the Securities Exchange
Act of 1934:
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in the offering, which creates the
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syndicate short position. This short position may be either a
covered short position or a naked short position. In a covered
short position, the number of shares involved in the sales made
by the underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares
that they may purchase by exercising their option to purchase
additional shares. In a naked short position, the number of
shares involved is greater than the number of shares in their
option to purchase additional shares. The underwriters may close
out any short position by either exercising their option to
purchase additional shares
and/or
purchasing shares in the open market. In determining the source
of shares to close out the short position, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which
they may purchase shares through their option to purchase
additional shares. A naked short position is more likely to be
created if the underwriters are concerned that there could be
downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in the offering.
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Syndicate covering transactions involve purchases of the common
shares in the open market after the distribution has been
completed in order to cover syndicate short positions.
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common shares
originally sold by the syndicate member are purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common shares or preventing or retarding
a decline in the market price of the common shares. As a result,
the price of the common shares may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common shares. In addition, neither we nor any of the
underwriters make representation that the representatives will
engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic
Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters
and/or
selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view
offering terms online and, depending upon the particular
underwriter or selling group member, prospective investors may
be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of shares for sale to
online brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same
basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
The New York
Stock Exchange
Our common shares are listed on the NYSE under the symbol
CLDT.
139
Stamp
Taxes
If you purchase common shares offered in this prospectus, you
may be required to pay stamp taxes and other charges under the
laws and practices of the country of purchase, in addition to
the offering price listed on the cover page of this prospectus.
Relationships
Barclays Capital and certain of the underwriters
and/or their
affiliates have engaged, and may in the future engage, in
commercial and investment banking transactions with us in the
ordinary course of their business. They have received, and may
in the future expect to receive, customary compensation and
expense reimbursement for these commercial and investment
banking transactions. The underwriters may in the future perform
investment banking and advisory services for us from time to
time for which they expect to receive customary fees and expense
reimbursement.
Barclays Capital and an affiliate of Morgan Keegan &
Company, Inc. are joint lead arrangers under our credit
facility, an affiliate of Barclays Capital is the administrative
agent under our credit facility, an affiliate of Morgan
Keegan & Company, Inc. is syndication agent under our
credit facility, and UBS Securities LLC and an affiliate of
Credit Agricole Securities (USA) Inc. are co-documentation
agents under our credit facility. In addition, certain of the
underwriters
and/or their
affiliates are lenders under credit facility and each will
receive its respective share of any repayment by us of amounts
outstanding under our credit facility from the net proceeds of
this offering, as well as customary fees for its services as a
lender. See Use of Proceeds.
Selling
Restrictions
European
Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of shares
described in this prospectus may not be made to the public in
that relevant member state other than:
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to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
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to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the representative; or
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in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive,
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provided that no such offer of shares shall require us or any
underwriter to publish a prospectus pursuant to Article 3
of the Prospectus Directive.
For purposes of this provision, the expression an offer of
shares to the public in any relevant member state means
the communication in any form and by any means of sufficient
information on the terms of the offer and the shares to be
offered so as to enable an investor to decide to purchase or
subscribe the shares, as the expression may be varied in that
member state by any measure implementing the Prospectus
Directive in that member state, and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
We have not authorized and do not authorize the making of any
offer of shares through any financial intermediary on their
behalf, other than offers made by the underwriters with a view
to the final placement of the shares as contemplated in this
prospectus. Accordingly, no purchaser of the
140
shares, other than the underwriters, is authorized to make any
further offer of the shares on behalf of us, or the underwriters.
United
Kingdom
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are
qualified investors within the meaning of Article 2(1)(e)
of the Prospectus Directive (Qualified Investors)
that are also (i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order) or
(ii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as relevant persons).
This prospectus and its contents are confidential and should not
be distributed, published or reproduced (in whole or in part) or
disclosed by recipients to any other persons in the United
Kingdom. Any person in the United Kingdom that is not a relevant
persons should not act or rely on this document or any of its
contents.
Switzerland
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a
and/or 1156
of the Swiss Code of Obligations. The shares will not be listed
on the SIX Swiss Exchange and, therefore, the documents relating
to the shares, including, but not limited to, this document, do
not claim to comply with the disclosure standards of the listing
rules of the SIX Swiss Exchange. The shares are being offered in
Switzerland by way of a private placement, i.e., to a small
number of selected investors only, without any public offer and
only to investors who do not purchase the shares with the
intention to distribute them to the public. The investors will
be individually approached by the issuer from time to time. This
document, as well as any other material relating to the shares,
is personal and confidential and do not constitute an offer to
any other person. This document may only be used by those
investors to whom it has been handed out in connection with the
offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without express consent of the issuer. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in (or from) Switzerland.
Hong
Kong
The shares may not be offered or sold in Hong Kong, by means of
any document, other than (a) to professional
investors as defined in the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made under
that Ordinance or (b) in other circumstances which do not
result in the document being a prospectus as defined
in the Companies Ordinance (Cap. 32, Laws of Hong Kong) or which
do not constitute an offer to the public within the meaning of
that Ordinance. No advertisement, invitation or document
relating to the shares may be issued or may be in the possession
of any person for the purpose of the issue, whether in Hong Kong
or elsewhere, which is directed at, or the contents of which are
likely to be read by, the public in Hong Kong (except if
permitted to do so under the laws of Hong Kong) other than with
respect to the shares which are intended to be disposed of only
to persons outside Hong Kong or only to professional
investors as defined in the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) or any rules made under
that Ordinance.
Japan
No securities registration statement (SRS) has been
filed under Article 4, Paragraph 1 of the Financial
Instruments and Exchange Law of Japan (Law No. 25 of 1948,
as amended) (FIEL) in relation to the shares. The
shares are being offered in a private placement to
qualified institutional investors
(tekikaku-kikan-toshika) under Article 10 of the Cabinet
Office Ordinance concerning Definitions provided in
Article 2 of the FIEL (the Ministry of Finance Ordinance
No. 14, as amended) (QIIs), under
Article 2, Paragraph 3, Item 2 i of the FIEL. Any
QII acquiring the shares in this offer may not transfer or
resell those shares except to other QIIs.
141
Korea
The shares may not be offered, sold and delivered directly or
indirectly, or offered or sold to any person for reoffering or
resale, directly or indirectly, in Korea or to any resident of
Korea except pursuant to the applicable laws and regulations of
Korea, including the Korea Securities and Exchange Act and the
Foreign Exchange Transaction Law and the decrees and regulations
thereunder. The shares have not been registered with the
Financial Services Commission of Korea for public offering in
Korea. Furthermore, the shares may not be resold to Korean
residents unless the purchaser of the shares complies with all
applicable regulatory requirements (including but not limited to
government approval requirements under the Foreign Exchange
Transaction Law and its subordinate decrees and regulations) in
connection with the purchase of the shares.
Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Future
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person as defined in
Section 275(2) of the SFA, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed and purchased under
Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as
defined in Section 4A of the SFA)) the sole business of
which is to hold investments and the entire share capital of
which is owned by one or more individuals, each of whom is an
accredited investor; or
(b) a trust (where the trustee is not an accredited
investor (as defined in Section 4A of the SFA)) whose sole
whole purpose is to hold investments and each beneficiary is an
accredited investor, shares, debentures and units of shares and
debentures of that corporation or the beneficiaries rights
and interest (howsoever described) in that trust shall not be
transferable within six months after that corporation or that
trust has acquired the shares under Section 275 of the SFA
except:
(i) to an institutional investor under Section 274 of
the SFA or to a relevant person (as defined in
Section 275(2) of the SFA) and in accordance with the
conditions, specified in Section 275 of the SFA;
(ii) (in the case of a corporation) where the transfer
arises from an offer referred to in Section 275(1A) of the
SFA, or (in the case of a trust) where the transfer arises from
an offer that is made on terms that such rights or interests are
acquired at a consideration of not less than S$200,000 (or its
equivalent in a foreign currency) for each transaction, whether
such amount is to be paid for in cash or by exchange of
securities or other assets;
(iii) where no consideration is or will be given for the
transfer; or
(iv) where the transfer is by operation of law.
By accepting this prospectus, the recipient hereof represents
and warrants that he is entitled to receive it in accordance
with the restrictions set forth above and agrees to be bound by
limitations contained herein. Any failure to comply with these
limitations may constitute a violation of law.
142
EXPERTS
The consolidated balance sheet of Chatham Lodging Trust, a
development stage company, as of December 31, 2009 included
in this Prospectus has been so included in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered
certified public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
The combined financial statements of RLJ Billerica Hotel, LLC,
RLJ Brentwood Hotel, LLC, RLJ Bloomington Hotel, LLC, RLJ Dallas
Hotel Limited Partnership, RLJ Farmington Hotel, LLC, and RLJ
Maitland Hotel, LLC (collectively the Initial Acquisition
Hotels) as of December 31, 2009 and 2008 and for each
of the three years in the period ended December 31, 2009
included in this Prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
The combined financial statements of Moody National 1715 OST
Houston S, LLC and Moody National 1715 OST Houston MT, LLC as of
December 31, 2009 and 2008 and for for the year ended
December 31, 2009 and for the period from February 14,
2008 (commencement of operations) to December 31, 2008 have
been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered certified
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Holtsville Hotel Group, LLC as of
December 31, 2009 and 2008 and for the years ended
December 31, 2009 and 2008 have been so included in
reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The combined financial statements of Moody National Three
Property Portfolio as of December 31, 2009 and 2008 and for
the years ended December 31, 2009 and 2008 have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered certified public accounting firm,
given on the authority of said firm as experts in auditing and
accounting.
The combined financial statements of New Roc Hotels, LLC as of
December 31, 2009 and 2008 and for the years ended
December 31, 2009 and 2008 have been so included in
reliance on the report of DeLeon and Stang, an independent
certified public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
LEGAL
MATTERS
Certain legal matters in connection with this offering will be
passed upon for us by Hunton & Williams LLP. Venable
LLP will issue an opinion to us regarding certain matters of
Maryland law, including the validity of the common shares
offered by this prospectus. The underwriters have been
represented by Latham & Watkins LLP, Los Angeles,
California.
WHERE YOU CAN
FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-11,
including exhibits and schedules filed with this registration
statement, under the Securities Act of 1933, as amended, with
respect to our common shares to be sold in this offering. This
prospectus does not contain all of the information set forth in
the registration statement and exhibits and schedules to the
registration statement. For further information with respect to
our company and our common shares to be sold in this offering,
reference is made to the registration statement, including the
exhibits and schedules to the registration statement. Statements
contained in this prospectus as to the contents of any contract
or other document referred to in this prospectus are not
necessarily complete and, where that contract is an exhibit to
the registration statement, each statement is qualified in all
respects by reference to the exhibit to which the reference
relates. Copies of the registration statement, including the
exhibits and schedules to the registration statement, may be
examined without charge at the public reference room of the
Securities and Exchange Commission, 100 F Street,
N.E., Room 1580, Washington, DC 20549. Information about
the operation of the public reference room may be obtained by
calling the SEC at
143
1-800-SEC-0300.
Copies of all or a portion of the registration statement can be
obtained from the public reference room of the SEC upon payment
of prescribed fees. Our SEC filings, including our registration
statement, are also available to you on the SECs website
www.sec.gov.
We are subject to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended, and file
periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other
information are available for inspection and copying at the
SECs public reference facilities and the SEC website
referred to above.
REPORTS TO
SHAREHOLDERS
We will furnish our shareholders with annual reports containing
consolidated financial statements audited by our independent
registered certified public accounting firm.
144
INDEX TO
FINANCIAL STATEMENTS
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Chatham Lodging Trust
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F-3
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F-5
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F-7
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F-10
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F-13
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F-13
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F-14
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F-15
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F-16
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F-17-31
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F-32
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F-33
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F-34-36
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Initial Acquisition Hotels
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F-37
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F-38
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F-39
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F-40
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F-41
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F-43
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F-44
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F-45
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F-46
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F-47
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F-48-53
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F-1
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Hampton Inn & Suites Houston, TX
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F-54-58
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F-59
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F-60
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F-61
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F-62
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F-63
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F-64-68
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Residence Inn Holtsville, NY
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F-69-73
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F-74
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F-75
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F-76
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F-77
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F-78
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F-79-82
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Courtyard by Marriott Altoona, PA, SpringHill Suites
Washington, PA and the Residence Inn White Plains, NY
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F-83-87
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F-88
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F-89
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F-90
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F-91
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F-92
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F-93-99
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Residence Inn New Rochelle, NY
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F-100-108
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F-109
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F-110
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F-111
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F-112
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F-113
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F-114-118
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F-2
UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF CHATHAM
LODGING TRUST
Chatham Lodging Trust (the Company) was formed as a
Maryland real estate investment trust (REIT) on
October 26, 2009. The Company completed its initial public
offering (IPO) and concurrent private placement of
common shares of beneficial interest on April 21, 2010. The
Company raised approximately $158.7 million, net of
underwriting discounts and commissions and other offering costs
paid or payable to third parties as of September 30, 2010.
On April 23, 2010, the Company acquired six Homewood Suites
by
Hilton®
hotels (the Initial Hotels) for an aggregate
purchase price of $73.5 million, plus customary pro-rated
amounts and closing costs from wholly owned subsidiaries of RLJ
Development, LLC (RLJ). The Initial Hotels which
contain an aggregate of 813 rooms are as follows:
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Homewood Suites by
Hilton®
Boston Billerica/Bedford/Burlington; Billerica,
Mass.; 147 rooms.
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Homewood Suites by
Hilton®
Hartford Farmington; Farmington, Conn.; 121 rooms.
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Homewood Suites by
Hilton®
Minneapolis Mall of America; Bloomington, Minn.,
144 rooms.
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Homewood Suites by
Hilton®
Dallas Market Center; Dallas, Texas; 137 rooms.
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Homewood Suites by
Hilton®
Orlando Maitland; Maitland, Fla.; 143 rooms.
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Homewood Suites by
Hilton®
Nashville Brentwood; Brentwood, Tenn.; 121 rooms.
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On July 2, 2010, the Company acquired the
120-room Hampton Inn &
Suites®
Houston-Medical Center in Houston, Texas (the Houston
Hotel) for a cash purchase price of $16.2 million,
plus customary pro-rated amounts and closing costs, from Moody
National 1715 OST Houston S, LLC and Moody National 1715 OST
Houston MT, LLC (collectively Moody). The Houston
Hotel will be managed by Island Hospitality Management
(IHM), a hotel management company
90 percent-owned by Jeffrey H. Fisher, the Companys
chief executive officer, pursuant to a management agreement
between one of the Companys taxable REIT subsidiaries
(TRS) and IHM. The Company funded the purchase price
for the Houston Hotel from the proceeds of its IPO.
On August 3, 2010, the Company acquired the
124-room Residence Inn by
Marriott®
Holtsville in Holtsville, New York (the Holtsville
Hotel) for a cash purchase price of $21.3 million,
plus customary pro-rated amounts and closing costs, from
Holtsville Hotel Group, LLC (collectively Holtsville
Group). The Holtsville Hotel will be managed by IHM
pursuant to a management agreement between a TRS and IHM. The
Company funded the purchase price for the Holtsville Hotel from
the proceeds of its IPO.
On August 24, 2010, the Company acquired the
105-room Courtyard by
Marriott®
Altoona in Altoona, Pennsylvania (the Altoona Hotel)
for a cash purchase price of $11.0 million, plus customary
pro-rated amounts and closing costs, from Moody National CY
Altoona PA, LLC (collectively Moody Altoona)
and the 86-room SpringHill Suites by
Marriott®
Washington in Washington, Pennsylvania (the Washington
Hotel) for a cash purchase price of $11.7 million,
plus customary pro-rated amounts and closing costs, from Moody
National SHS Washington PA, LLC (collectively
Moody Washington). The Hotels will be managed
by Concord Hospitality Enterprises (Concord)
pursuant to a management agreement between a TRS and Concord.
The Company funded the purchase price for the Hotels from the
proceeds of its IPO.
On September 23, 2010, the Company acquired the
133-room Residence Inn by
Marriott®
White Plains in White Plains, New York (the White Plains
Hotel) for a cash purchase price of $20.9 million,
plus customary pro-rated amounts and closing costs, from Moody
National White Plains S, LLC and Moody National White
Plains MT, LLC (collectively Moody White Plains).
The Hotel will be managed by IHM pursuant to a management
agreement between the TRS and IHM. The Company funded the
purchase price for the White Plains Hotel from the proceeds of
its IPO.
F-3
The acquisitions of the Altoona, Washington and White Plains
Hotels are hereafter referred to as the Moody
Acquisition.
On October 5, 2010, the Company acquired the
124-room Residence Inn by
Marriott®
New Rochelle in New Rochelle, New York (the New Rochelle
Hotel) for a cash purchase price of $20.7 million,
plus customary pro-rated amounts and closing costs, from New Roc
Hotels, LLC (collectively New Roc). The Hotel will
be managed by IHM pursuant to a management agreement between a
TRS and IHM. The Company funded the purchase price for the New
Rochelle Hotel from the proceeds of its IPO.
The unaudited pro forma condensed consolidated balance sheet as
of September 30, 2010 is based on the unaudited
consolidated balance sheet of the Company as of
September 30, 2010 and is presented as if this offering and
the acquisition of the New Rochelle Hotel had occurred on
September 30, 2010. The unaudited pro forma condensed
consolidated statements of operations for the nine months ended
September 30, 2010 and for the year ended December 31,
2009 are presented as if the completion of the IPO, this
offering and the acquisitions of the Initial Hotels, the
Houston, Holtsville, Moody Acquisition and New Rochelle Hotels
had occurred on January 1, 2009.
The unaudited pro forma financial information is not necessarily
indicative of what the Companys results of operations or
financial condition would have been assuming such transactions
had been completed at the beginning of the periods presented,
nor is it indicative of the Companys results of operations
or financial condition for future periods. In managements
opinion, all material adjustments necessary to reflect the
effects of the significant acquisitions described above have
been made. In addition, the unaudited pro forma financial
information is based upon available information and upon
assumptions and estimates, some of which are set forth in the
notes to the unaudited pro forma financial information, which we
believe are reasonable under the circumstances.
F-4
CHATHAM LODGING
TRUST
AS OF SEPTEMBER
30, 2010
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Chatham
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Pro Forma
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Lodging
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|
|
|
|
|
Pro Forma
|
|
|
Chatham
|
|
|
|
Trust(1)
|
|
|
Offering(2)
|
|
|
New
Rochelle(3)
|
|
|
Adjustments(4)
|
|
|
Lodging Trust
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS:
|
Investment in hotel properties, net
|
|
$
|
154,040
|
|
|
$
|
|
|
|
$
|
20,715
|
|
|
$
|
|
|
|
$
|
174,755
|
|
Cash and cash equivalents
|
|
|
26,845
|
|
|
|
63,537
|
|
|
|
(20,957
|
)
|
|
|
(305
|
)
|
|
|
69,120
|
|
Restricted cash
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,689
|
|
Hotel receivables (net of allowance for doubtful accounts of
approximately $20)
|
|
|
859
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
905
|
|
Deferred costs, net
|
|
|
1,047
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
1,109
|
|
Prepaid expenses and other assets
|
|
|
592
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189,072
|
|
|
$
|
63,537
|
|
|
$
|
36
|
|
|
$
|
(305
|
)
|
|
$
|
252,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY:
|
Mortgage payable
|
|
$
|
12,410
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,410
|
|
Accounts payable and accrued expenses
|
|
|
3,039
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
3,075
|
|
Accrued underwriter fees
|
|
|
5,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,175
|
|
Distributions payable
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,281
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
22,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares, $0.01 par value, 100,000,000 shares
authorized and unissued at September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value, 500,000,000 shares
authorized; 9,208,750 shares (historical) and
13,208,750 shares (pro forma) issued and outstanding at
September 30, 2010
|
|
|
92
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Additional paid-in capital
|
|
|
170,250
|
|
|
|
63,497
|
|
|
|
|
|
|
|
|
|
|
|
233,747
|
|
Unearned compensation
|
|
|
(1,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,284
|
)
|
Retained earnings (deficit)
|
|
|
(2,542
|
)
|
|
|
|
|
|
|
|
|
|
|
(305
|
)
|
|
|
(2,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
166,516
|
|
|
|
63,537
|
|
|
|
|
|
|
|
(305
|
)
|
|
|
229,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in Operating Partnership
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
166,791
|
|
|
|
63,537
|
|
|
|
|
|
|
|
(305
|
)
|
|
|
230,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
189,072
|
|
|
$
|
63,537
|
|
|
$
|
36
|
|
|
$
|
(305
|
)
|
|
$
|
252,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet
F-5
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
The accompanying Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 2010 is based on the unaudited
historical consolidated balance sheet of the Company as of
September 30, 2010, adjusted to reflect the purchase of the
New Rochelle Hotel.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet
assumes the following occurred on September 30, 2010:
|
|
|
|
|
Consummation of this offering, excluding the overallotment
option.
|
|
|
|
Completion of the purchase of the New Rochelle Hotel.
|
|
|
|
Payment of costs and expenses of approximately $305 after
September 30, 2010 related to the New Rochelle Hotel.
|
The Unaudited Pro Forma Consolidated Balance Sheet and
accompanying pro forma income statements do not reflect the
purchase of the Homewood Suites by Hilton in Carlsbad (North San
Diego County), California on November 3, 2010 or the purchase of
the hotel that we have under contract in Pittsburgh,
Pennsylvania.
Notes and
Management Assumptions:
1) Represents the Companys unaudited historical
consolidated balance sheet as of September 30, 2010.
Included in deferred costs are franchise fees of $62 for the New
Rochelle Hotel that were paid prior to September 30, 2010
and will be amortized over 20 years. Included in retained
earnings (deficit) at September 30, 2010 are expenses of
$27 related to the purchase of the New Rochelle Hotel that were
expensed prior to September 30, 2010.
2) Represents cash proceeds of $67,840 from the sale of
common shares pursuant to this offering excluding shares
issuable upon exercise of the underwriters overallotment
option, net of estimated underwriters fees of $3,053 and
other transaction costs of $1,250.
3) Pursuant to the purchase and sale agreement for the New
Rochelle Hotel, there was a proration of operating results on
the date of closing between the Company and the seller and this
proration is reflected in pro forma adjustment 3b below. Other
than the assets and liabilities described in notes 3b, 3c,
3d and 3e, no other non-real estate assets and liabilities were
acquired.
a. Investment in hotels of $20,715 is recorded at
acquisition cost and depreciated using the straight line method
over the estimated useful lives of the assets (5 years for
furniture and equipment, 15 years for land improvements and
40 years for buildings and improvements). No intangible
assets are expected to be recognized in connection with the
purchase of the New Rochelle Hotel based on the estimated
values of the identifiable assets acquired. The allocation of
the purchase price for the New Rochelle Hotel is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
Furniture &
|
|
Property
|
|
Allocation
|
|
|
Land
|
|
|
Building
|
|
|
Equipment
|
|
|
Residence Inn by
Marriott®
New Rochelle
|
|
$
|
20,715
|
|
|
$
|
0
|
|
|
$
|
20,281
|
|
|
$
|
434
|
|
b. Accounts receivable of $46 related to the Companys
50% share of the October 4, 2010 hotel revenue.
c. Deferred expenses of $62 for franchise fees for the New
Rochelle Hotel that will be amortized over the 20 year term
of the franchise agreement.
d. Prepaid expenses and other assets of $170 comprised of
prepaid expenses of $11 and real estate taxes of $159.
e. Accounts payable and accrued expenses of $36, comprised
of accrued sales taxes of $9, accounts payable of $19 and
advance deposits of $8.
4) Represents the costs incurred by the Company after
September 30, 2010 in connection with the purchase of the
New Rochelle Hotel:
a. Closing costs of $280.
b. Accounting fees of $25 for services related to the audit
and reviews.
F-6
CHATHAM LODGING
TRUST
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chatham
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Lodging
|
|
|
Initial
|
|
|
Houston
|
|
|
Holtsville
|
|
|
Moody
|
|
|
|
|
|
Pro Forma
|
|
|
Chatham
|
|
|
|
Trust(1)
|
|
|
Hotels(2)
|
|
|
Hotel(3)
|
|
|
Hotel(4)
|
|
|
Acquisition(5)
|
|
|
New
Rochelle(6)
|
|
|
Adjustments
|
|
|
Lodging Trust
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
12,691
|
|
|
$
|
6,634
|
|
|
$
|
1,931
|
|
|
$
|
2,651
|
|
|
$
|
7,656
|
|
|
$
|
4,422
|
|
|
$
|
|
|
|
$
|
35,985
|
|
Other operating
|
|
|
350
|
|
|
|
170
|
|
|
|
46
|
|
|
|
67
|
|
|
|
307
|
|
|
|
219
|
|
|
|
|
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
13,041
|
|
|
|
6,804
|
|
|
|
1,977
|
|
|
|
2,718
|
|
|
|
7,963
|
|
|
|
4,641
|
|
|
|
|
|
|
|
37,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
2,995
|
|
|
|
1,352
|
|
|
|
368
|
|
|
|
595
|
|
|
|
1,687
|
|
|
|
1,028
|
|
|
|
|
|
|
|
8,025
|
|
Other
|
|
|
240
|
|
|
|
577
|
|
|
|
24
|
|
|
|
41
|
|
|
|
225
|
|
|
|
10
|
|
|
|
|
|
|
|
1,117
|
|
General and administrative
|
|
|
2,683
|
|
|
|
1,279
|
|
|
|
495
|
|
|
|
619
|
|
|
|
1,486
|
|
|
|
1,125
|
|
|
|
|
|
|
|
7,687
|
|
Sales and marketing fees
|
|
|
352
|
|
|
|
632
|
|
|
|
20
|
|
|
|
80
|
|
|
|
275
|
|
|
|
203
|
|
|
|
|
|
|
|
1,562
|
|
Franchise fees
|
|
|
971
|
|
|
|
266
|
|
|
|
207
|
|
|
|
200
|
|
|
|
575
|
|
|
|
338
|
|
|
|
36
|
(7)
|
|
|
2,593
|
|
Management fees
|
|
|
351
|
|
|
|
139
|
|
|
|
130
|
|
|
|
80
|
|
|
|
382
|
|
|
|
181
|
|
|
|
(179
|
)(8)
|
|
|
1,084
|
|
Condominium fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
395
|
|
Depreciation and amortization
|
|
|
1,200
|
|
|
|
|
|
|
|
218
|
|
|
|
225
|
|
|
|
1,225
|
|
|
|
776
|
|
|
|
1,509
|
(9)
|
|
|
5,153
|
|
Ground rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property taxes
|
|
|
718
|
|
|
|
525
|
|
|
|
144
|
|
|
|
144
|
|
|
|
645
|
|
|
|
496
|
|
|
|
|
|
|
|
2,672
|
|
Corporate general and administrative
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
751
|
(10)
|
|
|
3,168
|
|
Acquisition transaction costs
|
|
|
2,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,165
|
)(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,015
|
|
|
|
4,770
|
|
|
|
1,606
|
|
|
|
1,984
|
|
|
|
6,972
|
|
|
|
4,157
|
|
|
|
(48
|
)
|
|
|
33,456
|
|
Operating income (loss)
|
|
|
(974
|
)
|
|
|
2,034
|
|
|
|
371
|
|
|
|
734
|
|
|
|
991
|
|
|
|
484
|
|
|
|
48
|
|
|
|
3,688
|
|
Gain on insurance proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
(149
|
)(12)
|
|
|
|
|
Interest expense
|
|
|
(19
|
)
|
|
|
(1,084
|
)
|
|
|
(402
|
)
|
|
|
(422
|
)
|
|
|
(1,527
|
)
|
|
|
(705
|
)
|
|
|
3,603
|
(13)
|
|
|
(556
|
)
|
Interest income
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
expense
|
|
|
(884
|
)
|
|
|
950
|
|
|
|
(31
|
)
|
|
|
312
|
|
|
|
(387
|
)
|
|
|
(221
|
)
|
|
|
3,502
|
|
|
|
3,241
|
|
Income taxes
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78
|
)(14)
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) from continuing operations
|
|
$
|
(930
|
)
|
|
$
|
950
|
|
|
$
|
(31
|
)
|
|
$
|
312
|
|
|
$
|
(387
|
)
|
|
$
|
(221
|
)
|
|
$
|
3,424
|
|
|
$
|
3,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted continuing operations
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares
|
|
|
5,448,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15)
|
|
|
9,208,750
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Operations
F-7
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(in thousands, except share data)
1) The Company was formed on October 26, 2009. There
were no results of operations for the Company for the period
from inception through April 21, 2010. These amounts
include the actual results of operations of all of the purchased
hotels from the date of their acquisition through September 30,
2010.
2) Represents the combined unaudited historical results of
operations of the Initial Hotels from January 1, 2010 to
the acquisition date of April 23, 2010.
3) Represents the unaudited historical results of
operations of the Houston Hotel from January 1, 2010 to the
acquisition date of July 2, 2010.
4) Represents the unaudited historical results of
operations of the Holtsville Hotel from January 1, 2010 to
the acquisition date of August 3, 2010.
5) Represents the combined unaudited historical results of
operations of the Moody Acquisition from January 1, 2010 to
the acquisition date of August 24, 2010 for the Altoona and
Washington Hotels and September 23, 2010 for the White
Plains Hotel.
6) Represents the unaudited historical results of
operations of the New Rochelle Acquisition for the nine months
ended September 30, 2010.
7) Reflects the adjustment to amortization of franchise
fees based on the franchise application fees paid of $749 and
the remaining terms of the new franchise applications, which are
15 years from the closing of the purchase of the Initial
Hotels and Holtsville Hotel, 10 years from the closing of
the Houston Hotel and 20 years from the closing of the
Moody Acquisition Hotels and the New Rochelle Hotel.
8) Reflects the adjustment to management fees for
contractual differences on the Houston, Altoona, Washington and
White Plains Hotels. The previous management company was paid a
4% management fee at the Houston Hotel and there was an
additional asset management fee payment of 1%. The new
management contract reflects a 3% management fee for the Houston
Hotel. The Altoona, Washington and White Plains Hotels had asset
management fees of .5%, 1% and 2%, respectively that will not be
paid going forward. Also reflects an adjustment for the
contractual difference in the cost of accounting fees.
9) Reflects net increase to depreciation expense based on
the Companys cost basis in the Initial, Houston,
Holtsville, Moody Acquisition and New Rochelle Hotels and their
accounting policy for depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives
of the assets, 5 years for furniture and equipment,
15 years for land improvements and 40 years for
buildings and improvements.
10) The Company was formed on October 26, 2009 and
completed its IPO on April 21, 2010 and thus there was no
corresponding corporate general and administrative expense until
April 21, 2010. Reflects the adjustment to include
corporate general and administrative expenses for the period
from January 1, 2010 to September 30, 2010, including:
a. Salaries and benefits of $337, of which $298 is to be
paid to the Companys executive officers, who are currently
Jeffrey H. Fisher, the Chairman, President and Chief Executive
Officer of the Company, Peter Willis, Executive Vice President
and Chief Investment Officer of the Company, Dennis Craven,
Executive Vice President and Chief Financial Officer of the
Company.
b. Amortization of restricted shares of $67 to
Messrs. Fisher, Willis and Craven based on a three-year
vesting period. The aggregate estimated value of the restricted
share awards are $295 to Mr. Fisher, $197 to
Mr. Willis and $176 to Mr. Craven.
c. Amortization of LTIP unit awards of $236 to
Messrs. Fisher, Willis and Craven based on a five-year
vesting period. The aggregate undiscounted estimated value of
the LTIP unit awards
F-8
are $3,979 for Mr. Fisher, $652 for Mr. Willis and
$525 for Mr. Craven. After applying the share-based payment
accounting guidance, the estimated discounted values of the LTIP
awards are $3,020 for Mr. Fisher, $495 for
Mr. Willis and $398 for Mr. Craven. The discounted
value is used for the purposes of determining the amortization.
d. Cash compensation of $100 and restricted share
compensation of $170 to the Trustees.
e. Directors and officers insurance of $86.
f. General office expenses including rent of $25.
g. Adjustment to remove severance costs associated with the
departure of the former CFO of $270.
11) Reflects the adjustment for one-time hotel acquisition
costs which are not recurring and thus excluded from the pro
forma results of operations.
12) Reflects the adjustment for one-time gain on an
insurance claim at the White Plains Hotel which is not recurring
and thus excluded from the pro forma results of operations.
13) Reflects the decrease to interest expense associated
with defeasing the existing loans upon the purchase of the
Initial, Houston, Holtsville, Moody Acquisition and New Rochelle
Hotels, except for two loans on the Altoona and Washington
hotels, which were assumed by the Company. Except for the two
assumed loans, RLJ, Moody, the Holtsville Group, Moody
Acquisition and New Rochelle are required under the terms
of the purchase and sale agreements to cause the defeasance of
the loans to occur on or before the closing of the purchase of
the hotels. Except for the two assumed loans, the purchase price
for the Initial, Houston, Holtsville, Moody Acquisition and
New Rochelle Hotels was fully funded from equity proceeds
of the IPO.
The Company assumed the $6,979 loan on the Altoona hotel. The
loan matures on April 1, 2016 and bears an interest at a
rate of 5.96%. The Company also assumed the $5,455 loan on the
Washington hotel. The loan matures on April 1, 2015 and
bears an interest rate of 5.84%.
14) Reflects the adjustment to recognize income tax expense
at an effective rate of 40% on the taxable income of the
Companys TRSs.
15) Reflects this offering of 4,000,000 common shares of
the Company at an estimated $16.96 per share (closing share
price on February 1, 2011) and assumes that the
underwriters overallotment option is not exercised, with
approximately $67,840 of cash proceeds to the Company, net of
estimated underwriters fees of $3,053 and other
transaction costs of $1,250. Since none of the net proceeds are
being used to acquire hotels or pay down debt outstanding on a
pro forma basis, none of these shares are included in the
denominator for calculating earnings per share.
F-9
CHATHAM LODGING
TRUST
FOR THE YEAR
ENDED DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chatham
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Lodging
|
|
|
Initial
|
|
|
Houston
|
|
|
Holtsville
|
|
|
Moody
|
|
|
|
|
|
Pro Forma
|
|
|
Chatham
|
|
|
|
Trust(1)
|
|
|
Hotels(2)
|
|
|
Hotel(3)
|
|
|
Hotel(4)
|
|
|
Acquisition(5)
|
|
|
New
Rochelle(6)
|
|
|
Adjustments
|
|
|
Lodging Trust
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
|
|
|
$
|
21,193
|
|
|
$
|
3,557
|
|
|
$
|
4,398
|
|
|
$
|
11,108
|
|
|
$
|
5,562
|
|
|
$
|
|
|
|
$
|
45,818
|
|
Other operating
|
|
|
|
|
|
|
545
|
|
|
|
77
|
|
|
|
111
|
|
|
|
482
|
|
|
|
203
|
|
|
|
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
21,738
|
|
|
|
3,634
|
|
|
|
4,509
|
|
|
|
11,590
|
|
|
|
5,765
|
|
|
|
|
|
|
|
47,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
|
|
|
|
4,239
|
|
|
|
724
|
|
|
|
901
|
|
|
|
2,437
|
|
|
|
1,250
|
|
|
|
|
|
|
|
9,551
|
|
Other
|
|
|
|
|
|
|
1,687
|
|
|
|
47
|
|
|
|
69
|
|
|
|
311
|
|
|
|
16
|
|
|
|
|
|
|
|
2,130
|
|
General and administrative
|
|
|
|
|
|
|
4,581
|
|
|
|
838
|
|
|
|
1,006
|
|
|
|
1,946
|
|
|
|
1,367
|
|
|
|
(74
|
)(7)
|
|
|
9,664
|
|
Sales and marketing fees
|
|
|
|
|
|
|
2,021
|
|
|
|
134
|
|
|
|
155
|
|
|
|
434
|
|
|
|
250
|
|
|
|
|
|
|
|
2,994
|
|
Franchise fees
|
|
|
|
|
|
|
848
|
|
|
|
285
|
|
|
|
330
|
|
|
|
841
|
|
|
|
425
|
|
|
|
48
|
(8)
|
|
|
2,777
|
|
Management fees
|
|
|
|
|
|
|
458
|
|
|
|
216
|
|
|
|
135
|
|
|
|
579
|
|
|
|
183
|
|
|
|
(252
|
)(9)
|
|
|
1,319
|
|
Condominium fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
524
|
|
Depreciation and amortization
|
|
|
|
|
|
|
2,619
|
|
|
|
435
|
|
|
|
506
|
|
|
|
1,642
|
|
|
|
1,136
|
|
|
|
483
|
(10)
|
|
|
6,821
|
|
Ground rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
Property taxes
|
|
|
|
|
|
|
1,255
|
|
|
|
391
|
|
|
|
239
|
|
|
|
849
|
|
|
|
611
|
|
|
|
|
|
|
|
3,345
|
|
Corporate general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,387
|
(11)
|
|
|
3,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
|
|
|
17,708
|
|
|
|
3,070
|
|
|
|
3,341
|
|
|
|
9,666
|
|
|
|
5,238
|
|
|
|
3,592
|
|
|
|
42,615
|
|
Operating income (loss)
|
|
|
|
|
|
|
4,030
|
|
|
|
564
|
|
|
|
1,168
|
|
|
|
1,924
|
|
|
|
527
|
|
|
|
(3,592
|
)
|
|
|
4,621
|
|
Write down of development costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
95
|
(12)
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(3,573
|
)
|
|
|
(854
|
)
|
|
|
(739
|
)
|
|
|
(2,564
|
)
|
|
|
(930
|
)
|
|
|
7,908
|
(13)
|
|
|
(752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
expense
|
|
|
|
|
|
|
457
|
|
|
|
(290
|
)
|
|
|
334
|
|
|
|
(640
|
)
|
|
|
(403
|
)
|
|
|
4,411
|
|
|
|
3,869
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276
|
)(14)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income(loss) from continuing operations
|
|
$
|
|
|
|
$
|
457
|
|
|
$
|
(290
|
)
|
|
$
|
334
|
|
|
$
|
(640
|
)
|
|
$
|
(403
|
)
|
|
$
|
4,135
|
|
|
$
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted continuing operations
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15)
|
|
|
9,208,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Operations
F-10
NOTES TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2009
(in thousands, except share data)
1) The Company was formed on October 26, 2009. There
were no results of operations for the Company for the period
from inception to December 31, 2009.
2) Represents the combined audited historical results of
operations of the Initial Hotels for the year ended
December 31, 2009.
3) Represents the audited historical results of operations
of the Houston Hotel for the year ended December 31, 2009.
4) Represents the audited historical results of operations
of the Holtsville Hotel for the year ended December 31,
2009.
5) Represents the combined unaudited historical results of
operations of the Moody Acquisition for the year ended
December 31, 2009.
6) Represents the unaudited historical results of
operations of the New Rochelle Acquisition for the year ended
December 31, 2009.
7) Reflects the adjustment to general and administrative
expense for corporate costs allocated by the previous owner to
the Initial Hotels that were included in the historical results
of operations of $74.
8) Reflects the adjustment to amortization of franchise
fees based on the franchise application fees paid of $749 and
the remaining terms of the new franchise applications, which are
15 years from the closing of the purchase of the Initial
Hotels and Holtsville Hotel, 10 years from the closing of
the Houston Hotel and 20 years from the closing of the
Moody Acquisition Hotels and the New Rochelle Hotel.
9) Reflects the adjustment to management fees for
contractual differences on the Houston, Altoona, Washington and
White Plains Hotels. The previous management company was paid a
4% management fee at the Houston Hotel and there was an
additional asset management fee payment of 1%. The new
management contract reflects a 3% management fee for the Houston
Hotel. The Altoona, Washington and White Plains Hotels had asset
management fees of .5%, 1% and 2%, respectively that will not be
paid going forward. Also reflects an adjustment for the
contractual difference in the cost of accounting fees.
10) Reflects net increase to depreciation expense based on
the Companys cost basis in the Initial, Houston,
Holtsville and the Moody Acquisition Hotels and their accounting
policy for depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the
assets, 5 years for furniture and equipment, 15 years
for land improvements and 40 years for buildings and
improvements.
11) The Company was formed on October 26, 2009 and
thus there was no corresponding corporate general and
administrative expense for the year ended December 31,
2009. Reflects the adjustment to include corporate general and
administrative expenses that the Company expects to pay,
including:
a. Salaries and benefits of $1,119, of which $989 is to be
paid to the Companys executive officers, who are currently
Jeffrey H. Fisher, the Chairman, President and Chief Executive
Officer of the Company, Peter Willis, Executive Vice President
and Chief Investment Officer of the Company, Dennis Craven,
Executive Vice President and Chief Financial Officer of the
Company.
b. Amortization of restricted shares of $223 to
Messrs. Fisher, Willis and Craven based on a three-year
vesting period. The aggregate estimated value of the restricted
share awards are $295 to Mr. Fisher, $197 to
Mr. Willis and $176 to Mr. Craven.
F-11
c. Amortization of LTIP unit awards of $783 to
Messrs. Fisher, Willis and Craven based on a five-year
vesting period. The aggregate undiscounted estimated value of
the LTIP unit awards are $3,979 for Mr. Fisher, $652 for
Mr. Willis and $525 for Mr. Craven. After applying the
share-based payment accounting guidance, the estimated
discounted values of the LTIP awards are $3,020 for
Mr. Fisher, $495 for Mr. Willis and $398 for
Mr. Craven. The discounted value is used for the purposes
of determining the amortization.
d. Cash compensation of $333 and restricted share
compensation of $563 to the Trustees.
e. Directors and officers insurance of $287.
f. General office expenses including rent of $79.
12) Reflects the write off of $95 of development costs that
were expensed in the Holtsville Hotel related to a project that
was not part of the acquired assets.
13) Reflects the decrease to interest expense associated
with defeasing the existing loans upon the purchase of the
Initial, Houston, Holtsville, Moody Acquisition and New Rochelle
Hotels, except for two loans on the Altoona and Washington
hotels, which were assumed by the Company. Except for the two
assumed loans, RLJ, Moody, the Holtsville Group, Moody
Acquisition and New Rochelle are required under the terms
of the purchase and sale agreements to cause the defeasance of
the loans to occur on or before the closing of the purchase of
the hotels. Except for the two assumed loans, the purchase price
for the Initial, Houston, Holtsville, Moody Acquisition and
New Rochelle Hotels was fully funded from equity proceeds
of the IPO.
The Company assumed the $6,979 loan on the Altoona hotel. The
loan matures on April 1, 2016 and bears an interest at a
rate of 5.96%. The Company also assumed the $5,455 loan on the
Washington hotel. The loan matures on April 1, 2015 and
bears an interest rate of 5.84%.
14) Reflects the adjustment to recognize income tax expense
at an effective rate of 40% on the taxable income of the
Companys TRSs.
15) Reflects this offering of 4,000,000 of common shares of
the Company at an estimated $16.96 per share (closing share
price on February 1, 2011) and assumes that the
underwriters overallotment option is not exercised, with
approximately $67,840 of cash proceeds to the Company, net of
estimated underwriters fees of $3,053 and other
transaction costs of $1,250. Since none of the net proceeds are
being used to acquire hotels or pay down debt outstanding on a
pro forma basis, none of these shares are included in the
denominator for calculating earnings per share.
F-12
PART I.
FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements.
|
CHATHAM LODGING
TRUST
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS:
|
Investment in hotel properties, net
|
|
$
|
154,040
|
|
|
$
|
|
|
Cash and cash equivalents
|
|
|
26,845
|
|
|
|
24
|
|
Restricted cash
|
|
|
5,689
|
|
|
|
|
|
Hotel receivables (net of allowance for doubtful accounts of
approximately $20 and $0, respectively)
|
|
|
859
|
|
|
|
|
|
Deferred costs, net
|
|
|
1,047
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189,072
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY:
|
Debt
|
|
$
|
12,410
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,039
|
|
|
$
|
14
|
|
Accrued underwriter fees
|
|
|
5,175
|
|
|
|
|
|
Distributions payable
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,281
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Preferred shares, $0.01 par value, 100,000,000 shares
authorized and unissued at September 30, 2010
|
|
|
|
|
|
|
|
|
Common shares, $0.01 par value, 500,000,000 shares
authorized; 9,208,750 and 1,000 shares issued and
outstanding at September 30, 2010 and December 31,
2009, respectively
|
|
|
92
|
|
|
|
|
|
Additional paid-in capital
|
|
|
170,250
|
|
|
|
10
|
|
Unearned compensation
|
|
|
(1,284
|
)
|
|
|
|
|
Retained deficit
|
|
|
(2,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
166,516
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interests:
|
|
|
|
|
|
|
|
|
Noncontrolling interest in Operating Partnership
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
166,791
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
189,072
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
CHATHAM LODGING
TRUST
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Hotel operating revenues:
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
8,147
|
|
|
$
|
12,691
|
|
Other operating
|
|
|
237
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
8,384
|
|
|
|
13,041
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Hotel operating expenses:
|
|
|
|
|
|
|
|
|
Room
|
|
|
1,925
|
|
|
|
2,995
|
|
Other operating
|
|
|
3,002
|
|
|
|
4,597
|
|
|
|
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
4,927
|
|
|
|
7,592
|
|
Depreciation and amortization
|
|
|
798
|
|
|
|
1,200
|
|
Property taxes and insurance
|
|
|
471
|
|
|
|
718
|
|
General and administrative
|
|
|
1,368
|
|
|
|
2,340
|
|
Hotel property acquisition costs
|
|
|
1,161
|
|
|
|
2,165
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,725
|
|
|
|
14,015
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(341
|
)
|
|
|
(974
|
)
|
Interest income
|
|
|
72
|
|
|
|
109
|
|
Interest expense
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(288
|
)
|
|
|
(884
|
)
|
Income tax expense
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(288
|
)
|
|
$
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share Basic:
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share Diluted:
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,125,000
|
|
|
|
5,448,663
|
|
Diluted
|
|
|
9,125,000
|
|
|
|
5,448,663
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
CHATHAM LODGING
TRUST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
Interest in
|
|
|
|
|
|
|
Common Shares
|
|
|
Paid-In
|
|
|
Unearned
|
|
|
Retained
|
|
|
Shareholders
|
|
|
Operating
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
|
Partnership
|
|
|
Equity
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share data)
|
|
|
Balance, December 31, 2009
|
|
|
1,000
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
10
|
|
Issuance of shares, net of offering costs of $13,752
|
|
|
9,125,000
|
|
|
|
91
|
|
|
|
168,657
|
|
|
|
|
|
|
|
|
|
|
|
168,748
|
|
|
|
|
|
|
|
168,748
|
|
Repurchase of common shares
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Issuance of restricted shares
|
|
|
87,000
|
|
|
|
1
|
|
|
|
1,654
|
|
|
|
(1,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
(61
|
)
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of share based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
310
|
|
|
|
320
|
|
|
|
630
|
|
Dividends declared on common shares ($0.175 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,612
|
)
|
|
|
(1,612
|
)
|
|
|
|
|
|
|
(1,612
|
)
|
Distributions on LTIP units ($0.175 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
(45
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(930
|
)
|
|
|
(930
|
)
|
|
|
|
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
9,208,750
|
|
|
$
|
92
|
|
|
$
|
170,250
|
|
|
$
|
(1,284
|
)
|
|
$
|
(2,542
|
)
|
|
$
|
166,516
|
|
|
$
|
275
|
|
|
$
|
166,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
CHATHAM LODGING
TRUST
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 30, 2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net Loss
|
|
$
|
(930
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
Depreciation
|
|
|
1,182
|
|
Amortization of deferred costs
|
|
|
18
|
|
Share based compensation
|
|
|
630
|
|
Changes in assets and liabilities:
|
|
|
|
|
Hotel receivables
|
|
|
(350
|
)
|
Deferred costs
|
|
|
(862
|
)
|
Prepaid expenses and other assets
|
|
|
(168
|
)
|
Accounts payable and accrued expenses
|
|
|
2,201
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,721
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Improvements and additions to hotel properties
|
|
|
(930
|
)
|
Acquisition of hotel properties, net of cash acquired
|
|
|
(144,609
|
)
|
Restricted cash
|
|
|
(3,047
|
)
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(148,586
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Payments of debt
|
|
|
(24
|
)
|
Payment of financing costs
|
|
|
(203
|
)
|
Proceeds from issuance of common shares
|
|
|
182,490
|
|
Payment of common share offering costs
|
|
|
(8,577
|
)
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
173,686
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
26,281
|
|
Cash and cash equivalents, beginning of period
|
|
|
24
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
26,845
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing information:
|
|
|
|
|
The company has accrued underwriter fees of $5,175. These fees
were paid on October 21, 2010.
|
|
|
|
|
The company has accrued distributions payable of $1,657. These
distributions were paid on October 29, 2010.
|
|
|
|
|
The company assumed the mortgages on the Altoona and Washington
Hotels for $12,434.
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-16
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Chatham Lodging Trust (the Company) was formed as a
Maryland real estate investment trust (REIT) on
October 26, 2009 and intends to elect to qualify as a REIT
for U.S. Federal Income Tax purposes beginning with its
short taxable year ended December 31, 2010. The Company is
internally-managed and was organized to invest primarily in
premium-branded upscale extended-stay and select-service hotels.
The Company completed its initial public offering (the
IPO) on April 21, 2010. The IPO resulted in the
sale of 8,625,000 common shares at a $20.00 price per share,
generating $172.5 million in gross proceeds. Net proceeds,
after underwriters discounts and commissions and other
offering costs paid or payable to third parties as of
September 30, 2010, were approximately $158.7 million.
Concurrently with the closing of the IPO, in a separate private
placement pursuant to Regulation D under the Securities Act
of 1933, as amended (the Securities Act), the
Company sold 500,000 of its common shares to Jeffrey H. Fisher,
the Companys Chairman, President and Chief Executive
Officer, at the public offering price of $20.00 per share, for
proceeds to the Company of $10 million.
The Company had no operations prior to the consummation of the
IPO. Following the closing of the IPO, the Company contributed
the net proceeds from the IPO and the concurrent private
placement to Chatham Lodging, L.P (the Operating
Partnership) in exchange for partnership interests in the
Operating Partnership. Substantially all of the Companys
assets are held by and all of its operations are conducted
through the Operating Partnership. The Company is the sole
general partner of the Operating Partnership and currently owns
100% of the units of the limited partnership interest in the
Operating Partnership at September 30, 2010. As discussed
in Note 10 Equity Incentive Plan, certain of
the Companys executive officers hold unvested long-term
incentive plan units in the Operating Partnership, which are
presented as noncontrolling interests on the accompanying
consolidated balance sheet.
As of September 30, 2010, the Company owned 11 hotels with
an aggregate of 1,381 rooms located in 8 states. For the
Company to qualify as a REIT, it cannot operate the hotels.
Therefore, the Operating Partnership and its subsidiaries lease
the hotels to the Companys wholly owned taxable REIT
subsidiaries (the TRS). Each hotel is leased to a
TRS under a percentage lease that provides for rental payments
equal to the greater of (i) a fixed base rent amount or
(ii) a percentage rent based on hotel room revenue. The
initial term of each of the TRS leases is 5 years. Lease
revenue from each TRS and its wholly-owned subsidiaries is
eliminated in consolidation. Island Hospitality Management Inc.
(IHM), a related party, manages 3 hotels, Homewood
Suites Management LLC (IAH Manager), a subsidiary of
Hilton Worldwide Inc. (Hilton) manages 6 hotels and
Concord Hospitality Enterprises Company (Concord)
manages 2 hotels.
|
|
2.
|
Summary of
Significant Accounting Policies
|
Basis of
Presentation
The accompanying unaudited interim financial statements and
related notes have been prepared in accordance with
U.S. generally accepted accounting principles
(GAAP) and in conformity with the rules and
regulations of the Securities and Exchange Commission
(SEC) applicable to interim financial information.
These unaudited consolidated financial statements, in the
opinion of management, include all adjustments considered
necessary for a fair presentation of the consolidated balance
sheets, consolidated statements of operations, consolidated
statements of equity, and consolidated statement of cash flows
for the periods presented. Interim results are not necessarily
indicative of full year performance due to seasonal and other
factors.
The consolidated financial statements include all of the
accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions are eliminated in
consolidation.
F-17
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts included in the unaudited consolidated balance sheet as
of December 31, 2009 have been derived from the audited
consolidated balance sheet as of that date. The accompanying
unaudited consolidated financial statements should be read in
conjunction with the consolidated balance sheet and notes
thereto as of December 31, 2009 included in Amendment
No. 7 to
Form S-11,
which was filed with the SEC on April 5, 2010.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
balance sheet date and the reported amounts of revenues and
expenses during the reporting periods. Actual results could
differ from those estimates.
Investment in
Hotel Properties
The Company allocates the purchase prices of hotel properties
acquired based on the fair value of the acquired real estate,
furniture, fixtures and equipment, identifiable intangible
assets and assumed liabilities. In making estimates of fair
value for purposes of allocating the purchase price, the Company
utilizes a number of sources of information that are obtained in
connection with the acquisition of a hotel property, including
valuations performed by independent third parties and
information obtained about each hotel property resulting from
pre-acquisition due diligence. Hotel property acquisition costs,
such as transfer taxes, title insurance, environmental and
property condition reviews, and legal and accounting fees, are
expensed in the period incurred.
The Companys investments in hotel properties are carried
at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets, 40 years for
buildings, 15 years for building improvements, seven years
for land improvements and three to ten years for furniture,
fixtures and equipment. Renovations
and/or
replacements at the hotel properties that improve or extend the
life of the assets are capitalized and depreciated over their
useful lives, while repairs and maintenance are expensed as
incurred. Upon the sale or retirement of property and equipment,
the cost and related accumulated depreciation are removed from
the Companys accounts and any resulting gain or loss is
recognized in the consolidated statements of operations.
The Company will periodically review its 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 will perform an analysis to
determine if the estimated undiscounted future cash flows,
without interest charges, 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, an adjustment to reduce the carrying
amount to the related hotel propertys estimated fair
market value is recorded and an impairment loss recognized. The
Company does not believe that there currently are any facts or
circumstances indicating impairment in the carrying value of any
of its hotel properties.
The Company will consider a hotel property as held for sale when
a binding agreement to purchase the property has been signed
under which the buyer has committed a significant amount of
nonrefundable cash, no significant financing contingencies exist
which could cause the transaction not to be completed in a
timely manner and the sale is expected to occur within one year.
If these criteria are met, depreciation and amortization of the
hotel property will cease and an impairment loss if any will be
recognized if the fair value of the hotel property, less the
costs to sell, is lower than the carrying amount of the hotel
property. The Company will classify the loss, together with the
related operating
F-18
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
results, as discontinued operations in the consolidated
statements of operations and classify the assets and related
liabilities as held for sale in the consolidated balance sheets.
As of September 30, 2010, the Company had no hotel
properties held for sale.
Cash and Cash
Equivalents
Cash and cash equivalents consist of cash on hand, demand
deposits with financial institutions and short term liquid
investments with an original maturity of three months or less.
Cash balances in individual banks may exceed federally insurable
limits.
Restricted
Cash
Restricted cash represents purchase price deposits held in
escrow for potential hotel acquisitions currently under contract
and escrows for reserves required pursuant to the Companys
loans or management agreements with Hilton. Included in
restricted cash on the accompanying consolidated balance sheet
at September 30, 2010 are deposits for hotel acquisitions
of $2.6 million and $3.1 million of other escrows. The
hotel mortgage loan agreements require the Company to
fund 4% of gross revenues on a monthly basis for
furnishings, fixtures, equipment and general repair maintenance
reserve (Replacement Reserve) of the hotels in an
account to be held by Berkadia Commercial Mortgage
(Lender). In addition, insurance and real estate tax
reserves are required to be deposited into an escrow account to
be held by Lender.
Hotel
Receivables
Hotel receivables consist of amounts owed by guests staying at
the Companys hotels at quarter end and amounts due from
business and group customers. An allowance for doubtful accounts
is provided and maintained at a level believed to be adequate to
absorb estimated probable receivable losses. At
September 30, 2010 and December 31, 2009, the
allowance for doubtful accounts was $20 thousand and $0,
respectively.
Deferred
Costs
Deferred costs consist of franchise agreement fees for the
Companys hotels and deferred loan costs. Franchise fees
are recorded at cost and amortized over a straight-line basis
over the term of the franchise agreements. Loan costs are
recorded at cost and amortized over a straight-line basis which
approximates the interest rate method over the term of the loan.
Amortization expense was $13 thousand and $18 thousand for the
three and nine months ended September 30, 2010.
Prepaid
Expenses and Other Assets
The Companys prepaid expenses and other assets consist of
prepaid insurance, deposits and hotel supplies inventory.
Revenue
Recognition
Revenues from hotel operations are recognized when rooms are
occupied and when services are provided. Revenues consist of
amounts derived from hotel operations, including sales from
room, meeting room, gift shop, in-room movie and other ancillary
amenities. Sales, use, occupancy, and similar taxes are
collected and presented on a net basis (excluded from revenues)
in the accompanying consolidated statements of operations.
Share-Based
Compensation
The Company measures compensation expense for the restricted
share awards based upon the fair market value of its common
shares at the date of grant. Compensation expense is recognized
on a straight-line basis over the vesting period and is included
in general and administrative expense in the
F-19
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accompanying consolidated statements of operations. The Company
will pay dividends on nonvested restricted shares.
Earnings Per
Share
Basic earnings per share (EPS) is computed by
dividing net income (loss) available for common shareholders,
adjusted for dividends on unvested share grants, by the weighted
average number of common shares outstanding for the period.
Diluted EPS is computed by dividing net income (loss) available
for common shareholders, adjusted for dividends on unvested
share grants, by the weighted average number of common shares
outstanding plus potentially dilutive securities such as share
grants or shares issuable in the event of conversion of
operating partnership units. No adjustment is made for shares
that are anti-dilutive during the period. The Companys
restricted share awards and long-term incentive plan units are
entitled to receive dividends, if declared. The rights to
dividends declared are non-forfeitable, and therefore, the
unvested restricted shares and long-term incentive plan units
qualify as participating securities requiring the allocation of
earnings under the two-class method to calculate EPS. The
percentage of earnings allocated to the unvested restricted
shares is based on the proportion of the weighted average
unvested restricted shares outstanding to the total of the basic
weighted average common shares outstanding and the weighted
average unvested restricted shares outstanding. Basic EPS is
then computed by dividing income less earnings allocable to
unvested restricted shares by the basic weighted average number
of shares outstanding. Diluted EPS is computed similar to basic
EPS, except the weighted average number of shares outstanding is
increased to include the effect of potentially dilutive
securities. Because the Company reported a net loss for the
periods, no allocation was made to the unvested restricted
shares or the long-term incentive plan units.
Income
Taxes
The Company is currently subject to corporate federal and state
income taxes. Prior to April 21, 2010, the Company had no
operating results subject to taxation.
The Company intends to elect to be taxed as a REIT for federal
income tax purposes under Sections 856 through 860 of the
Internal Revenue Code. To qualify as a REIT, the Company must
meet certain organizational and operational requirements,
including a requirement to distribute at least 90% of the
Companys annual REIT taxable income to its shareholders
(which is computed without regard to the dividends paid
deduction or net capital gain, and which does not necessarily
equal net income as calculated in accordance with
U.S. GAAP). As a REIT, the Company generally will not be
subject to federal income tax to the extent it distributes
qualifying dividends to its shareholders. If the Company fails
to qualify as a REIT in any taxable year, it will be subject to
federal income tax on its taxable income at regular corporate
income tax rates, and generally will not be permitted to qualify
for treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which qualification
is lost, unless the Internal Revenue Service grants the Company
relief under certain statutory provisions. Such an event could
materially adversely affect the Companys net income and
net cash available for distribution to shareholders. However,
the Company intends to organize and operate in such a manner as
to qualify for treatment as a REIT.
The Company leases its hotels to lessee subsidiaries of the TRS
(TRS lessees). The TRS is subject to federal and
state income taxes and the Company accounts for taxes, where
applicable, in accordance with the provisions of Financial
Accounting Standards Board Accounting Standards Codification 740
using the asset and liability method which recognizes deferred
tax assets and liabilities for future tax consequences arising
from differences between financial statement carrying amounts
and income tax bases.
F-20
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Organizational
and Offering Costs
The Company expenses organizational costs as incurred. Offering
costs, which include selling commissions, are recorded as a
reduction in additional paid-in capital in shareholders
equity.
Recently
Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board
(FASB) issued amended guidance related to the
consolidation of variable-interest entities, which requires
enterprises to qualitatively assess the determination of the
primary beneficiary of a variable interest entity
(VIE) based on whether the entity (1) has the
power to direct matters that most significantly impact the
activities of the VIE, and (2) has the obligation to absorb
losses or the right to receive benefits of the VIE that could
potentially be significant to the VIE. The amendments change the
consideration of kick-out rights in determining if an entity is
a VIE which may cause certain additional entities to now be
considered VIEs. Additionally, they require an ongoing
reconsideration of the primary beneficiary and provide a
framework for the events that trigger a reassessment of whether
an entity is a VIE. This guidance is effective for financial
statements issued for fiscal years beginning after
November 15, 2009. The Company analyzed and considered the
structure of each of its management agreements with its hotel
managers and determined that it had appropriately consolidated
the results of operations of the 11 owned hotels at
September 30, 2010.
|
|
3.
|
Acquisition of
Hotel Properties
|
Acquisition of
Hotel Properties
On April 23, 2010, wholly owned subsidiaries of the Company
completed the acquisition of six hotel properties (the
Initial Acquisition Hotels) from wholly owned
subsidiaries of RLJ Development, LLC for an aggregate purchase
price of $73.5 million, plus customary pro-rated amounts
and closing costs. Each of the Initial Acquisition Hotels
operates under the Homewood Suites by
Hilton®
brand. The Initial Acquisition Hotels contain an aggregate of
813 rooms and are located in the major metropolitan statistical
areas of Boston, Massachusetts; Minneapolis, Minnesota;
Nashville, Tennessee; Dallas, Texas; Hartford, Connecticut and
Orlando, Florida.
On July 2, 2010, the Company acquired the
120-room Hampton Inn &
Suites®
Houston-Medical Center in Houston, Texas (the Houston
hotel) for $16.5 million, plus customary pro-rated
amounts and closing costs, from Moody National 1715 OST Houston
S, LLC.
On August 3, 2010, the Company acquired the
124-room Residence Inn by
Marriott®
Long Island Holtsville on Long Island, New York (the
Holtsville hotel) for $21.3 million, plus
customary pro-rated amounts and closing costs, from Holtsville
Hotel Group, LLC and FB Holtsville Utility LLC.
On August 24, 2010, the Company completed the acquisitions
of the 105-room Courtyard by
Marriott®
in Altoona, Pennsylvania (the Altoona hotel) and the
86-room SpringHill Suites by
Marriott®
in Washington, Pennsylvania (the Washington hotel)
for a total cash purchase price of $23.3 million, plus
customary pro-rated amounts and closing costs, including the
assumption of $12.4 million of debt on the Hotels. The
Altoona hotel was purchased from Moody National CY Altoona PA,
LLC and the Washington hotel was purchased from Moody National
SHS Washington PA, LLC.
On September 23, 2010, the Company acquired the
133-room Residence Inn by
Marriott®
White Plains in White Plains, New York (the White
Plains hotel) for $21.2 million, plus customary
pro-rated amounts and closing costs, from Moody National White
Plains S, LLC.
Hotel
Management Agreements
The Initial Acquisition Hotels are managed by the IAH Manager, a
subsidiary of Hilton. A TRS lessee assumed each of the
existing hotel management agreements for these hotels. Each
hotel
F-21
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
management agreement previously became effective on
December 20, 2000, has an initial term of 15 years and
is renewable for an additional five-year period at the IAH
Managers option by written notice to the Company no later
than 120 days prior to the expiration of the initial term.
Under the hotel management agreements, the IAH Manager receives
a base management fee equal to 2% of the hotels gross room
revenue and, if certain financial thresholds are met or
exceeded, an incentive management fee equal to 10% of the
hotels net operating income, less fixed costs, base
management fees,
agreed-upon
return on the owners original investment and debt service
payments. Prior to April 23, 2013, each of these six
management agreements may be terminated for cause, including the
failure of the managed hotel to meet specified performance
levels, and may be terminated by the manager in the event the
Company undergoes a change in control. If the new owner does not
assume the existing management agreements and does not obtain a
Homewood Suites franchise license upon such a change of control,
the Company will be required to pay a termination fee to the IAH
Manager. Beginning on April 23, 2013, the Company may
terminate the six Hilton management agreements upon six
months notice to the manager.
The Houston, Holtsville and White Plains hotels are managed by
IHM, a hotel management company 90 percent-owned by Jeffrey
H. Fisher, the Companys chief executive officer, pursuant
to management agreements between a TRS lessee and IHM. The
management agreements with IHM are for a five-year term and
provide for base management fees of 3% of the hotels gross
room revenue and incentive management fees of 10% of net
operating income in excess of a return threshold as defined in
the agreements plus a monthly accounting fee of $1 thousand per
hotel property. Incentive management fees are capped at 1% of
gross hotel revenue. IHM may extend the management agreements
for two additional
5-year
renewal terms upon 90 days written notice to the
Company. The management agreements may be terminated upon the
sale of the hotels for no termination fee upon six months
advance notice. The management agreements may also be terminated
for cause, including the failure of the hotels operating
performance to meet specified levels.
The Altoona and Washington hotels are managed by Concord
pursuant to management agreements between a TRS lessee and
Concord. The management agreements with Concord provide for base
management fees equal to 4% of the managed hotels gross
room revenue. The initial ten-year term of each management
agreement is set to expire on February 28, 2017 and will
renew automatically for successive one-year terms unless
terminated by the TRS or Concord by written notice to the other
party no later than 90 days prior to the terms
expiration. The management agreements may be terminated for
cause, including the failure of the hotels operating
performance to meet specified levels.
Hotel
Franchise Agreements
The Companys TRS lessees have entered into franchise
agreements for its 11 hotels.
Upon acquisition of the Initial Acquisition Hotels, a TRS lessee
entered into new hotel franchise agreements with Promus Hotels,
Inc., a subsidiary of Hilton, as manager for these hotels. Each
of the new hotel franchise agreements has an initial term of
15 years and may be renewed for an additional
5-year term.
These Hilton hotel franchise agreements provide for a franchise
royalty fee equal to 4% of the hotels gross room revenue
and a program fee equal to 4% of the hotels gross room
revenue. The Hilton franchise agreements generally have no
termination rights unless the franchisee fails to cure an event
of default in accordance with the franchise agreements.
Certain of the Companys TRS lessees have entered into
franchise agreements with Marriott International, Inc.
(Marriott), relating to the Residence Inn properties
in Holtsville, New York, and White Plains, New York, in addition
to a Courtyard property in Altoona, Pennsylvania and a
SpringHill Suites property in Washington, Pennsylvania. These
franchise agreements have initial terms ranging from 15 to
20 years and will expire between 2025 and 2030. None of the
agreements has a renewal
F-22
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
option. The Marriott franchise agreements provide for franchise
fees ranging from 5.0% to 5.5% of the hotels gross room
sales and marketing fees equal to 2.5% of the hotels gross
room sales. The Marriott franchise agreements are terminable by
Marriott in the event that the applicable franchisee fails to
cure an event of default or, in certain circumstances such as
the franchisees bankruptcy or insolvency, are terminable
by Marriott at will.
The Hampton Inn & Suites Houston-Medical Center is
governed by a franchise agreement with Hampton Inns Franchise
LLC, or Hampton Inns. The franchise agreement has an initial
term of approximately 10 years and expires on July 31,
2020. There is no renewal option. The Hampton Inns franchise
agreement provides for a monthly program fee equal to 4% of the
hotels gross rooms revenue and a monthly royalty fee equal
to 5% of the hotels gross rooms revenue. Hampton Inns may
terminate the franchise agreement in the event that the
franchisee fails to cure an event of default or, in certain
circumstances such as the franchisees bankruptcy or
insolvency, Hampton Inns may terminate the agreement at will.
Franchise fees were approximately $0.6 million and
$1.0 million for the three and nine months ended
September 30, 2010.
Hotel Purchase
Price Allocation
The allocation of the purchase price to the hotels based on
their fair value, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inn &
|
|
|
Residence
|
|
|
|
|
|
|
|
|
|
|
|
|
Suites
|
|
|
Inn
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
Houston
|
|
|
Holtsville
|
|
|
Moody
|
|
|
|
|
|
|
Acquisition
|
|
|
Houston,
|
|
|
Holtsville,
|
|
|
Three
|
|
|
|
|
|
|
Hotels
|
|
|
TX
|
|
|
NY
|
|
|
Portfolio
|
|
|
Total
|
|
|
Land
|
|
$
|
12,120
|
|
|
$
|
3,200
|
|
|
$
|
2,200
|
|
|
$
|
3,200
|
|
|
$
|
20,720
|
|
Building and improvements
|
|
|
57,976
|
|
|
|
12,708
|
|
|
|
18,765
|
|
|
|
39,099
|
|
|
|
128,548
|
|
Furniture, fixtures and equipment
|
|
|
3,421
|
|
|
|
325
|
|
|
|
335
|
|
|
|
943
|
|
|
|
5,024
|
|
Cash
|
|
|
30
|
|
|
|
2
|
|
|
|
2
|
|
|
|
7
|
|
|
|
41
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,642
|
|
|
|
2,642
|
|
Accounts receivable
|
|
|
379
|
|
|
|
24
|
|
|
|
|
|
|
|
106
|
|
|
|
509
|
|
Prepaid expenses and other assets
|
|
|
31
|
|
|
|
|
|
|
|
83
|
|
|
|
310
|
|
|
|
424
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,434
|
)
|
|
|
(12,434
|
)
|
Accounts payable and accrued expenses
|
|
|
(440
|
)
|
|
|
(148
|
)
|
|
|
(56
|
)
|
|
|
(180
|
)
|
|
|
(824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
73,517
|
|
|
$
|
16,111
|
|
|
$
|
21,329
|
|
|
$
|
33,693
|
|
|
$
|
144,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired, net of cash
|
|
$
|
73,487
|
|
|
$
|
16,109
|
|
|
$
|
21,327
|
|
|
$
|
33,686
|
|
|
$
|
144,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Altoona, Washington and White Plains hotels were acquired
from parties under common control and their acquisition is
referred to the Moody Three Portfolio in the above
chart.
All of the Companys hotel revenue and expenses are
comprised of hotel revenue and expenses from the hotels acquired
during the year to date as of September 30, 2010.
Pro Forma
Financial Information
The following condensed pro forma financial information presents
the results of operations as if the acquisition of the Initial
Acquisition, Houston, Holtsville, Altoona, Washington and White
Plains hotels had taken place on January 1, 2010. Since the
Company commenced operations on April 21, 2010 upon
completion of the IPO, pro forma adjustments have been included
for corporate general and administrative expense and income
taxes for the periods presented. The pro forma results have been
F-23
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prepared for comparative purposes only and are not necessarily
indicative of what actual results of operations would have been
had the acquisition taken place on January 1, 2010, nor do
they purport to represent the results of operations for future
periods (in thousands, except share and per share data).
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 30, 2010
|
|
|
Pro forma total revenues
|
|
$
|
32,503
|
|
Pro forma total hotel expense
|
|
|
19,542
|
|
Pro forma total operating expenses
|
|
|
32,063
|
|
|
|
|
|
|
Pro forma operating income
|
|
|
440
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(477
|
)
|
|
|
|
|
|
Pro forma loss income per share:
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.05
|
)
|
Weighted average Common Shares Outstanding
|
|
|
|
|
Basic and diluted
|
|
|
9,125,000
|
|
|
|
4.
|
Allowance for
Doubtful Accounts
|
The Company maintains an allowance for doubtful accounts at a
level believed to be adequate to absorb estimated probable
losses. That estimate is based on past loss experience, current
economic and market conditions and other relevant factors. The
allowance for doubtful accounts was $20 thousand and $0 as of
September 30, 2010 and December 31, 2009, respectively.
|
|
5.
|
Investment in
Hotel Properties
|
The Company did not own any hotel properties at
December 31, 2009. Investment in hotel properties as of
September 30, 2010, consisted of the following (in
thousands):
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
Land and improvements
|
|
$
|
20,720
|
|
Building and improvements
|
|
|
128,546
|
|
Furniture, fixtures and equipment
|
|
|
5,956
|
|
|
|
|
|
|
|
|
|
155,222
|
|
Less accumulated depreciation
|
|
|
(1,182
|
)
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
154,040
|
|
|
|
|
|
|
The Company assumed a $7.0 million loan on the Altoona
hotel and a $5.4 million loan on the Washington hotel in
connection with their acquisition. Each loan is collateralized
by the hotel and
F-24
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requires a minimum debt service coverage ratio and the Company
was in compliance with these covenants at September 30,
2010. Key information regarding the loans is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Altoona Loan
|
|
|
Washington Loan
|
|
|
Balance at September 30, 2010
|
|
$
|
6,966
|
|
|
$
|
5,444
|
|
Interest rate
|
|
|
5.96
|
%
|
|
|
5.84
|
%
|
Maturity
|
|
|
April 1, 2016
|
|
|
|
April 1, 2015
|
|
Monthly principal and interest payment
|
|
$
|
49
|
|
|
$
|
39
|
|
Minimum debt service coverage ratio
|
|
|
1.5
|
x
|
|
|
1.65x
|
|
|
|
7.
|
Dividends
Declared and Paid
|
The Company declared common share dividends of $0.175 per share
and distributions on LTIP units of $0.175 per LTIP unit for the
three months ended September 30, 2010. The dividends and
distributions were paid on October 29, 2010 to common
shareholders and LTIP unit holders of record on October 15,
2010. The Company did not pay any dividends during the three
months ended September 30, 2010.
Under the initial Declaration of Trust of the Company, the total
number of shares initially authorized for issuance was 1,000
common shares. On October 30, 2009, the Company issued the
sole shareholder of the Company 1,000 common shares at $10.00
per share. Following the close of the IPO, the Company
repurchased the 1,000 shares issued to Mr. Fisher at
his cost of $10.00 per share.
Effective March 31, 2010, the Companys Declaration of
Trust was amended and restated to authorize the issuance of
500,000,000 common shares and 100,000,000 preferred shares. On
April 21, 2010, the Company completed its IPO. The IPO
resulted in the sale of 8,625,000 common shares at a $20.00
price per share, generating $172.5 million in gross
proceeds. Net proceeds, after net underwriters discounts
and commissions and other offering costs, were approximately
$158.7 million. Underwriting discounts and offering costs
of $13.8 million have been recorded as a reduction in
additional paid-in capital. This includes underwriters
commission of $5.2 million which, in accordance with the
underwriting agreement entered into in connection with the IPO,
is payable once the Company invests at least 85% of the net
proceeds from the offering in hotel properties. Payment was made
on October 21, 2010. Concurrently with the closing of the
IPO, in a separate private placement pursuant to
Regulation D under the Securities Act of 1933, as amended,
the Company sold 500,000 of its common shares to Jeffrey H.
Fisher, the Companys Chairman, President and Chief
Executive Officer, at the public offering price of $20.00 per
share, for proceeds to the Company of $10 million. There
were no preferred shares issued or outstanding as of
September 30, 2010.
F-25
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of the amounts used in
calculating basic and diluted net loss per share (in thousands,
except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(288
|
)
|
|
$
|
(930
|
)
|
Dividends paid on unvested restricted shares
|
|
|
|
|
|
|
|
|
Undistributed earnings attributable to unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders excluding amounts
attributable to unvested restricted shares
|
|
$
|
(288
|
)
|
|
$
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares basic
|
|
|
9,125,000
|
|
|
|
5,448,663
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Unvested restricted shares
|
|
|
|
|
|
|
|
|
Compensation-related shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares diluted
|
|
|
9,125,000
|
|
|
|
5,448,663
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share:
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders per weighted
average common share excluding amounts attributable to unvested
restricted shares
|
|
$
|
(0.03
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share:
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders per weighted
average common share excluding amounts attributable to unvested
restricted shares
|
|
$
|
(0.03
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Equity Incentive
Plan
|
On April 9, 2010, the Companys sole shareholder
approved the Equity Incentive Plan (the Equity Incentive
Plan) to attract and retain independent trustees,
executive officers and other key employees and service
providers. The Equity Incentive Plan provides for the grant of
options to purchase common shares, share awards, share
appreciation rights, performance units and other equity-based
awards, including grants of restricted common shares and
long-term incentive plan units (LTIP Units). The
Equity Incentive Plan is administered by the Compensation
Committee of the Companys Board of Trustees (the
Compensation Committee), which has the ability to
approve all terms of awards under the Equity Incentive Plan. The
Compensation Committee also has the ability to approve who will
receive grants under the Equity Incentive Plan and the number of
common shares subject to the grant. The Equity Incentive Plan is
scheduled to terminate on April 8, 2020.
The number of common shares authorized for issuance under the
Equity Incentive Plan is 565,359. In connection with share
splits, dividends, recapitalizations and certain other events,
the Companys Board of Trustees will make adjustments that
it deems appropriate in the aggregate number of common shares
that may be issued under the Equity Incentive Plan and the terms
of outstanding awards. On April 21, 2010, the
Companys Operating Partnership granted 246,960 LTIP Units
to the Companys executive officers pursuant to the Equity
Incentive Plan. In addition, on
F-26
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
April 26, 2010 and May 20, 2010, the Company issued
40,000 and 36,550 restricted common shares to the Companys
Independent Trustees and executive officers, respectively,
pursuant to the Equity Incentive Plan. During the third quarter,
7,200 shares granted to the Companys former Chief
Financial Officer (CFO) vested,
3,250 restricted shares granted to the Companys
former CFO were forfeited and 15,435 LTIP Units granted to the
Companys former CFO were forfeited. Also, during the third
quarter 10,450 restricted common shares and 26,250 LTIP Units
were granted to the Companys current CFO. As of
September 30, 2010, there were 211,730 common shares
available for future grant under the Equity Incentive Plan.
Restricted
Share Awards
The Company measures compensation expense for restricted share
awards based upon the fair market value of its common shares at
the date of grant. Compensation expense is recognized on a
straight-line basis over the vesting period and is included in
general and administrative expense in the accompanying
consolidated statements of operations. The Company will pay
dividends on nonvested restricted shares.
A summary of the Companys restricted share awards for the
nine months ended September 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Nonvested at January 1, 2010
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
87,000
|
|
|
|
19.02
|
|
Vested
|
|
|
(7,200
|
)
|
|
|
18.86
|
|
Forfeited
|
|
|
(3,250
|
)
|
|
|
18.86
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2010
|
|
|
76,550
|
|
|
$
|
19.04
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and December 31, 2009, there
were $1.3 million and $0, respectively, of unrecognized
compensation costs related to restricted share awards. As of
September 30, 2010, these costs were expected to be
recognized over a weighted average period of
approximately 2.6 years. For each of the three and nine
months ended September 30, 2010, the Company recognized
approximately $0.2 million and $0.3 million,
respectively, in expense related to the restricted share awards.
This expense is included in general and administrative expenses
in the accompanying consolidated statements of operations. As of
September 30, 2010, 7,200 shares were vested.
Long-Term
Incentive Plan Units
LTIP Units are a special class of partnership interests in the
Operating Partnership which may be issued to eligible
participants for the performance of services to or for the
benefit of the Company. Under the Equity Incentive Plan, each
LTIP Unit issued is deemed equivalent to an award of one common
share thereby reducing the availability for other equity awards
on a
one-for-one
basis. The Company will not receive a tax deduction for the
value of any LTIP Units granted to employees. LTIP Units,
whether vested or not, will receive the same per unit profit
distributions as other outstanding units of the Operating
Partnership, which profit distribution will generally equal per
share dividends on the Companys common shares. Initially,
LTIP Units have a capital account balance of zero, and will not
have full parity with common Operating Partnership units with
respect to liquidating distributions. The Operating Partnership
will revalue its assets upon the occurrence of certain specified
events and any increase in valuation will be allocated first to
the holders of LTIP Units to equalize the capital accounts of
such holders with the capital accounts of the Operating
Partnership unit holders. If such parity is reached, vested LTIP
Units may be converted, at any time, into an equal number of
common units of
F-27
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
limited partnership interest in the Operating Partnership
(OP Units), which may, in the Companys
sole and absolute discretion, be redeemed by the Company for
cash or exchanged for an equivalent number of the Companys
common shares.
On April 21, 2010, the Companys Operating Partnership
granted 246,960 LTIP Units to the Companys executive
officers pursuant to the Equity Incentive Plan, all of which are
accounted for in accordance with FASB Codification Topic
(ASC) 718, Stock Compensation. The LTIP
Units granted to the Companys executive officers vest
ratably over a five-year period beginning on the date of grant.
On September 9, 2010, the Companys Operating
Partnership granted 26,250 LTIP units to the Companys new
CFO and 15,435 LTIP units granted to the Companys former
CFO were forfeited.
The LTIP Units fair value was determined by using a
discounted value approach. In determining the discounted value
of the LTIP Units, the Company considered the inherent
uncertainty that the LTIP Units would never reach parity with
the other OP Units and thus have an economic value of zero
to the grantee. Additional factors considered in reaching the
assumptions of uncertainty included discounts for illiquidity;
expectations for future dividends; no operating history as of
the date of the grant; significant dependency on the efforts and
services of our executive officers and other key members of
management to implement the Companys business plan;
available acquisition opportunities; and economic environment
and conditions. The Company used an expected stabilized dividend
yield of 5.0% and a risk free interest rate of 2.33% based on a
five-year U.S. Treasury yield.
The Company recorded $0.2 million and $0.3 million in
compensation expense related to the LTIP Units for the three and
nine months ended September 30, 2010, respectively. As of
September 30, 2010, there was $3.6 million of total
unrecognized compensation cost related to LTIP Units. This cost
is expected to be recognized over 4.6 years, which
represents the weighted average remaining vesting period of the
LTIP Units. As of September 30, 2010, none of the LTIP
Units have reached parity.
|
|
11.
|
Commitments and
Contingencies
|
Litigation
The nature of the operations of the hotels exposes the hotels,
the Company and the Operating Partnership to the risk of claims
and litigation in the normal course of their business. The
Company is not presently subject to any material litigation nor,
to the Companys knowledge, is any litigation threatened.
Hotel Ground
Rent
The Altoona hotel is subject to a ground lease with an
expiration date of April 30, 2029 with an option of up to
12 additional terms of five years each. Monthly payments are
determined by the quarterly average room occupancy of the hotel
as follows with base rent equal to $5,500 per month which shall
be increased on an annual basis by two and one-half percent
(2.5%):
|
|
|
|
|
Avg Occupancy
|
|
Lease Amount
|
|
> 85%
|
|
|
Base Rent
|
|
85% but less than 90%
|
|
$
|
4/room/day
|
|
90% but less than 100%
|
|
$
|
5/room/day
|
|
100%
|
|
$
|
6/room/day
|
|
F-28
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a schedule of the minimum future obligation
payments required under the ground lease (in thousands):
|
|
|
|
|
2010
|
|
|
82
|
|
2011
|
|
|
84
|
|
2012
|
|
|
87
|
|
2013
|
|
|
89
|
|
2014
|
|
|
91
|
|
Thereafter
|
|
|
1,992
|
|
|
|
|
|
|
Total
|
|
|
2,425
|
|
|
|
|
|
|
Condo
Leases
The White Plains hotel is part of a condominium known as
La Reserva Condominium (the Condominium). The
Condominium is comprised of 143 residential units and four
commercial units. The four commercial units are owned by the
Company and are part of the White Plains Hotel. The White Plains
Hotel is comprised of 129 of the residential units owned by the
Company and four residential units leased by the Company from
unaffiliated third party owners. The remaining 10 residential
units are owned and occupied by unaffiliated third party owners.
The Company leases 4 residential units in the White Plains hotel
from individual owners (the Condo Owner). The lease
agreements are for 6 years with a one-time 5 year
renewal option. The White Plains hotel shall have the right to
sublease the unit to any third party (a Hotel Guest)
for such rent and on such terms as the White Plains hotel may
determine. Each Condo Owner may reserve the unit for seven
(7) days in any calendar quarter or two (2) weeks in
any calendar year. The White Plains hotel will have no
obligation to pay rent during such period. Each Condo Owner is
also obligated to reimburse the White Plains hotel for
renovations that were completed in 2008. Minimum annual rents
payable to the Condo Owner are approximately $70 thousand per
year and amounts receivable from the Condo Owner for its
renovation reimbursements are approximately $11 thousand per
year, subject to a balloon repayment at the end of the lease
term of any remaining reimbursements. The White Plains hotel is
responsible for paying assessments to the Condominium
association on a monthly basis for all residential units owned
and leased. The White Plains hotel provides certain services to
the Condominium association for housekeeping, maintenance and
certain other services and receives compensation from the
Condominium association for said services.
|
|
12.
|
Related Party
Transactions
|
The Company paid $3.2 million to reimburse Mr. Fisher
for expenses he incurred in connection with the Companys
formation and the IPO, including $2.5 million he funded as
earnest money deposits for the Companys purchase of the
Initial Acquisition Hotels. Mr. Fisher had also advanced
$14 thousand to the Company which was included in accounts
payable and accrued expenses on the accompanying consolidated
balance sheet as of December 31, 2009 which was reimbursed
following the close of the IPO.
Mr. Fisher owns 90% of Island Hospitality Management, Inc.
(IHM), a hotel management company. The Company has
entered into hotel management agreements with IHM to manage
three of its hotels. Management and accounting fees paid to IHM
for the three and nine months ended September 30, 2010 were
$69 thousand.
On October 5, 2010, the Company acquired the
124-room Residence Inn by
Marriott®
New Rochelle in New Rochelle, New York for
$21 million, plus customary pro-rated amounts and
F-29
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
closing costs, from New Roc Hotels, LLC. The hotel will be
managed by IHM pursuant to a
5-year
management agreement.
On October 12, 2010, the REIT, as parent guarantor and the
Operating Partnership, as borrower (the Borrower),
entered into a $85.0 million, three-year, secured revolving
credit agreement (the Credit Agreement) with the
lenders party thereto, Barclays Capital and Regions Capital
Markets as joint lead arrangers, Barclays Bank PLC as
administrative agent, Regions Bank as syndication agent, Credit
Agricole Corporate and Investment Bank, UBS Securities LLC and
US Bank National Association acting as co-documentation agents.
Subject to certain terms and conditions set forth in the Credit
Agreement, the Borrower may increase the original principal
amount of the Credit Agreement by an additional
$25.0 million. Pursuant to the Credit Agreement, the
Company and certain indirect subsidiaries of the Company
guarantee to the Lenders all of the obligations of the Borrower
under the Credit Agreement, any notes and the other loan
documents, including any obligations under hedging arrangements.
From time to time, the Borrower may be required to cause
additional subsidiaries to become guarantors under the Credit
Agreement.
Availability under the Credit Agreement is based on the least of
the following: (i) the aggregate commitments of all
Lenders, (ii) a percentage of the as-is
appraised value of qualifying borrowing base properties (subject
to certain concentration limitations and other deductions) and
(iii) a percentage of net operating income from qualifying
borrowing base properties (subject to certain limitations and
other deductions). The Credit Agreement is secured by each
borrowing base property, including all personal property assets
related thereto, and the equity interests of borrowing base
entities and certain other subsidiaries of the Company. There
are currently seven properties in the borrowing base under the
Credit Agreement.
The Credit Agreement provides for revolving credit loans to the
Company. All borrowings under the Credit Agreement will bear
interest at a rate per annum equal to, at the option of the
Company, (i) the greater of (A) 1.25% plus a margin
that fluctuates based upon the Companys leverage ratio or
(B) the Eurodollar Rate (as defined in the Credit
Agreement) plus a margin that fluctuates based upon the
Companys leverage ratio; or (ii) the greatest of
(A) 2.25%, (B) the prime lending rate as set forth on
the Reuters Screen RTRTSY1 (or such other comparable publicly
available rate if such rate no longer appears on the Reuters
Screen RTRTSY1), (C) the weighted average of the rates on
overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus
1/2
of 1%, or (D) 1% plus the Eurodollar Rate (as defined in
the Credit Agreement). The Credit Agreement also permits the
issuance of letters of credit and provides for swing line loans.
The Credit Agreement contains representations, warranties,
covenants, terms and conditions customary for transactions of
this type, including a maximum leverage ratio, a minimum fixed
charge coverage ratio and minimum net worth financial covenants,
limitations on (i) liens, (ii) incurrence of debt,
(iii) investments, (iv) distributions, and
(v) mergers and asset dispositions, covenants to preserve
corporate existence and comply with laws, covenants on the use
of proceeds of the credit facility and default provisions,
including defaults for non-payment, breach of representations
and warranties, insolvency, non-performance of covenants,
cross-defaults and guarantor defaults. The occurrence of an
event of default under the Credit Agreement could result in all
loans and other obligations becoming immediately due and payable
and the credit facility being terminated and allow the Lenders
to exercise all rights and remedies available to them with
respect to the collateral.
On November 3, 2010, the Company acquired the
145-room Homewood Suites by Hilton Carlsbad-North
San Diego County in Carlsbad, CA for $32.0 million,
plus customary pro-rated amounts
F-30
CHATHAM LODGING
TRUST
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and closing costs, from Royal Hospitality Washington, LLC and
Lee Estates, LLC. The Hotel will be managed by IHM pursuant to a
5-year
management agreement.
The allocation of the purchase price of the hotels acquired
after September 30, 2010 is based on preliminary estimates
of fair value as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homewood
|
|
|
|
|
|
|
Residence Inn
|
|
|
Suites
|
|
|
|
|
|
|
New Rochelle
|
|
|
Carlsbad, CA
|
|
|
Total
|
|
|
Acquistion date
|
|
|
10/05/10
|
|
|
|
11/04/10
|
|
|
|
|
|
Land
|
|
$
|
|
|
|
$
|
3,900
|
|
|
$
|
3,900
|
|
Building and improvements
|
|
|
20,281
|
|
|
|
27,520
|
|
|
|
47,801
|
|
Furniture, fixtures and equipment
|
|
|
434
|
|
|
|
580
|
|
|
|
1,014
|
|
Cash
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
Accounts receivable, net
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Prepaid expenses and other assets
|
|
|
170
|
|
|
|
9
|
|
|
|
179
|
|
Accounts payable and accrued expenses
|
|
|
(36
|
)
|
|
|
(13
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
20,898
|
|
|
$
|
32,000
|
|
|
$
|
52,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired, net of cash
|
|
$
|
20,895
|
|
|
$
|
31,996
|
|
|
$
|
52,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following condensed pro forma financial information presents
the results of operations as if the Residence Inn by
Marriott®
New Rochelle in New Rochelle, New York was acquired on
January 1, 2010. Pro forma information for the Homewood
Suites by
Hilton®
Carlsbad-North San Diego County in Carlsbad, CA is
unavailable at this time and has not been included. Since the
Company commenced operations on April 21, 2010 upon
completion of the IPO, pro forma adjustments have been included
for corporate general and administrative expense and income
taxes for the periods presented. The pro forma results have been
prepared for comparative purposes only and are not necessarily
indicative of what actual results of operations would have been
had the acquisition taken place on January 1, 2010, nor do
they purport to represent the results of operations for future
periods (in thousands, except share and per share data).
|
|
|
|
|
|
|
For the
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 30, 2010
|
|
|
Pro forma total revenues
|
|
$
|
17,682
|
|
Pro forma total hotel expense
|
|
|
10,477
|
|
Pro forma total operating expenses
|
|
|
20,391
|
|
|
|
|
|
|
Pro forma operating income
|
|
|
(2,709
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(2,592
|
)
|
|
|
|
|
|
Pro forma net loss per share:
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.28
|
)
|
Weighted average Common Shares Outstanding
|
|
|
|
|
Basic and diluted
|
|
|
9,125,000
|
|
F-31
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
The Board of Trustees and Shareholder
Chatham Lodging Trust:
In our opinion, the accompanying consolidated balance sheet
presents fairly, in all material respects, the financial
position of Chatham Lodging Trust and its subsidiaries (a
development stage company) at December 31, 2009 in
conformity with accounting principles generally accepted in the
United States of America. This financial statement is the
responsibility of the Companys management. Our
responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this
statement in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 10, 2010
F-32
CHATHAM LODGING
TRUST
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEET
December 31, 2009
|
|
|
|
|
ASSETS
|
Cash
|
|
$
|
23,666
|
|
|
|
|
|
|
Total assets
|
|
$
|
23,666
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
Due to related party
|
|
$
|
13,666
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,666
|
|
|
|
|
|
|
Commitment and contingencies (See Note 1 and 2)
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
Common shares, $0.01 par value per share; 1,000 shares
authorized; 1,000 shares issued and outstanding
|
|
|
10
|
|
Additional paid-in capital
|
|
|
9,990
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
10,000
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
23,666
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated
financial statement.
F-33
Chatham Lodging Trust (the Company) was formed as a
Maryland real estate investment trust on October 26, 2009,
and intends to elect to qualify as a real estate investment
trust for U.S. Federal Income Tax purposes beginning in
2010. The Company plans to be internally-managed and was
organized to invest primarily in premium-branded upscale
extended-stay and select-service hotels. The Company expects
that a significant portion of its portfolio will consist of
hotels in the upscale extended-stay category, including brands
such as Homewood Suites by
Hilton®,
Residence Inn by
Marriott®
and Summerfield Suites by
Hyatt®.
The Company is in the development stage, has no assets other
than cash and has not yet commenced operations.
The Company intends to offer for sale up to $150 million in
common shares through the filing of a registration statement on
Form S-11.
Concurrently with the closing of its initial public offering, in
a separate private placement pursuant to Regulation D under
the Securities Act of 1933, the Company will sell common shares
for an aggregate purchase price of $10 million to its chief
executive officer, Jeffrey H. Fisher, at a price per share equal
to the price to the public in the initial public offering and
without payment by the Company of any underwriting discount or
commission.
The Company formed Chatham Lodging, L.P. (the Operating
Partnership) on November 18, 2009. The Company is the
sole general partner of the Operating Partnership and plans to
conduct substantially all of its business through the Operating
Partnership. Net proceeds from the initial public offering and
concurrent private placement will be contributed to the
Operating Partnership.
The Company has entered into an agreement which required the
payment of $2.5 million as an earnest money deposit to
purchase six upscale all-suite extended stay hotels from wholly
owned subsidiaries of RLJ Development, LLC for an aggregate
purchase price of $73.5 million. Completion of the purchase
is contingent upon completion of the initial public offering.
|
|
2.
|
Summary of
Significant Accounting Policies
|
Below is a discussion of significant accounting policies as the
Company prepares to commence operations and acquire hotel assets:
Basis of
Presentation
The balance sheet includes all of the accounts of the Company as
of December 31, 2009, presented in accordance with
U.S. generally accepted accounting principles. All
intercompany profits, balances and transactions are eliminated
in consolidation.
Use of
Estimates
The preparation of the financial statement in conformity with
U.S. generally accepted accounting principles 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. Actual results could differ from those estimates.
Cash and Cash
Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
F-34
CHATHAM LODGING
TRUST
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Income
Taxes
The Company intends to elect to be taxed as a real estate
investment trust (REIT) for federal income tax
purposes. To qualify as a REIT, the Company must meet certain
organizational and operational requirements, including a
requirement to distribute at least 90% of the Companys
annual REIT taxable income to its shareholders (which is
computed without regard to the dividends paid deduction or net
capital gain and which does not necessarily equal net income as
calculated in accordance with U.S. generally accepted
accounting principles). As a REIT, the Company generally will
not be subject to federal income tax to the extent it
distributes qualifying dividends to its shareholders. If the
Company fails to qualify as a REIT in any taxable year, it will
be subject to federal income tax on its taxable income at
regular corporate income tax rates and generally will not be
permitted to qualify for treatment as a REIT for federal income
tax purposes for the four taxable years following the year
during which qualification is lost unless the Internal Revenue
Service grants the Company relief under certain statutory
provisions. Such an event could materially adversely affect the
Companys net income and net cash available for
distribution to shareholders. However, the Company intends to
organize and operate in such a manner as to qualify for
treatment as a REIT.
The Company plans to lease its hotels to subsidiaries of its
taxable REIT subsidiary, or TRS, Chatham TRS Holding, Inc. The
TRS would be subject to federal and state income taxes and the
Company would account for them, where applicable, using the
asset and liability method which recognizes deferred tax assets
and liabilities arising from differences between financial
statement carrying amounts and income tax bases.
The Company is currently subject to corporate federal and state
income taxes. However, as of December 31, 2009, the Company
had no operating results subject to taxation.
Organizational
and Offering Costs
The Company expenses organization costs as incurred and offering
costs, which include selling commissions, will be deferred and
charged to shareholders equity.
The Company will reimburse its sole shareholder for any
out-of-pocket
expenses incurred in connection with the organization of the
Company and the proposed offering of common shares to the
public. If the proposed offering is terminated, the Company will
have no obligation to reimburse its shareholder for any
organizational or offering costs.
Recently
Issued Accounting Standards
In June 2009, the FASB issued an accounting standard that made
the FASB Accounting Standards Codification (the
Codification) the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification has
superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification became
non-authoritative. This accounting standard is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. Following the issuance of
this accounting standard, the FASB will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates. The Board will not consider Accounting
Standards Updates as authoritative in their own right.
Accounting Standards Updates will serve only to update the
Codification, provide background information about the guidance,
and provide the bases for conclusions on the change(s) in the
Codification. The adoption of this accounting standard did not
have a significant impact on the Companys financial
statements.
F-35
CHATHAM LODGING
TRUST
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Under the Declaration of Trust of the Company, the total number
of shares initially authorized for issuance is 1,000 common
shares. The Board of Trustees may amend the Declaration of Trust
to increase or decrease the number of authorized shares.
On October 30, 2009, the Company issued the sole
shareholder of the Company 1,000 common shares at $10 per share.
|
|
4.
|
Related Party
Transactions
|
Jeffrey H. Fisher, the Companys Chief Executive Officer,
President and Chairman of the Board of Trustees, owns 90% of
Island Hospitality Management, Inc. (IHM), a hotel
management company. The Company may enter into hotel management
agreements with IHM in the future to manage certain acquired
hotels.
Jeffrey H. Fisher has advanced $13,666 to the Company which is
accounted for as a due to related party on the accompanying
balance sheet.
Upon completion of the offering, the amount due to Jeffrey H.
Fisher as of December 31, 2009 is approximately
$3.4 million for reimbursement of organizational and
offering costs including the earnest money deposits related to
the purchase agreement with subsidiaries of RLJ Development, LLC.
F-36
INITIAL
ACQUISITION HOTELS
As of
March 31, 2010 (Unaudited) and December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,294,067
|
|
|
$
|
1,091,139
|
|
Cash held in escrow
|
|
|
1,871,660
|
|
|
|
1,546,380
|
|
Accounts receivable, net
|
|
|
549,655
|
|
|
|
498,964
|
|
Prepaid expenses and other current assets
|
|
|
116,867
|
|
|
|
251,950
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,832,249
|
|
|
|
3,388,433
|
|
Property and equipment, net
|
|
|
48,771,701
|
|
|
|
49,406,096
|
|
Deferred financing costs, net
|
|
|
46,417
|
|
|
|
62,634
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
52,650,367
|
|
|
$
|
52,857,163
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS CAPITAL
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of mortgage notes payable
|
|
$
|
42,458,904
|
|
|
$
|
1,242,949
|
|
Accounts payable, trade
|
|
|
15,377
|
|
|
|
120,182
|
|
Accounts payable, management companies
|
|
|
265,801
|
|
|
|
372,088
|
|
Advance deposits
|
|
|
41,293
|
|
|
|
15,125
|
|
Accrued sales and occupancy tax
|
|
|
225,564
|
|
|
|
155,725
|
|
Accrued property taxes
|
|
|
191,464
|
|
|
|
54,615
|
|
Accrued vacation
|
|
|
203,583
|
|
|
|
205,460
|
|
Accrued interest
|
|
|
229,881
|
|
|
|
231,595
|
|
Other accrued expenses
|
|
|
533,695
|
|
|
|
456,416
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
44,165,562
|
|
|
|
2,854,155
|
|
Mortgage notes payable
|
|
|
|
|
|
|
41,531,809
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
44,165,562
|
|
|
|
44,385,964
|
|
Members capital
|
|
|
8,484,805
|
|
|
|
8,471,199
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
52,650,367
|
|
|
$
|
52,857,163
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-37
INITIAL
ACQUISITION HOTELS
Unaudited Three
Month Periods Ended March 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Room revenues
|
|
$
|
5,305,828
|
|
|
$
|
5,209,889
|
|
Other service revenues
|
|
|
133,320
|
|
|
|
131,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,439,148
|
|
|
|
5,341,094
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Room expenses
|
|
|
1,032,293
|
|
|
|
1,002,741
|
|
Other service expenses
|
|
|
437,999
|
|
|
|
373,878
|
|
General and administrative
|
|
|
1,105,223
|
|
|
|
1,184,262
|
|
Sales and marketing
|
|
|
515,036
|
|
|
|
493,656
|
|
Depreciation
|
|
|
654,653
|
|
|
|
646,119
|
|
Property taxes
|
|
|
338,141
|
|
|
|
317,287
|
|
Franchise fees
|
|
|
212,233
|
|
|
|
208,395
|
|
Management fees
|
|
|
113,602
|
|
|
|
108,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,409,180
|
|
|
|
4,334,376
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,029,968
|
|
|
|
1,006,718
|
|
Interest expense
|
|
|
(868,986
|
)
|
|
|
(892,562
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
160,982
|
|
|
$
|
114,156
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-38
INITIAL
ACQUISITION HOTELS
Unaudited Three
Month Periods Ended March 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Members capital beginning of period
|
|
$
|
8,471,199
|
|
|
$
|
9,585,707
|
|
Net income
|
|
|
160,982
|
|
|
|
114,156
|
|
Distributions to RLJ Development, LLC
|
|
|
(147,376
|
)
|
|
|
(161,234
|
)
|
|
|
|
|
|
|
|
|
|
Members capital end of period
|
|
$
|
8,484,805
|
|
|
$
|
9,538,629
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-39
INITIAL
ACQUISITION HOTELS
Unaudited
Three Month Periods Ended March 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
160,982
|
|
|
$
|
114,156
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
654,653
|
|
|
|
646,119
|
|
Amortization of deferred financing costs
|
|
|
16,217
|
|
|
|
16,217
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Funding of real estate tax and insurance escrow, net
|
|
|
(233,428
|
)
|
|
|
(67,551
|
)
|
Accounts receivable
|
|
|
(50,691
|
)
|
|
|
(58,297
|
)
|
Prepaid expenses and other current assets
|
|
|
135,083
|
|
|
|
71,202
|
|
Accounts payable
|
|
|
(211,092
|
)
|
|
|
(75,698
|
)
|
Advance deposits
|
|
|
26,168
|
|
|
|
8,929
|
|
Other accrued expenses
|
|
|
77,279
|
|
|
|
61,743
|
|
Accrued property taxes
|
|
|
136,849
|
|
|
|
133,911
|
|
Accrued sales and occupancy tax
|
|
|
69,839
|
|
|
|
36,190
|
|
Accrued vacation
|
|
|
(1,877
|
)
|
|
|
(5,417
|
)
|
Accrued interest
|
|
|
(1,714
|
)
|
|
|
(1,664
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
778,268
|
|
|
|
879,840
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Proceeds from replacement and renovation reserves
|
|
|
|
|
|
|
|
|
held in escrow, net
|
|
|
(91,852
|
)
|
|
|
(144,853
|
)
|
Purchase of property and equipment
|
|
|
(20,258
|
)
|
|
|
(40,178
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(112,110
|
)
|
|
|
(185,031
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Distributions of members capital
|
|
|
(147,376
|
)
|
|
|
(161,234
|
)
|
Principal payments on mortgage notes
|
|
|
(315,854
|
)
|
|
|
(292,332
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(463,230
|
)
|
|
|
(453,566
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
202,928
|
|
|
|
241,243
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,091,139
|
|
|
|
1,227,649
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,294,067
|
|
|
$
|
1,468,892
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
854,483
|
|
|
$
|
930,765
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-40
INITIAL
ACQUISITION HOTELS
Unaudited Three Month Periods Ended March 31, 2010
and 2009
|
|
1.
|
Businesses and
Organization
|
Description of
Business
The Initial Acquisition Hotels are comprised of the following
six Homewood Suites hotel properties held within each of the
below entities:
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|
|
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|
RLJ Billerica Hotel, LLC
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|
Bedford, Massachusetts
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|
147 rooms
|
RLJ Bloomington Hotel, LLC
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|
Bloomington, Minnesota
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|
144 rooms
|
RLJ Brentwood Hotel, LLC
|
|
Brentwood, Tennessee
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|
121 rooms
|
RLJ Dallas Hotel Limited Partnership
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|
Dallas, Texas
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|
137 rooms
|
RLJ Farmington Hotel, LLC
|
|
Farmington, Connecticut
|
|
121 rooms
|
RLJ Maitland Hotel, LLC
|
|
Maitland, Florida
|
|
143 rooms
|
On November 16, 2009, a purchase and sale agreement was
signed related to the acquisition of the hotel properties by
Chatham Lodging Trust. The six hotels to be acquired are wholly
owned by RLJ Development, LLC through the above entities
(collectively the Initial Acquisition Hotels or
Hotels). RLJ Development, LLC owns and operates
limited service hotels. Limited service hotels offer amenities
such as limited meeting space, fitness centers, swimming pools,
continental breakfast or similar services.
The Initial Acquisition Hotels operate in the hospitality and
lodging industry and are subject to risks common to companies in
that industry.
|
|
2.
|
Summary of
Significant Accounting Policies
|
Cash Held in
Escrow
As of March 31, 2010 and December 31, 2009, amounts
legally restricted and held in escrow were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Insurance escrows
|
|
$
|
89,823
|
|
|
$
|
51,918
|
|
Tax escrows
|
|
|
521,793
|
|
|
|
326,270
|
|
Replacement and renovation reserves
|
|
|
1,260,044
|
|
|
|
1,168,192
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,871,660
|
|
|
$
|
1,546,380
|
|
|
|
|
|
|
|
|
|
|
Deferred
Financing Costs
The Hotels deferred financing costs relate to fees and
costs incurred to obtain long-term financing to purchase the
hotel and related properties. These costs are amortized using
the straight-line method, which approximates the effective
interest method, over the life of the applicable mortgage and
are included as a component of interest expense. There were no
capitalized deferred financing costs during the three month
periods ended March 31, 2010 and 2009. Accumulated
amortization related to deferred financing costs as of
March 31, 2010 and December 31, 2009 was $602,144 and
$585,927, respectively. Amortization expense related to deferred
financing costs for the three month periods ended March 31,
2010 and 2009 was $16,217.
Reclassifications
Certain amounts in prior years financial statements have
been reclassified to conform to the current year presentation
with no effect on previously reported net income or equity.
F-41
INITIAL
ACQUISITION HOTELS
Notes to Combined
Financial Statements (Continued)
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|
3.
|
Property and
Equipment
|
Property and equipment at March 31, 2010 and
December 31, 2009 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Lives
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Land
|
|
|
|
|
|
$
|
8,882,552
|
|
|
$
|
8,882,552
|
|
Building
|
|
|
39 years
|
|
|
|
44,953,448
|
|
|
|
44,953,448
|
|
Machinery, equipment and fixtures
|
|
|
5-15 years
|
|
|
|
27,224,119
|
|
|
|
27,203,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
81,060,119
|
|
|
|
81,039,861
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(32,288,418
|
)
|
|
|
(31,633,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
48,771,701
|
|
|
$
|
49,406,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three month periods ended
March 31, 2010 and 2009 was $654,653 and $646,119,
respectively.
|
|
4.
|
Mortgage Notes
Payable
|
Mortgage notes payable as of March 31, 2010 and
December 31, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Mortgage notes with fixed interest rates
|
|
|
|
|
|
|
|
|
7.84%, maturing January 2011
|
|
$
|
34,050,775
|
|
|
$
|
34,304,772
|
|
8.69%, maturing January 2011
|
|
|
8,408,129
|
|
|
|
8,469,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,458,904
|
|
|
|
42,774,758
|
|
Less current portion
|
|
|
(42,458,904
|
)
|
|
|
(1,242,949
|
)
|
|
|
|
|
|
|
|
|
|
Long term mortgage notes payable
|
|
$
|
|
|
|
$
|
41,531,809
|
|
|
|
|
|
|
|
|
|
|
On November 16, 2009, a purchase and sale agreement was
signed related to the sale of the six hotel properties held by
the Initial Acquisition Hotels to Chatham Lodging Trust for a
total purchase price of $73.5 million. As part of the
acquisition Chatham Lodging Trust did not acquire the operating
legal entities nor did they assume the related mortgage debt.
The sale closed on April 23, 2010.
On April 23, 2010, the Initial Acquisition Hotels defeased
the five individual mortgages held in two collateralized loans
by replacing the original collateral with government securities.
These loans carried an outstanding balance of $34.1 and
$34.3 million at March 31, 2010 and December 31,
2009, respectively.
On April 28, 2010 the Initial Acquisition Hotels fully
repaid its outstanding $8.4 million mortgage note.
The Hotels have performed an evaluation of subsequent events
through October 27, 2010. No other subsequent events were
identified.
F-42
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder of
Chatham Lodging Trust
In our opinion, the accompanying combined statements of
financial position and the related combined statements of
operations, of changes in net assets and of cash flows present
fairly, in all material respects, the financial position of RLJ
Billerica Hotel, LLC, RLJ Brentwood Hotel, LLC, RLJ Bloomington
Hotel, LLC, RLJ Dallas Hotel Limited Partnership, RLJ Farmington
Hotel, LLC, and RLJ Maitland Hotel, LLC (collectively the
Initial Acquisition Hotels or the
Hotels) at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Hotels management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 4, 2010
F-43
Initial
Acquisition Hotels
December 31,
2009 and 2008
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|
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|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,091,139
|
|
|
$
|
1,227,649
|
|
Cash held in escrow
|
|
|
1,546,380
|
|
|
|
1,470,539
|
|
Accounts receivable, net
|
|
|
498,964
|
|
|
|
524,714
|
|
Prepaid expenses and other current assets
|
|
|
251,950
|
|
|
|
157,262
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,388,433
|
|
|
|
3,380,164
|
|
Property and equipment, net
|
|
|
49,406,096
|
|
|
|
51,540,562
|
|
Deferred financing costs, net
|
|
|
62,634
|
|
|
|
127,511
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
52,857,163
|
|
|
$
|
55,048,237
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND NET ASSETS
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of mortgage notes payable
|
|
$
|
1,242,949
|
|
|
$
|
1,166,841
|
|
Accounts payable, trade
|
|
|
120,182
|
|
|
|
85,511
|
|
Accounts payable, management companies
|
|
|
372,088
|
|
|
|
275,534
|
|
Advance deposits
|
|
|
15,125
|
|
|
|
32,327
|
|
Accrued sales and occupancy tax
|
|
|
155,725
|
|
|
|
177,268
|
|
Accrued vacation
|
|
|
205,460
|
|
|
|
201,229
|
|
Accrued interest
|
|
|
231,595
|
|
|
|
237,890
|
|
Other accrued expenses
|
|
|
511,031
|
|
|
|
511,193
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,854,155
|
|
|
|
2,687,793
|
|
Mortgage notes payable
|
|
|
41,531,809
|
|
|
|
42,774,737
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
44,385,964
|
|
|
|
45,462,530
|
|
Net assets
|
|
|
8,471,199
|
|
|
|
9,585,707
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and net assets
|
|
$
|
52,857,163
|
|
|
$
|
55,048,237
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-44
Initial
Acquisition Hotels
For the Three
Years Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenues
|
|
$
|
21,193,140
|
|
|
$
|
24,105,287
|
|
|
$
|
24,074,091
|
|
Other service revenues
|
|
|
544,937
|
|
|
|
859,176
|
|
|
|
865,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,738,077
|
|
|
|
24,964,463
|
|
|
|
24,939,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Room expenses
|
|
|
4,238,748
|
|
|
|
4,656,224
|
|
|
|
4,584,978
|
|
Other service expenses
|
|
|
1,687,113
|
|
|
|
1,780,142
|
|
|
|
1,759,520
|
|
General and administrative
|
|
|
4,580,931
|
|
|
|
5,170,572
|
|
|
|
5,034,445
|
|
Sales and marketing
|
|
|
2,021,046
|
|
|
|
2,374,485
|
|
|
|
2,385,135
|
|
Depreciation
|
|
|
2,618,613
|
|
|
|
2,480,970
|
|
|
|
2,294,127
|
|
Property taxes
|
|
|
1,255,310
|
|
|
|
1,227,023
|
|
|
|
1,204,138
|
|
Franchise fees
|
|
|
847,726
|
|
|
|
964,231
|
|
|
|
962,964
|
|
Management fees
|
|
|
458,150
|
|
|
|
570,362
|
|
|
|
562,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,707,637
|
|
|
|
19,224,009
|
|
|
|
18,787,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,030,440
|
|
|
|
5,740,454
|
|
|
|
6,151,780
|
|
Interest expense
|
|
|
(3,573,111
|
)
|
|
|
(3,671,782
|
)
|
|
|
(3,747,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
457,329
|
|
|
$
|
2,068,672
|
|
|
$
|
2,404,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-45
Initial
Acquisition Hotels
For the Three
Years Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net assets beginning of year
|
|
$
|
9,585,707
|
|
|
$
|
10,298,652
|
|
|
$
|
8,115,356
|
|
Net income
|
|
|
457,329
|
|
|
|
2,068,672
|
|
|
|
2,404,429
|
|
Distributions to RLJ Development, LLC
|
|
|
(1,571,837
|
)
|
|
|
(2,781,617
|
)
|
|
|
(1,791,537
|
)
|
Contributions from RLJ Development, LLC
|
|
|
|
|
|
|
|
|
|
|
1,570,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets end of year
|
|
$
|
8,471,199
|
|
|
$
|
9,585,707
|
|
|
$
|
10,298,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-46
Initial
Acquisition Hotels
For the Three
Years Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
457,329
|
|
|
$
|
2,068,672
|
|
|
$
|
2,404,429
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,618,613
|
|
|
|
2,480,970
|
|
|
|
2,294,127
|
|
Amortization of deferred financing costs
|
|
|
64,877
|
|
|
|
64,877
|
|
|
|
64,877
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding (releases) of real estate tax and insurance escrow, net
|
|
|
97,717
|
|
|
|
179,229
|
|
|
|
(136,877
|
)
|
Accounts receivable
|
|
|
25,750
|
|
|
|
108,566
|
|
|
|
(202,678
|
)
|
Prepaid expenses and other current assets
|
|
|
(94,688
|
)
|
|
|
(21,649
|
)
|
|
|
21,948
|
|
Accounts payable
|
|
|
131,225
|
|
|
|
44,618
|
|
|
|
(5,344
|
)
|
Advance deposits
|
|
|
(17,202
|
)
|
|
|
17,198
|
|
|
|
(13,683
|
)
|
Other accrued expenses
|
|
|
(162
|
)
|
|
|
322
|
|
|
|
(23,123
|
)
|
Accrued sales and occupancy tax
|
|
|
(21,543
|
)
|
|
|
(20,042
|
)
|
|
|
21,854
|
|
Accrued vacation
|
|
|
4,231
|
|
|
|
1,757
|
|
|
|
16,617
|
|
Accrued interest
|
|
|
(6,295
|
)
|
|
|
(5,763
|
)
|
|
|
(5,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,259,852
|
|
|
|
4,918,755
|
|
|
|
4,436,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions to (proceeds from) replacement and renovation
reserves held in escrow, net
|
|
|
(173,558
|
)
|
|
|
595,417
|
|
|
|
12,207
|
|
Advances to affiliates, net
|
|
|
|
|
|
|
|
|
|
|
(49,026
|
)
|
Purchase of property and equipment
|
|
|
(484,147
|
)
|
|
|
(1,358,703
|
)
|
|
|
(1,818,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(657,705
|
)
|
|
|
(763,286
|
)
|
|
|
(1,855,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions of net assets
|
|
|
(1,571,837
|
)
|
|
|
(2,781,617
|
)
|
|
|
(1,607,537
|
)
|
Contributions of net assets
|
|
|
|
|
|
|
|
|
|
|
5,998
|
|
Principal payments on mortgage notes
|
|
|
(1,166,820
|
)
|
|
|
(1,068,678
|
)
|
|
|
(993,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,738,657
|
)
|
|
|
(3,850,295
|
)
|
|
|
(2,595,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(136,510
|
)
|
|
|
305,174
|
|
|
|
(13,645
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,227,649
|
|
|
|
922,475
|
|
|
|
936,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,091,139
|
|
|
$
|
1,227,649
|
|
|
$
|
922,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,514,529
|
|
|
$
|
3,612,667
|
|
|
$
|
3,687,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of payable to RLJ Development, LLC to equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,564,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of a receivable to RLJ Development, LLC
|
|
$
|
|
|
|
$
|
|
|
|
$
|
184,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined
financial statements.
F-47
Initial
Acquisition Hotels
For the Three
Years Ended December 31, 2009
|
|
1.
|
Businesses and
Organization
|
Description of
Business
The Initial Acquisition Hotels are comprised of the following
six Homewood Suites hotel properties:
|
|
|
|
|
RLJ Billerica Hotel, LLC
|
|
Bedford, Massachusetts
|
|
147 rooms
|
RLJ Bloomington Hotel, LLC
|
|
Bloomington, Minnesota
|
|
144 rooms
|
RLJ Brentwood Hotel, LLC
|
|
Brentwood, Tennessee
|
|
121 rooms
|
RLJ Dallas Hotel Limited Partnership
|
|
Dallas, Texas
|
|
137 rooms
|
RLJ Farmington Hotel, LLC
|
|
Farmington, Connecticut
|
|
121 rooms
|
RLJ Maitland Hotel, LLC
|
|
Maitland, Florida
|
|
143 rooms
|
The six hotel properties (collectively the Initial
Acquisition Hotels or Hotels) are wholly owned
by RLJ Development, LLC. RLJ Development, LLC owns and operates
limited service hotels. Limited service hotels offer amenities
such as limited meeting space, fitness centers, swimming pools,
continental breakfast or similar services.
The Initial Acquisition Hotels operate in the hospitality and
lodging industry and are subject to risks common to companies in
that industry.
|
|
2.
|
Summary of
Significant Accounting Policies
|
Basis of
Presentation
The combined financial statements have been prepared on the
accrual basis of accounting and in accordance with accounting
principles generally accepted in the United States of America.
All intercompany balances and transactions have been eliminated
in combination. These financials are being presented on a
combined basis as all of the Initial Acquisition Hotels are
under common management and control.
Use of
Estimates
The preparation of 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.
Revenue
Recognition
Room revenues are recognized the night of occupancy. Cash
received prior to guest arrival is recorded as an advance from
customers and recognized as revenue at the time of occupancy.
The Hotels also recognize revenues for food, beverage, telephone
charges and various ancillary services performed at the time the
service is provided. These amounts are included in other service
revenues.
Accounts
Receivable, net
Accounts receivable consist primarily of payments due from
credit card companies and from corporate customers. The
allowance for doubtful accounts is the best estimate of the
amount of probable credit losses in existing accounts
receivable. The Hotels record bad debt expense in general and
administrative expense in the accompanying statements of
operations based on an assessment of the ultimate realizability
of receivables considering historical collection experience, the
economic environment, and the individual circumstances of each
receivable. When the Hotels determine that an
F-48
Initial
Acquisition Hotels
Notes to Combined
Financial Statements (Continued)
account is not collectible, the account is written-off to the
associated allowance for doubtful accounts. As of
December 31, 2009 and 2008, the allowance for doubtful
accounts balance was $5,612 and $7,817, respectively.
Cash and Cash
Equivalents
The Hotels consider all funds held in money market accounts and
highly liquid investments with an original maturity of three
months or less to be cash and cash equivalents. The Hotels
maintain their cash accounts at various major financial
institutions within the United States of America. At times,
deposits may be in excess of federally insured limits. The
Hotels have not experienced any losses on cash deposited with
the financial institutions.
Cash Held in
Escrow
The Hotels are required by certain mortgage agreements to
maintain escrow accounts for real estate taxes and insurance,
and by certain property management agreements
and/or
mortgages to maintain replacements reserves for each hotel
financed. The escrow accounts for real estate taxes and
insurance are determined by the lender, based on annual
estimates. The Hotels various debt and property management
agreements require individual hotel properties to contribute a
predetermined amount to replacement reserves based on adjusted
gross revenues from the preceding month. The predetermined
amounts required to be contributed range from 4% to 5%.
As of December 31, 2009 and 2008, amounts held in escrow
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Insurance escrows
|
|
$
|
51,918
|
|
|
$
|
32,133
|
|
Tax escrows
|
|
|
326,270
|
|
|
|
443,772
|
|
Replacement and renovation reserves
|
|
|
1,168,192
|
|
|
|
994,634
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,546,380
|
|
|
$
|
1,470,539
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments and Fair Value Measurements
Fair value is defined 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
in the principal or most advantageous market. The fair value
hierarchy has three levels of inputs, both observable and
unobservable. Level 1 inputs include quoted market prices
in an active market for identical assets or liabilities.
Level 2 inputs are market data, other than Level 1,
that are observable either directly or indirectly. Level 2
inputs include quoted market prices for similar assets or
liabilities, quoted market prices in an inactive market, and
other observable information that can be corroborated by market
data. Level 3 inputs are unobservable and corroborated by
little or no market data.
The following tables provide fair value information on the
Hotels financial assets and liabilities at
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount in
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
Fair Value
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
Fair Value Measurements Using:
|
|
|
2009
|
|
2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Cash and cash equivalents and cash held in escrow
|
|
$
|
2,637,519
|
|
|
$
|
2,637,519
|
|
|
$
|
2,637,519
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage notes payable
|
|
|
42,774,758
|
|
|
|
42,098,604
|
|
|
|
|
|
|
|
42,098,604
|
|
|
|
|
|
F-49
Initial
Acquisition Hotels
Notes to Combined
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount in
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
Fair Value
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
Fair Value Measurements Using:
|
|
|
2008
|
|
2008
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Cash and cash equivalents and cash held in escrow
|
|
$
|
2,698,188
|
|
|
$
|
2,698,188
|
|
|
$
|
2,698,188
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage notes payable
|
|
|
43,941,578
|
|
|
|
42,532,176
|
|
|
|
|
|
|
|
42,532,176
|
|
|
|
|
|
Because of their short-term nature, the carrying amount of the
Hotels current financial instruments approximates fair
value as of December 31, 2009 and 2008. The fair value of
long-term mortgage notes payable is based on rates available to
the Hotels for debt with similar terms and maturities. As of
December 31, 2009 and 2008, the fair market value of
mortgage notes payable for mortgages with fixed interest rates
is approximately $42,098,604 and $42,532,176 based on quoted
market prices at December 31, 2009 and December 31,
2008, respectively, as compared to the carrying value of
$42,774,758 and $43,941,578, respectively
Property and
Equipment
The Hotels property and equipment consists primarily of
land, buildings, improvements and related fixtures, furniture
and equipment. Property and equipment are stated at cost. Major
renewals and improvements are capitalized, while maintenance and
repairs are expensed when incurred. Depreciation is computed
over the estimated useful lives of the depreciable assets using
the straight-line method.
When properties
and/or
equipment are sold or retired, their cost and related
accumulated depreciation are eliminated from the accounts and
the resulting gain or loss is reflected in operations.
Impairment of
Long-Lived Assets
The Hotels periodically evaluate the recoverability of its
long-lived assets when events or circumstances indicate that an
asset may be impaired. This evaluation consists of a comparison
of the carrying value of the assets with the assets
expected future cash flows, undiscounted and without interest
costs. Estimates of expected future cash flows represent
managements best estimate based on reasonable and
supportable assumptions and projections. If the expected future
undiscounted cash flows exceed the carrying value of the asset,
no impairment is recognized. If expected undiscounted cash flows
are less than the carrying value then impairment is indicated.
Such impairment is measured as the difference between the
carrying value of long-lived assets and their fair market value.
During 2009 and 2008 there were no events or changes in
circumstances indicating that the carrying value of the
Hotels long-lived assets may not be recoverable.
Advances to
Affiliates, net
Amounts advanced to affiliates represent short-term transfers of
cash provided by and to other properties affiliated with RLJ
Development, LLC in order to meet short-term cash needs. During
2007, these affiliates of the Hotels were sold and amounts owed
to/from those affiliates were transferred and considered
receivable / payable to RLJ Development, LLC. The
Hotels recognized a non-cash contribution and distribution for
this transaction.
Deferred
Financing Costs
The Hotels deferred financing costs relate to fees and
costs incurred to obtain long-term financing to purchase the
hotel and related properties. These costs are amortized using
the straight-line method, which approximates the effective
interest method, over the life of the applicable mortgage and
are included as a component of interest expense. There were no
capitalized deferred financing costs in 2009 or 2008.
Accumulated amortization related to deferred financing costs as
of
F-50
Initial
Acquisition Hotels
Notes to Combined
Financial Statements (Continued)
December 31, 2009 and 2008 was $585,957 and $521,080,
respectively. Amortization expense related to deferred financing
costs for each of the three years ended December 31, 2009
was $64,877 a year.
Advertising
Costs
The Hotels expense advertising costs as incurred. Advertising
expenses were $1,273,715, $1,410,254 and $1,420,171 for the
years ended December 31, 2009, 2008 and 2007, respectively,
and have been included in sales and marketing expenses.
Income and
Sales Taxes
No provision has been made for federal or state income taxes
since the Hotels profits and losses are reported by the
individual members and partners on their respective income tax
returns. The Hotels perform an annual review for any uncertain
tax positions and will record expected future tax consequences
of uncertain tax positions in their financials. At
December 31, 2009 and 2008, the Hotels did not identify any
uncertain tax positions.
Additionally, the Hotels collect sales, use, occupancy and
similar taxes which are presented on a net basis (excluded from
revenues) on the combined statements of operations.
|
|
3.
|
Property
Management Agreements
|
In December 2000, the Hotels entered into six separate fifteen
(15) year property management agreements (the Promus
Agreements) with Promus Hotels, Inc. (Promus)
that expire in 2015 with a five-year renewal option that may be
exercised by Promus. The Promus Agreements require that Promus
provide all services required to operate the six hotels, located
in Billerica, MA; Bloomington, MN; Brentwood, TN; Dallas, TX;
Farmington CT; and Maitland, FL., including directing the
day-to-day activities of the hotels and establishing all
policies and procedures relating to the management and operation
of the hotels.
In accordance with the Promus Agreements, Promus is required to
maintain and manage the operating activities of the hotels.
Accordingly, Promus initially pays for all operating expenses on
behalf of the hotels and is reimbursed by withdrawing funds from
the individual hotels operating cash account. As of
December 31, 2009 and 2008, $372,088 and $275,534,
respectively, was due to Promus under these arrangements and
have been included in accounts payable, management companies.
The Promus Agreements also include provisions for a management
fee and a management incentive fee to be paid to Promus for its
services. Additionally, the Promus Agreements call for a monthly
franchise fee to be collected from the hotels and paid to Hilton
Worldwide. The management fee is computed in accordance with the
Promus Agreements and is based on 2% of adjusted monthly gross
revenue of the individual hotels. For the years ended
December 31, 2009, 2008 and 2007, the management fees
incurred by the hotels were $434,735, $498,810 and $497,626,
respectively. The incentive management fee is calculated based
on 10% of the adjusted net operating income from operations of
the individual hotels at the end of each year. For the years
ended December 31, 2009, 2008 and 2007, the incentive
management fees incurred by the hotels were $23,415, $71,552,
and $64,756, respectively.
The Hotels are charged a monthly franchise fee paid to Hilton
Worldwide based on 4% of the individual hotels respective
gross room revenue. For the years ended December 31, 2009,
2008 and 2007, the franchise fees for hotels managed pursuant to
the Promus Agreements were $847,726, $964,231, and $962,964,
respectively.
F-51
Initial
Acquisition Hotels
Notes to Combined
Financial Statements (Continued)
|
|
4.
|
Property and
Equipment
|
Property and equipment at December 31, 2009 and 2008
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Lives
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
|
|
|
|
$
|
8,882,552
|
|
|
$
|
8,882,552
|
|
Building
|
|
|
39 years
|
|
|
|
44,953,448
|
|
|
|
44,953,448
|
|
Machinery, equipment and fixtures
|
|
|
5-15 years
|
|
|
|
27,203,861
|
|
|
|
26,719,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
81,039,861
|
|
|
|
80,555,714
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(31,633,765
|
)
|
|
|
(29,015,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
49,406,096
|
|
|
$
|
51,540,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2009,
2008 and 2007 was $2,618,613, $2,480,970 and $2,294,127,
respectively.
|
|
5.
|
Other Accrued
Expenses
|
Other accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued payroll
|
|
$
|
96,162
|
|
|
$
|
95,703
|
|
Accrued property tax
|
|
|
54,615
|
|
|
|
56,746
|
|
Accrued bonus and commission
|
|
|
47,787
|
|
|
|
33,219
|
|
Accrued capitalizable assets
|
|
|
8,861
|
|
|
|
194,634
|
|
Other accrued operating expenses
|
|
|
303,606
|
|
|
|
130,891
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
511,031
|
|
|
$
|
511,193
|
|
|
|
|
|
|
|
|
|
|
Other accrued operating expense includes additional accruals for
telephone, utilities, maintenance and service contracts and
other miscellaneous accrued expenses.
|
|
6.
|
Mortgage Notes
Payable
|
Mortgage notes payable as of December 31, 2009 and 2008
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Mortgage notes with fixed interest rates
|
|
|
|
|
|
|
|
|
7.84%, maturing January 2011
|
|
$
|
34,304,772
|
|
|
$
|
35,237,130
|
|
8.69%, maturing January 2011
|
|
|
8,469,986
|
|
|
|
8,704,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,774,758
|
|
|
|
43,941,578
|
|
Less current portion
|
|
|
1,242,949
|
|
|
|
1,166,841
|
|
|
|
|
|
|
|
|
|
|
Long term mortgage notes payable
|
|
$
|
41,531,809
|
|
|
$
|
42,774,737
|
|
|
|
|
|
|
|
|
|
|
In December 2000, the Hotels entered into a $40.5 million
credit facility with a financial institution for mortgages
related to five of the hotels acquired in December 2000. In
April 2001, the credit facility was modified to split the five
individual mortgages into two collateralized pools. The first
collateralized pool consists of the mortgages to RLJ Brentwood
Hotel, LLC, RLJ Dallas Hotel Limited Partnership, and RLJ
Farmington Hotel, LLC and had an initial borrowing under the
facility of $20.7 million, with combined principal and
interest of $157,578 payable monthly. As of December 31,
2009 and 2008, the outstanding balance of the first pool was
$17,533,550 and $18,010,089,
F-52
Initial
Acquisition Hotels
Notes to Combined
Financial Statements (Continued)
respectively. The second collateralized pool, consisting of the
mortgages to RLJ Billerica Hotel, LLC and RLJ Bloomington Hotel,
LLC, was established with an initial borrowing under the
facility of $19.8 million, with combined principal and
interest of $150,726 payable monthly. As of December 31,
2009 and 2008, the outstanding balance of the second pool was
$16,771,222 and $17,227,041, respectively. All related mortgage
note agreements mature in January 2011. The interest rates
related to the mortgages are 7.84% and are payable monthly. The
mortgage note agreements include a prepayment penalty in whole
or in part based on the higher of 3% of the principal amount of
the note being prepaid or the present value of a series of
payments as defined in the credit facility. The individual
mortgages in the credit facility are collateralized by the
individual hotel properties and equipment.
In December 2000, RLJ Maitland Hotel, LLC entered into a
mortgage note agreement with a financial institution at an
initial borrowing of $10.0 million, with monthly principal
and interest payments of $81,807. The final payment on the
mortgage note is due in January 2011 and bears an 8.69% fixed
rate of interest. The mortgage note contains a prepayment
penalty provision based on rates defined in the note agreement,
related to the
10-year
Treasury note rate plus premium ranging from 0.013% to 0.120% of
the outstanding principal balance of the loan. The note is
collateralized by the individual hotel property and equipment.
The managing member of RLJ Development, LLC had personally
guaranteed up to $1,346,400 of the loan, the amount of the
guarantee outstanding as of December 31, 2009 and 2008, was
zero and $50,847, respectively. As of December 31, 2009 and
2008, the outstanding balance on the note was $8,469,986 and
$8,704,448, respectively.
The mortgage notes include financial and other covenants that
require the maintenance of certain ratios. As of
December 31, 2009 and 2008, the Hotels were in compliance
with all covenants under the mortgage notes.
|
|
7.
|
Guarantees and
Indemnifications
|
The Hotels may enter into service agreements with service
providers in which they agrees to indemnify the service provider
against certain losses and liabilities arising from the service
providers performance under the agreement. Generally, such
indemnification obligations do not apply in situations in which
the service provider is grossly negligent, engages in wilful
misconduct, or acts in bad faith. The Hotels believe their
liabilities under such service agreements are immaterial.
On November 16, 2009, a purchase and sale agreement was
signed related to the acquisition of the Hotels by Chatham
Lodging Trust for a total purchase price of $73.5 million
(for all six hotels).
The Hotels have performed an evaluation of subsequent events
through March 4, 2010. No subsequent events were identified.
F-53
MOODY NATIONAL
1715 OST HOUSTON S, LLC AND
MOODY NATIONAL 1715 OST HOUSTON MT, LLC
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in hotel properties, net
|
|
$
|
15,702
|
|
|
$
|
15,920
|
|
Cash and cash equivalents
|
|
|
120
|
|
|
|
80
|
|
Restricted cash
|
|
|
1,230
|
|
|
|
750
|
|
Hotel receivables and other assets
|
|
|
73
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,125
|
|
|
$
|
17,297
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS CAPITAL
|
Mortgage loan
|
|
|
14,051
|
|
|
|
14,220
|
|
Note payable
|
|
|
1,550
|
|
|
|
1,550
|
|
Accounts payable and accrued expenses
|
|
$
|
1,365
|
|
|
$
|
1,364
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
16,966
|
|
|
|
17,134
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
159
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
17,125
|
|
|
$
|
17,297
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements.
F-54
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
1,931
|
|
|
$
|
1,873
|
|
Other operating
|
|
|
46
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,977
|
|
|
|
1,913
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
368
|
|
|
|
365
|
|
Other
|
|
|
24
|
|
|
|
22
|
|
General and administrative
|
|
|
495
|
|
|
|
387
|
|
Sales and marketing fees
|
|
|
20
|
|
|
|
67
|
|
Franchise fees
|
|
|
207
|
|
|
|
137
|
|
Management fees
|
|
|
130
|
|
|
|
111
|
|
Depreciation
|
|
|
218
|
|
|
|
218
|
|
Property taxes
|
|
|
144
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,606
|
|
|
|
1,514
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
371
|
|
|
|
399
|
|
Interest expense
|
|
|
402
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31
|
)
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements.
F-55
|
|
|
|
|
|
|
Members Capital
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at December 31, 2009
|
|
$
|
163
|
|
Contributions
|
|
|
27
|
|
Distributions
|
|
|
|
|
Net loss
|
|
|
(31
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
159
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements.
F-56
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31
|
)
|
|
$
|
(33
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
218
|
|
|
|
218
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Hotel receivables and other assets
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Accounts payable and accrued expenses
|
|
|
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
182
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(420
|
)
|
Restricted cash
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(580
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Advances (payments) on mortgage loan
|
|
|
(169
|
)
|
|
|
96
|
|
Capital distributions
|
|
|
|
|
|
|
(330
|
)
|
Capital contributions
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(142
|
)
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
40
|
|
|
|
(36
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
80
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
120
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
388
|
|
|
$
|
437
|
|
Supplemental disclosure of investing activities:
|
|
|
|
|
|
|
|
|
Receipt of insurance settlement
|
|
$
|
480
|
|
|
$
|
540
|
|
The accompanying notes are an integral part of the condensed
combined financial statements.
F-57
The statements presented herein have been prepared in
conformity with accounting principles generally accepted in the
United States of America and should be read in conjunction with
the audited balance sheet as of December 31, 2009, and the
related statements of operations, changes in members
capital, and cash flows for the year ended December 31,
2009. In the opinion of management, all adjustments that are
deemed necessary have been made in order to fairly present the
unaudited interim financial statements for the period and
accounting policies have been consistently applied.
|
|
(2)
|
Investment in
Hotel Properties, net
|
Investment in hotel properties, net as of June 30, 2010
and December 31, 2009 consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
1,900
|
|
|
$
|
1,900
|
|
Building and improvements
|
|
|
14,523
|
|
|
|
14,523
|
|
Furniture, fixtures, and equipment
|
|
|
304
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
16,727
|
|
|
|
16,727
|
|
Less: Accumulated depreciation
|
|
|
(1,025
|
)
|
|
|
(807
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
15,702
|
|
|
$
|
15,920
|
|
|
|
|
|
|
|
|
|
|
F-58
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
To the Members of
Moody National 1715 OST Houston S, LLC and
Moody National 1715 OST Houston MT, LLC
In our opinion, the accompanying combined balance sheets and the
related combined statements of operations, of members
capital and of cash flows present fairly, in all material
respects, the financial position of Moody National 1715 OST
Houston S, LLC and Moody National 1715 OST Houston MT, LLC
(collectively the Company) at December 31, 2009
and 2008, and the results of its operations and its cash flows
for the year ended December 31, 2009 and for the period
from February 14, 2008 (commencement of operations) to
December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
September 20, 2010
F-59
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in hotel properties, net
|
|
$
|
15,920
|
|
|
$
|
15,936
|
|
Cash and cash equivalents
|
|
|
80
|
|
|
|
133
|
|
Restricted cash
|
|
|
750
|
|
|
|
0
|
|
Hotel receivables and other assets
|
|
|
547
|
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,297
|
|
|
$
|
17,227
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS CAPITAL
|
Mortgage loan
|
|
|
14,220
|
|
|
|
14,317
|
|
Note payable
|
|
|
1,550
|
|
|
|
1,550
|
|
Accounts payable and accrued expenses
|
|
$
|
1,364
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,134
|
|
|
|
16,444
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
163
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
17,297
|
|
|
$
|
17,227
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements.
F-60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
February 14, 2008
|
|
|
|
For the
|
|
|
(Commencement of
|
|
|
|
Year Ended
|
|
|
Operations)
|
|
|
|
2009
|
|
|
to December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
3,557
|
|
|
$
|
3,824
|
|
Other operating
|
|
|
77
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,634
|
|
|
|
3,893
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
724
|
|
|
|
657
|
|
Other
|
|
|
47
|
|
|
|
50
|
|
General and administrative
|
|
|
838
|
|
|
|
689
|
|
Sales and marketing fees
|
|
|
134
|
|
|
|
100
|
|
Franchise fees
|
|
|
285
|
|
|
|
343
|
|
Management fees
|
|
|
216
|
|
|
|
218
|
|
Depreciation
|
|
|
435
|
|
|
|
372
|
|
Property taxes
|
|
|
391
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,070
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
564
|
|
|
|
1,223
|
|
Interest expense
|
|
|
854
|
|
|
|
799
|
|
Gain on insurance proceeds (Note 9)
|
|
|
0
|
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(290
|
)
|
|
$
|
1,054
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements.
F-61
|
|
|
|
|
|
|
Members Capital
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at February 14, 2008
|
|
$
|
|
|
Contributions
|
|
|
2,610
|
|
Distributions
|
|
|
(2,881
|
)
|
Net income
|
|
|
1,054
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
783
|
|
Contributions
|
|
|
|
|
Distributions
|
|
|
(330
|
)
|
Net loss
|
|
|
(290
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
163
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements.
F-62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from
|
|
|
|
For the
|
|
|
February 14, 2008
|
|
|
|
Year Ended
|
|
|
(Commencement of Operations)
|
|
|
|
2009
|
|
|
to December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(290
|
)
|
|
$
|
1,054
|
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Gain on insurance settlement
|
|
|
|
|
|
|
(630
|
)
|
Depreciation and amortization
|
|
|
435
|
|
|
|
372
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Hotel receivables and other assets
|
|
|
21
|
|
|
|
66
|
|
Accounts payable and accrued expenses
|
|
|
787
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
953
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Hotel acquisition
|
|
|
|
|
|
|
(16,646
|
)
|
Capital expenditures
|
|
|
(419
|
)
|
|
|
(124
|
)
|
Restricted cash
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(579
|
)
|
|
|
(16,770
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
|
|
|
|
(102
|
)
|
Mortgage loan
|
|
|
(97
|
)
|
|
|
14,317
|
|
New borrowing note
|
|
|
|
|
|
|
1,550
|
|
Capital distributions
|
|
|
(330
|
)
|
|
|
(2,881
|
)
|
Capital contributions
|
|
|
|
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(427
|
)
|
|
|
15,494
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(53
|
)
|
|
|
133
|
|
Cash and cash equivalents, beginning of year
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
80
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
849
|
|
|
$
|
695
|
|
Supplemental disclosure of investing activities:
|
|
|
|
|
|
|
|
|
Receipt of insurance settlement
|
|
$
|
590
|
|
|
$
|
|
|
The accompanying notes are an integral part of the combined
financial statements.
F-63
Moody National 1715 OST Houston S, LLC and Moody National 1715
OST Houston MT, LLC (collectively the Company) are
Delaware single member limited liability companies formed on
January 4, 2008 that commenced operations on
February 14, 2008. Two separate companies were formed for
tax purposes such that one company would hold the assets and
lease them to the other company through a long-term triple net
lease. The Members are directly or indirectly owned by Brett C.
Moody (the Owner). The Company shall continue until
December 31, 2099 unless it is dissolved earlier in
accordance with the limited liability operating agreement (the
Operating Agreement).
The purpose of the Company is to engage in the business of
acquiring, developing, owning, leasing, operating, and
transferring the 120-room Hampton Inn and
Suites®
Medical Center located in Houston, TX (the Hotel).
The Hotel was initially placed in service in 2000 and was
subsequently renovated in 2007. The Company acquired a 100%
ownership interest in the Hotel on February 14, 2008 for a
purchase price of approximately $16.5 million plus
customary pro-rated amounts and closing costs.
The Hotel is managed and operated by Moody National Management,
L.P. (the Operator), an affiliate of the Owner,
pursuant to Management and Asset Management Agreements dated
February 14, 2008 (the Management Agreement)
(Note 6). The Operator operates the Hotel as a Hampton Inn
pursuant to a Franchise Agreement dated February 14, 2008
(Franchise Agreement) with a subsidiary of Hilton
Hotels Corporation (Note 7).
Upon the acquisition of a hotel, the Company follows the
business combination guidance and assesses the fair value of the
acquired tangible assets and allocates the purchase price to the
acquired assets and liabilities based on the estimated fair
values. The allocation of the purchase price to the Hotel based
on the fair value was as follows (in thousands):
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
16,603
|
|
Hotel receivables and other assets
|
|
|
73
|
|
Accounts payable and accrued expenses
|
|
|
(30
|
)
|
|
|
|
|
|
Net assets acquited
|
|
|
16,646
|
|
|
|
|
|
|
|
|
(2)
|
Summary of
Significant Accounting Policies
|
Basis of
Presentation
The combined financial statements have been prepared on the
accrual basis of accounting and in accordance with accounting
principles generally accepted in the United State of America.
All intercompany balances and transactions have been eliminated
in combination. These financials are being presented on a
combined basis as Moody National 1715 OST Houston S, LLC and
Moody National 1715 OST Houston MT, LLC are under common
management and control.
Use of
Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of certain assets
and liabilities and disclosure of contingent assets and
liabilities at the balance sheet date and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-64
MOODY NATIONAL
1715 OST HOUSTON S, LLC AND
MOODY NATIONAL 1715 OST HOUSTON MT, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Investment in
Hotel Properties
Investment in hotel properties consists primarily of land,
buildings, improvements and related fixtures and equipment.
Investment in hotel properties is stated at cost and is
generally depreciated using the straight-line method over
estimated useful lives of 39 years for building,
15 years for improvements and between 5 and 7 years
for furniture, fixtures and equipment. Major renewals and
improvements are capitalized, while maintenance and repairs are
expensed when incurred. When property
and/or
equipment are sold or retired, their cost and related
accumulated depreciation are eliminated from the accounts and
the resulting gain or loss is reflected in operations.
Impairment of
Long-Lived Assets
The Company periodically evaluates the recoverability of its
property and equipment when events or circumstances indicate
that the asset may be impaired. This evaluation consists of a
comparison of the carrying value of the asset with the
assets expected future cash flows, undiscounted and
without interest costs. Estimates of expected future cash flows
represent managements best estimate based on reasonable
and supportable assumptions and projections. If the expected
future undiscounted cash flows exceed the carrying value of the
asset, no impairment is recognized. If expected future
undiscounted cash flows are less than the carrying value of the
asset then impairment is indicated. Such impairment is measured
as the difference between the carrying value of the asset and
its fair market value. During 2009 and 2008, there were no
events or changes in circumstances indicating that the carrying
value of the property and equipment may not be recoverable.
Cash and Cash
Equivalents
All highly liquid investments with a maturity of three months or
less when purchased are considered to be cash equivalents. The
Hotel maintains its cash accounts at various major financial
institutions within the United States of America. At times,
deposits may be in excess of federally insured limits. The
Hotels have not experienced any losses on cash deposited with
the financial institutions.
Restricted
Cash
The mortgage loan agreement requires the Company to fund between
2% and 3% of gross revenues on a monthly basis for a
furnishings, fixtures, equipment and general repair maintenance
reserve of the Hotel in an account to be held by the lender
(FF&E Reserves). In addition, insurance
proceeds were deposited into an escrow account by the insurance
carrier on behalf of the Company (see Note 9).
Deferred
Financing Costs
The Companys deferred financing costs relate to fees and
costs incurred to obtain long-term financing to purchase the
Hotel. These costs are amortized using the straight-line method,
which approximates the effective interest method, over the life
of the applicable borrowing and are included as a component of
interest expense. Capitalized deferred financing costs are
recorded in Hotel receivables and other assets and totaled $102
as of December 31, 2009 and 2008. Accumulated amortization
was $41 and $20 as of December 31, 2009 and 2008,
respectively.
Revenue
Recognition
Room revenues are recognized the night of occupancy. Cash
received prior to guest arrival is recorded as an advanced
deposit from customers and recognized as revenue at the time of
occupancy.
F-65
MOODY NATIONAL
1715 OST HOUSTON S, LLC AND
MOODY NATIONAL 1715 OST HOUSTON MT, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Other revenues are also recognized for food, beverage, telephone
charges and various ancillary services performed at the time the
service is provided.
Fair value of
Non-Financial Assets and Liabilities
Effective January 1, 2009, the Company adopted a new
accounting pronouncement which affects how fair value is
determined for non-financial assets that are measured at fair
value on a non-recurring basis such as intangibles and
long-lived assets, including the incorporation of market
participant assumption in determining the fair value. The
adoption of this pronouncement did not have a material impact on
the Companys financial position or results of operations.
Income
Taxes
The Company has elected to be a limited liability company for
federal tax purposes. As such, no federal or state income taxes
are payable by the Company and none have been provided for in
the accompanying financial statements. In accordance with
partnership taxation, each of the partners is responsible for
reporting its share of taxable income or loss. The Company
analyzed its material tax positions and determined that it has
not taken any uncertain tax positions.
|
|
(3)
|
Investment in
Hotel Properties, net
|
Investment in hotel properties, net, as of December 31,
2009 and 2008 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
1,900
|
|
|
$
|
1,900
|
|
Building and improvements
|
|
|
14,523
|
|
|
|
14,146
|
|
Furniture, fixtures, and equipment
|
|
|
304
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
16,727
|
|
|
|
16,308
|
|
Less: Accumulated depreciation
|
|
|
(807
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
15,920
|
|
|
$
|
15,936
|
|
|
|
|
|
|
|
|
|
|
On February 14, 2008, the Company and the Operator entered
into a $14.5 million mortgage loan (the Mortgage
Loan) with Specialty Finance Group, LLC (the
Lender), a subsidiary of Silverton Bank, N.A.,
which matures in February 2014. The Mortgage Loan is
collateralized by the Hotel and is guaranteed by the Owner. The
Mortgage Loan may be repaid in full during the first
24 months for a prepayment fee of 0.5% and may be repaid in
full for the remainder of the term without any prepayment fee.
The Mortgage Loan bears interest only payments for twelve months
at a rate of
30-day LIBOR
+ 3.5% and then requires monthly interest and principal payments
on a 25 year amortization schedule. The Mortgage Loan
requires the Company to maintain a certain debt service coverage
ratio ranging from 1.15:1 to 1.35:1. The Company is in
compliance with the covenants as of December 31, 2009 and
2008.
On May 1, 2009, the Office of the Comptroller of the
Currency closed Silverton Bank, N.A. and the Federal Deposit
Insurance Corporation was named receiver. On March 26,
2010, the Mortgage Loan was subsequently purchased by The
Independent BankersBank (TIB).
F-66
MOODY NATIONAL
1715 OST HOUSTON S, LLC AND
MOODY NATIONAL 1715 OST HOUSTON MT, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Future estimated scheduled debt principal payments at
December 31, 2009 are as follows:
|
|
|
|
|
2010
|
|
|
169
|
|
2011
|
|
|
179
|
|
2012
|
|
|
190
|
|
2013
|
|
|
13,682
|
|
2014
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,220
|
|
|
|
|
|
|
On December 11, 2008, the Company entered into a
$1.550 million note payable (the Note Payable)
with MNFA 1, LLC, an affiliate of the Company, which matures in
January 2012. The Note Payable is collateralized by the
Owners security interest in the Company. The Note Payable
may be repaid in full without any prepayment fee. The Note
Payable bears interest at a rate of 20% annually and requires
monthly payments of $25 over the term of the note. All unpaid
interest and principal is due upon maturity.
Future estimated scheduled debt principal payments at
December 31, 2009 are as follows:
|
|
|
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
2012
|
|
|
1,550
|
|
|
|
|
|
|
Total
|
|
|
1,550
|
|
|
|
|
|
|
The Management Agreement expires on February 13, 2018 and
has four automatic successive renewal options to extend the term
of the Management Agreement for terms of five years each if
neither the Company nor the Operator elect to terminate the
Management Agreement. The Management Agreement requires a base
management fee equal to 4% of Gross Operating Revenues (as
defined) and an accounting fee of $25 annually. The Company has
the option to terminate the Management Agreement early, however,
a termination fee of the estimated management fees and any
others fees over the remainder of the term of the agreement are
required. On July 1, 2010, the Company and the Operator
jointly agreed to terminate the Management Agreement effective
immediately and without any termination fees required from the
Company. The asset management agreement also requires a fee
equal to 1% of Gross Operating Revenues (as defined). Base
Management fees for the year ended December 31, 2009 and
the period ended December 31, 2008 was $216 and $218,
respectively.
The Hotel is subject to a ten year non-exclusive franchise
agreement with Hilton Hotels Corporation to operate under the
Hampton Inn brand. Under the agreement, monthly royalty fees are
equal to 5% of hotel gross room revenues (as defined), and
monthly program fees are equal to 4% of hotel gross room
revenues (as defined). In addition, the Operator may be required
to pay certain advertising and other miscellaneous fees. The
franchise fee expense for the year ended December 31, 2009
and the period ended December 31, 2008 was $285 and $343,
respectively.
F-67
MOODY NATIONAL
1715 OST HOUSTON S, LLC AND
MOODY NATIONAL 1715 OST HOUSTON MT, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
For the year ended December 31, 2009, an affiliate of the
Company provided construction management services related to the
capital improvements made to the Hotel to repair damage as a
result of Hurricane Ike. The Company contracted with the
affiliate for capital improvements totaling $420 of which $24
was for construction management fees. There were no construction
management services provided in the period ended
December 31, 2008.
The Companys note payable is with an affiliate. For the
year ended December 31, 2009 and the period ended
December 31, 2008, the Company paid interest of $310 and
$26 to the affiliate. No additional amounts were advanced or
repaid subsequent to the initial funding.
The Operator is an affiliate of the Company and provides hotel
management services. For the year ended December 31, 2009
and the period ended December 31, 2008, the affiliate
received management fees of approximately $216 and $191.
In September 2008, the Hotel suffered damage as a result of
Hurricane Ike and recorded a loss of approximately $420 to
remove the Hotel property, equipment and improvements from the
balance sheet. As of December 31, 2008, the Company had
calculated the estimated damages that were probable to be
reimbursed by the insurance company under the Companys
insurance coverage and recorded the estimated net insurance
proceeds after deductibles of $1,050 in the statement of
operations. The Company received all of the estimated cash
proceeds during 2009 and 2010 prior to the sale of the Hotel
(see note 11).
|
|
(10)
|
Commitments and
Contingencies
|
The nature of the operations of the Hotel exposes the Company to
the risk of claims and litigation in the normal course of
business. Although the outcome of these matters cannot be
determined, management does not expect the ultimate resolution
of these matters to have a material adverse effect on the
financial position, operations, or liquidity of the Company.
On May 18, 2010, the Company entered into a purchase and
sale agreement with Chatham Lodging Trust for the sale of the
Hotel for a purchase price of $16.5 million. On
July 2, 2010, the acquisition was completed for the
purchase price plus customary pro-rated amounts and closing
costs.
The Company has evaluated the need for disclosures
and/or
adjustments resulting from subsequent events through
September 20, 2010, the date the financial statements were
available to be issued.
F-68
HOLTSVILLE HOTEL
GROUP, LLC
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
June 30, 2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in hotel properties, net
|
|
$
|
10,523
|
|
|
$
|
10,557
|
|
Cash and cash equivalents
|
|
|
308
|
|
|
|
344
|
|
Restricted cash
|
|
|
661
|
|
|
|
714
|
|
Hotel receivables and other assets
|
|
|
213
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,705
|
|
|
$
|
11,723
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS DEFICIT
|
Mortgage loan
|
|
$
|
13,009
|
|
|
$
|
13,176
|
|
Accounts payable and accrued expenses
|
|
|
215
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,224
|
|
|
|
13,453
|
|
Commitments and contingencies Members deficit
|
|
|
(1,519
|
)
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and members deficit
|
|
$
|
11,705
|
|
|
$
|
11,723
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-69
HOLTSVILLE HOTEL
GROUP, LLC
CONDENSED
STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
2,197
|
|
|
$
|
2,134
|
|
Other operating
|
|
|
55
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,252
|
|
|
|
2,188
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
479
|
|
|
|
452
|
|
Other
|
|
|
35
|
|
|
|
36
|
|
General and administrative
|
|
|
491
|
|
|
|
516
|
|
Sales and marketing fees
|
|
|
74
|
|
|
|
71
|
|
Franchise fees
|
|
|
165
|
|
|
|
161
|
|
Management fees
|
|
|
67
|
|
|
|
65
|
|
Depreciation and amortization
|
|
|
193
|
|
|
|
240
|
|
Property taxes
|
|
|
124
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,628
|
|
|
|
1,682
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
624
|
|
|
|
506
|
|
Interest expense
|
|
|
361
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
263
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-70
HOLTSVILLE HOTEL
GROUP, LLC
CONDENSED
STATEMENTS OF MEMBERS DEFICIT (UNAUDITED)
For the Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FB Holtsville
|
|
|
|
|
|
|
S&S Hotels LLC
|
|
|
Partners LLC
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at December 31, 2009
|
|
$
|
(432
|
)
|
|
$
|
(1,298
|
)
|
|
$
|
(1,730
|
)
|
Distributions
|
|
|
(13
|
)
|
|
|
(39
|
)
|
|
|
(52
|
)
|
Net income
|
|
|
66
|
|
|
|
197
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
(379
|
)
|
|
$
|
(1,140
|
)
|
|
$
|
(1,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-71
HOLTSVILLE HOTEL
GROUP, LLC
CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
263
|
|
|
$
|
137
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
193
|
|
|
|
240
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Hotel receivables and other assets
|
|
|
(77
|
)
|
|
|
(18
|
)
|
Accounts payable and accrued expenses
|
|
|
(62
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
317
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(151
|
)
|
|
|
(13
|
)
|
Restricted cash
|
|
|
53
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(98
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment of mortgage loan
|
|
|
(167
|
)
|
|
|
(138
|
)
|
Payments for financing costs
|
|
|
(36
|
)
|
|
|
|
|
Capital distributions
|
|
|
(52
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(255
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(36
|
)
|
|
|
146
|
|
Cash and cash equivalents, beginning of period
|
|
|
344
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
308
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
340
|
|
|
$
|
369
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-72
HOLTSVILLE HOTEL
GROUP, LLC
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The statements presented herein have been prepared in conformity
with accounting principles generally accepted in the United
States of America and should be read in conjunction with the
audited balance sheet as of December 31, 2009, and the
related statements of operations, changes in members
deficit, and cash flows for the year ended December 31,
2009. In the opinion of management, all adjustments that are
deemed necessary have been made in order to fairly present the
unaudited interim financial statements for the period and
accounting policies have been consistently applied.
|
|
2)
|
Investment in
Hotel Properties, net
|
Investment in hotel properties, net as of June 30, 2010 and
December 31, 2009 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
2,377
|
|
|
$
|
2,377
|
|
Building and improvements
|
|
|
10,324
|
|
|
|
10,324
|
|
Furniture, fixtures, and equipment
|
|
|
2,303
|
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
15,004
|
|
|
|
14,853
|
|
Less: Accumulated depreciation
|
|
|
(4,481
|
)
|
|
|
(4,296
|
)
|
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
10,523
|
|
|
$
|
10,557
|
|
|
|
|
|
|
|
|
|
|
F-73
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Holtsville Hotel Group, LLC
In our opinion, the accompanying balance sheets and the related
statements of operations, of members deficit and of cash
flows present fairly, in all material respects, the financial
position of Holtsville Hotel Group, LLC ( the
Company) at December 31, 2009 and 2008, and the
results of its operations and its cash flows for the year ended
December 31, 2009 and 2008 in conformity with accounting
principles generally accepted in the United States of America.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
October 19, 2010
F-74
HOLTSVILLE HOTEL
GROUP, LLC
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in hotel properties, net
|
|
$
|
10,557
|
|
|
$
|
11,109
|
|
Cash and cash equivalents
|
|
|
344
|
|
|
|
334
|
|
Restricted cash
|
|
|
714
|
|
|
|
539
|
|
Hotel receivables and other assets
|
|
|
108
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,723
|
|
|
$
|
12,139
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS DEFICIT
|
Mortgage loan
|
|
$
|
13,176
|
|
|
$
|
13,448
|
|
Accounts payable and accrued expenses
|
|
|
277
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,453
|
|
|
|
13,783
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Members deficit
|
|
|
(1,730
|
)
|
|
|
(1,644
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and members deficit
|
|
$
|
11,723
|
|
|
$
|
12,139
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-75
Years ended
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
4,398
|
|
|
$
|
4,733
|
|
Other
|
|
|
111
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,509
|
|
|
|
4,844
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
901
|
|
|
|
1,030
|
|
Other
|
|
|
69
|
|
|
|
75
|
|
General and administrative
|
|
|
1,006
|
|
|
|
1,175
|
|
Sales & marketing
|
|
|
155
|
|
|
|
121
|
|
Franchise fees
|
|
|
330
|
|
|
|
360
|
|
Management fees
|
|
|
135
|
|
|
|
145
|
|
Depreciation and amortization
|
|
|
506
|
|
|
|
850
|
|
Property taxes
|
|
|
239
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,341
|
|
|
|
3,987
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,168
|
|
|
|
857
|
|
Writedown of development costs
|
|
|
95
|
|
|
|
0
|
|
Interest income
|
|
|
1
|
|
|
|
3
|
|
Interest expense
|
|
|
740
|
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
334
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
F-76
HOLTSVILLE HOTEL
GROUP, LLC
For the years
ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FB Holtsville
|
|
|
|
|
|
|
S&S Hotels LLC
|
|
|
Partners LLC
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1, 2008
|
|
$
|
(258
|
)
|
|
$
|
(769
|
)
|
|
$
|
(1,027
|
)
|
Distributions
|
|
|
(178
|
)
|
|
|
(542
|
)
|
|
|
(720
|
)
|
Net income
|
|
|
26
|
|
|
|
77
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
(410
|
)
|
|
$
|
(1,234
|
)
|
|
$
|
(1,644
|
)
|
Distributions
|
|
|
(105
|
)
|
|
|
(315
|
)
|
|
|
(420
|
)
|
Net income
|
|
|
83
|
|
|
|
251
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
(432
|
)
|
|
$
|
(1,298
|
)
|
|
$
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-77
HOLTSVILLE HOTEL
GROUP, LLC
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
334
|
|
|
$
|
103
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
506
|
|
|
|
850
|
|
Write-off of development costs
|
|
|
95
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Hotel receivables and other assets
|
|
|
22
|
|
|
|
28
|
|
Accounts payable and accrued expenses
|
|
|
(58
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
899
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(22
|
)
|
|
|
(10
|
)
|
Restricted cash
|
|
|
(175
|
)
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(197
|
)
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment of mortgage loan
|
|
|
(272
|
)
|
|
|
(255
|
)
|
Capital distributions
|
|
|
(420
|
)
|
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(692
|
)
|
|
|
(975
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
10
|
|
|
|
42
|
|
Cash and cash equivalents, beginning of year
|
|
|
334
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
344
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
741
|
|
|
$
|
746
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
financial statements.
F-78
HOLTSVILLE HOTEL
GROUP, LLC
December 31,
2009 and 2008
(dollars in thousands)
Holtsville Hotel Group, LLC (the Company) is a
single member Delaware limited liability corporation formed on
June 15, 2005. The Company is wholly owned by Holtsville
Associates, LLC (the Limited Liability Company). The
Limited Liability Company is 75% owned by FB Holtsville
Partners, LLC (the Manager Member) and 25% owned by
Schleicher & Stebbins, LLC (the Member).
Profits and losses of the Company are allocated 75% to the
Managing Member and 25% to the Member. The purpose of the
Company is to engage in the business of owning, maintaining,
developing, improving, operating, managing, leasing and
transferring the 124-room Residence Inn-Holtsville in Long
Island, New York (the Hotel). The Company shall
continue indefinitely unless it is dissolved earlier in
accordance with the limited liability operating agreement.
The hotel was placed in service in May 2004. The Company owns a
100% equity interest in the Hotel. The Hotel is operated by
Colwen Management, Inc. (the Operator), pursuant to
a Management Agreement dated August 23, 2003 (the
Management Agreement) (Note 5). The Hotel
operates as a Residence Inn pursuant to a Franchise Agreement
dated February 3, 2003 (Franchise Agreement)
with Marriott International, Inc. (Note 6).
|
|
(2)
|
Summary of
Significant Accounting Policies
|
Basis of
Presentation
The financial statements have been prepared on the accrual basis
of accounting and in accordance with accounting principles
generally accepted in the United States of America.
Use of
Estimates
The preparation of the financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the balance
sheet date and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Investment in
Hotel Properties
Investment in hotel properties consists primarily of land,
buildings, improvements and related fixtures and equipment.
Investment in hotel properties is stated at cost and is
depreciated using the straight-line method over estimated useful
lives of 39 years for building, 15 years for
improvements, 5 and 7 years for furniture, fixtures and
equipment and 5 years for computer equipment. Major
renewals and improvements are capitalized, while maintenance and
repairs are expensed when incurred. When property
and/or
equipment are sold or retired, their cost and related
accumulated depreciation are eliminated from the accounts and
the resulting gain or loss is reflected in operations.
Impairment of
Long-Lived Assets
The Company periodically evaluates the recoverability of its
hotel assets when events or circumstances indicate that the
asset may be impaired. This evaluation consists of a comparison
of the carrying value of the asset with the assets
expected future cash flows, undiscounted and without interest
costs. Estimates of expected futures cash flows represent
managements best estimate based on reasonable and
supportable assumptions and projections. If the expected future
undiscounted cash flows exceed the carrying value of the asset,
no impairment is recognized. If expected future undiscounted
cash flows are less than the carrying value of the asset then
impairment is indicated. Such impairment is measured as the
difference between the carrying value of the asset and its
F-79
HOLTSVILLE HOTEL
GROUP, LLC
NOTES TO
FINANCIAL STATEMENTS (Continued)
discounted cash flow. During 2009 and 2008, there were no events
or changes in circumstances indicating that the carrying value
of the hotel asset may not be recoverable.
Cash and Cash
Equivalents
All highly liquid investments with a maturity of three months or
less when purchased are considered to be cash equivalents. The
Hotel maintains its cash accounts at various major financial
institutions within the United States of America. At times,
deposits may be in excess of federally insured limits. The
Company has not experienced any losses on cash deposited with
the financial institutions.
Restricted
Cash
The mortgage loan agreement requires the Company to fund on a
monthly basis reserves for furnishings, fixtures, equipment and
general repair maintenance of the Hotel. The Company is also
required to fund reserves for insurance premiums and real estate
taxes. The reserves are in an account to be held by the lender.
Deferred
Financing Fees
The Companys deferred financing costs relate to fees and
costs incurred to obtain long-term financing to purchase the
Hotel. These costs are amortized using the straight-line method,
which approximates the effective interest method, over the life
of the applicable borrowing and are included as a component of
interest expense. Capitalized deferred financial costs are
recorded in Hotel receivables and other assets and totaled $143
as of December 31, 2009 and 2008. Accumulated amortization
at December 31, 2009 and 2008 was $125 and $97 respectively.
Revenue
Recognition
Room revenues are recognized the night of occupancy. Cash
received prior to guest arrival is recorded as an advanced
deposit from customers and recognized as revenue at the time of
occupancy.
Other revenues are also recognized for food, beverage, telephone
charges and various ancillary services performed at the time the
service is provided.
Fair value of
Non-Financial Assets and Liabilities
Effective January 1, 2009, the Company adopted a new
accounting pronouncement which affects how fair value is
determined for non-financial assets that are measured at fair
value on a non-recurring basis such as intangibles and
long-lived assets, including the incorporation of market
participant assumption in determining the fair value. The
adoption of this pronouncement did not have a material impact on
the Companys financial position or results of operations.
Income
Taxes
The Company has elected to be a limited liability company for
federal tax purposes. As such, no federal or state income taxes
are payable by the Company and none have been provided for in
the accompanying financial statements. In accordance with
partnership taxation, each of the members is responsible for
reporting its share of taxable income or loss. The Company
analyzed its material tax positions and determined that it has
not taken any uncertain tax positions.
F-80
HOLTSVILLE HOTEL
GROUP, LLC
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
(3)
|
Investment in
Hotel Properties
|
Investment in hotel properties, net, as of December 31,
2009 and 2008 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
2,377
|
|
|
$
|
2,377
|
|
Building and improvements
|
|
|
10,324
|
|
|
|
10,324
|
|
Furniture, fixtures, and equipment
|
|
|
2,152
|
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
14,853
|
|
|
|
14,926
|
|
Less: Accumulated depreciation
|
|
|
(4,296
|
)
|
|
|
(3,817
|
)
|
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
10,557
|
|
|
$
|
11,109
|
|
|
|
|
|
|
|
|
|
|
On September 11, 2005, the Company entered into a $14,250
mortgage loan (the Mortgage Loan). The Mortgage Loan
is collateralized by the Hotel. The Mortgage Loan matured on
August 11, 2010, and does not allow for any prepayment
prior to the maturity date. The Mortgage Loan bears interest at
a fixed rate of 5.482% and requires monthly interest and
principal payments on a
27-year
amortization schedule. The Mortgage Loan requires the Company to
maintain a certain debt service coverage ratio.
The Mortgage Loan requires the Company to make a monthly deposit
to a tax and insurance escrow fund (Tax and Insurance
Escrow) held by Wells Fargo Bank/Lehman Brothers (the
Lender) for real estate taxes and insurance related
to the Hotel. At December 31, 2009 and 2008, the Tax and
Insurance Escrow had a balance of $55 and $30, respectively.
These funds are included in the restricted cash in the Balance
Sheet.
The Mortgage Loan requires the Company to make a monthly deposit
to a furniture, fixture and equipment escrow fund
(FF&E Escrow) for the replacement or
refurbishment of furniture, fixtures, and equipment of the
Hotel. The FF&E Escrow is held by the Lender. At
December 31, 2009 and 2008, the FF&E Escrow had a
balance of $659 and $509, respectively. These funds are included
in restricted cash in the Balance Sheet.
The Mortgage Loan had a principal balance of $13,176 and $13,448
at December 31, 2009 and 2008, respectively. Future
scheduled debt principal payments at December 31, 2009 are
as follows:
The Management Agreement expires on December 31, 2014 and
has two successive renewal options to extend the term of the
Management Agreement for terms of ten years each. The Management
Agreement requires a base management fee equal to 3% of Gross
Revenues (as defined) and an incentive management fee equal to
12% of available cash flows (as defined). Pursuant to the terms
of the Management Agreement, the Operator provides the Hotel
with various services, including marketing, reservations,
construction management, and insurance. Base management fee
expense was $135 and $145, respectively, for the years ended
December 31, 2009 and 2008. There was no incentive fee
expense was for the years ended December 31, 2009 and 2008.
The Company and the Operator terminated the Management Agreement
in connection with the sale of the Hotel (see Note 8).
The Hotel is subject to a twenty year franchise agreement with
Marriott International, Inc. which expires on May 11, 2024
and has one renewal option to extend the term of the Franchise
F-81
HOLTSVILLE HOTEL
GROUP, LLC
NOTES TO
FINANCIAL STATEMENTS (Continued)
Agreement for ten years. Under the agreement, royalty fees are
equal to 5% of hotel gross room revenues (as defined), and
marketing fees are equal to
21/2%
of hotel gross room revenues (as defined). The franchise fee
expense for the years ended December 31, 2009 and
December 31, 2008 was $330 and $360, respectively.
|
|
(7)
|
Commitments and
Contingencies
|
The Hotel is subject to a
99-year
ground lease on two land parcels with FB Holtsville Retail LLC
(the Landlord). The lease expires on July 17,
2101. The current annual rent is one dollar and is a fixed
amount for the entire lease period. There are no options to
renew.
The nature of the operations of the Hotel exposes the Company to
the risk of claims and litigation in the normal course of
business. Although the outcome of these matters cannot be
determined, management does not expect the ultimate resolution
of these matters to have a material adverse effect on the
financial position, operations, or liquidity of the Partnership.
On June 17, 2010, the Company entered into a purchase and
sale agreement with Chatham Lodging Trust, a third party, for
the sale of the Hotel for a purchase price of
$21.3 million. On August 3, 2010, the sale was
completed for the purchase price of $21.3 million, plus
customary pro-rated amounts and closing costs.
The Company has evaluated the need for disclosures
and/or
adjustments resulting from subsequent events through
October 19, 2010, the date the financial statements were
available to be issued.
F-82
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
CONDENSED COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
June 30, 2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in hotel properties, net
|
|
$
|
52,614
|
|
|
$
|
53,489
|
|
Cash and cash equivalents
|
|
|
747
|
|
|
|
593
|
|
Restricted cash
|
|
|
3,440
|
|
|
|
3,114
|
|
Hotel receivables and other assets
|
|
|
847
|
|
|
|
785
|
|
Due from affiliate
|
|
|
104
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
57,752
|
|
|
$
|
57,981
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS CAPITAL
|
Mortgage loan
|
|
$
|
39,971
|
|
|
$
|
52,826
|
|
Note payable
|
|
|
525
|
|
|
|
525
|
|
Due to affiliate
|
|
|
104
|
|
|
|
105
|
|
Accrued rent
|
|
|
62
|
|
|
|
50
|
|
Accounts payable and accrued expenses
|
|
|
647
|
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
41,309
|
|
|
|
53,987
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
16,443
|
|
|
|
3,994
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
57,752
|
|
|
$
|
57,981
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements
F-83
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
CONDENSED
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
5,317
|
|
|
$
|
5,378
|
|
Other operating
|
|
|
232
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
5,549
|
|
|
|
5,617
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
1,183
|
|
|
|
1,184
|
|
Other
|
|
|
162
|
|
|
|
147
|
|
General and administrative
|
|
|
1,017
|
|
|
|
958
|
|
Sales and marketing
|
|
|
211
|
|
|
|
207
|
|
Franchise fees
|
|
|
399
|
|
|
|
403
|
|
Management fees
|
|
|
268
|
|
|
|
286
|
|
Condominium fees
|
|
|
264
|
|
|
|
284
|
|
Depreciation
|
|
|
875
|
|
|
|
806
|
|
Ground rent
|
|
|
60
|
|
|
|
50
|
|
Property taxes
|
|
|
439
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,878
|
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
671
|
|
|
|
868
|
|
Gain on insurance proceeds
|
|
|
236
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
4
|
|
Interest expense
|
|
|
1,256
|
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(347
|
)
|
|
$
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements
F-84
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
CONDENSED
COMBINED STATEMENT OF MEMBERS CAPITAL (UNAUDITED)
For the Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
Members Capital
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at December 31, 2009
|
|
$
|
3,994
|
|
Contributions
|
|
|
139
|
|
Contribution related to assumption of debt by members
|
|
|
12,690
|
|
Distributions
|
|
|
(33
|
)
|
Net loss
|
|
|
(347
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
16,443
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements
F-85
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
CONDENSED
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(347
|
)
|
|
$
|
(427
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Straight line rent adjustment
|
|
|
12
|
|
|
|
12
|
|
Loan cost amortization
|
|
|
178
|
|
|
|
178
|
|
Depreciation and amortization
|
|
|
875
|
|
|
|
806
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Hotel receivables and other assets
|
|
|
(240
|
)
|
|
|
(92
|
)
|
Due to/from affiliate
|
|
|
(105
|
)
|
|
|
(142
|
)
|
Accounts payable and accrued expenses
|
|
|
166
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
539
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(326
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(326
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Advances (payments) on mortgage loan
|
|
|
(165
|
)
|
|
|
(141
|
)
|
Capital contributions
|
|
|
139
|
|
|
|
|
|
Capital distributions
|
|
|
(33
|
)
|
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(59
|
)
|
|
|
(862
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
154
|
|
|
|
(684
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
593
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
747
|
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,255
|
|
|
$
|
1,266
|
|
Noncash assumption of debt by member (Note 4)
|
|
$
|
12,690
|
|
|
$
|
|
|
The accompanying notes are an integral part of the condensed
combined financial statements
F-86
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The statements presented herein have been prepared in conformity
with accounting principles generally accepted in the United
States of America and should be read in conjunction with the
audited balance sheet as of December 31, 2009, and the
related statements of operations, changes in members
capital, and cash flows for the year ended December 31,
2009. In the opinion of management, all adjustments that are
deemed necessary have been made in order to fairly present the
unaudited interim financial statements for the period and
accounting policies have been consistently applied.
|
|
(2)
|
Investment in
Hotel Properties, net
|
Investment in hotel properties, net as of June 30, 2010 and
December 31, 2009 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
6,718
|
|
|
$
|
6,718
|
|
Building and improvements
|
|
|
50,553
|
|
|
|
50,553
|
|
Furniture, fixtures, and equipment
|
|
|
401
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
57,672
|
|
|
|
57,672
|
|
Less: Accumulated depreciation
|
|
|
(5,058
|
)
|
|
|
(4,183
|
)
|
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
52,614
|
|
|
$
|
53,489
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Gain on Insurance
Proceeds
|
During the six months ended June 30, 2010, the White Plains
Hotel suffered water damage. Included in repairs and maintenance
is approximately $164 for repair costs to the White Plains Hotel
caused by the water damage. In settlement of an insurance claim,
the Company received insurance proceeds of $400. Accordingly, a
gain of $236 was recognized and this gain is included in
Gain on insurance proceeds in the accompanying
Condensed Combined Statements of Operations.
|
|
(4)
|
Assumption of
Debt by Member
|
During the six months ended June 30, 2010, the members of
the Company assumed $12,690 of the Companys debt. This is
reflected as a contribution on the accompanying Condensed
Combined Statements of Members Capital.
F-87
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
To the Members of
Moody National Three Property Portfolio
In our opinion, the accompanying combined balance sheets and the
related combined statements of operations, of members
capital and of cash flows present fairly, in all material
respects, the financial position of Moody National Three
Property Portfolio at December 31, 2009 and 2008, and the
results of its operations and its cash flows for the years ended
December 31, 2009 and 2008 in conformity with accounting
principles generally accepted in the United States of America.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
October 26, 2010
F-88
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
COMBINED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Investment in hotel properties, net
|
|
$
|
53,489
|
|
|
$
|
55,427
|
|
Cash and cash equivalents
|
|
|
593
|
|
|
|
1,409
|
|
Restricted cash
|
|
|
3,114
|
|
|
|
2,603
|
|
Hotel receivables and other assets
|
|
|
785
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
57,981
|
|
|
$
|
60,591
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS CAPITAL
|
Mortgage loan
|
|
$
|
52,826
|
|
|
$
|
53,110
|
|
Note payable
|
|
|
525
|
|
|
|
0
|
|
Due to affiliate
|
|
|
105
|
|
|
|
1,220
|
|
Accrued rent
|
|
|
50
|
|
|
|
25
|
|
Accounts payable and accrued expenses
|
|
|
481
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
53,987
|
|
|
|
54,932
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
3,994
|
|
|
|
5,659
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
57,981
|
|
|
$
|
60,591
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-89
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
COMBINED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hotel operating:
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
11,108
|
|
|
$
|
12,718
|
|
Other operating
|
|
|
482
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
11,590
|
|
|
|
13,228
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
2,437
|
|
|
|
2,860
|
|
Other
|
|
|
311
|
|
|
|
329
|
|
General and administrative
|
|
|
1,946
|
|
|
|
2,093
|
|
Sales and marketing
|
|
|
434
|
|
|
|
427
|
|
Franchise fees
|
|
|
841
|
|
|
|
962
|
|
Management fees
|
|
|
579
|
|
|
|
627
|
|
Condominium fees
|
|
|
524
|
|
|
|
637
|
|
Depreciation
|
|
|
1,642
|
|
|
|
1,610
|
|
Ground rent
|
|
|
103
|
|
|
|
105
|
|
Property taxes
|
|
|
849
|
|
|
|
813
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,666
|
|
|
|
10,463
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,924
|
|
|
|
2,765
|
|
Interest income
|
|
|
7
|
|
|
|
18
|
|
Interest expense
|
|
|
2,571
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(640
|
)
|
|
$
|
(811
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-90
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
STATEMENTS OF
MEMBERS CAPITAL
For the years
ended December 31, 2009 and 2008
|
|
|
|
|
|
|
Members Capital
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1, 2008
|
|
$
|
5,970
|
|
Contributions
|
|
|
500
|
|
Distributions
|
|
|
|
|
Net loss
|
|
|
(811
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
5,659
|
|
Contributions
|
|
|
|
|
Distributions
|
|
|
(1,025
|
)
|
Net loss
|
|
|
(640
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
3,994
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
financial statements
F-91
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
STATEMENTS OF
CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(640
|
)
|
|
$
|
(811
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Straight line rent adjustment
|
|
|
25
|
|
|
|
25
|
|
Loan cost amortization
|
|
|
356
|
|
|
|
356
|
|
Depreciation and amortization
|
|
|
1,642
|
|
|
|
1,610
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Hotel receivables and other assets
|
|
|
11
|
|
|
|
50
|
|
Due to/from affiliate
|
|
|
(817
|
)
|
|
|
879
|
|
Accounts payable and accrued expenses
|
|
|
(98
|
)
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
479
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(3,075
|
)
|
Restricted cash
|
|
|
(511
|
)
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(511
|
)
|
|
|
(1,463
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from note
|
|
|
525
|
|
|
|
|
|
Payments on mortgage loan
|
|
|
(284
|
)
|
|
|
(265
|
)
|
Capital contributions
|
|
|
|
|
|
|
500
|
|
Capital distributions
|
|
|
(1,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(784
|
)
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(816
|
)
|
|
|
644
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,409
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
593
|
|
|
$
|
1,409
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,592
|
|
|
$
|
3,687
|
|
The accompanying notes are an integral part of the combined
financial statements
F-92
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2009 and 2008
(dollars in thousands)
The Moody National Three Property Portfolio includes the
following hotels:
The Courtyard by
Marriott®
Altoona in Altoona, Pennsylvania
The SpringHill Suites by
Marriott®
Washington in Washington, Pennsylvania
The Residence Inn by
Marriott®
White Plains in White Plains, New York
The three hotel properties (collectively the Company
or the Hotels) are owned by three single member
Delaware limited liability companies directly or indirectly
owned and subject to management control by Brett C. Moody
(Moody). The Residence Inn in White Plains, New York
is leased on a long term basis to another single member Delaware
limited liability company that is also owned by Moody (the
Lessee).
The Company operates in the hospitality and lodging industry and
is subject to risks common to companies in that industry.
The Hotels are operated under franchise agreements with Marriott
International and are subject to hotel management agreements
with Concord Hospitality Enterprises (Concord)
(Note 6) and asset management agreements with Moody
National Management LP (the Moody Operator)
(Note 8).
|
|
(2)
|
Summary of
Significant Accounting Policies
|
Basis of
Presentation
The combined financial statements have been prepared on the
accrual basis of accounting and in accordance with accounting
principles generally accepted in the United State of America.
All intercompany balances and transactions including those
between the Hotels and Lessee have been eliminated in
combination. These financials are being presented on a combined
basis as the Hotels and the Lessee are under common management
and control.
Use of
Estimates
The preparation of the financial statements requires management
to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the balance sheet date and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Investment in
Hotel Properties
Investment in hotel properties consists primarily of land,
buildings, improvements and related fixtures and equipment.
Investment in hotel properties is stated at cost and is
depreciated using the straight-line method over estimated useful
lives of 39 years for building, 5 to 15 years for
improvements, 5 and 7 years for furniture, fixtures and
equipment and 5 years for computer equipment. Major
renewals and improvements are capitalized, while maintenance and
repairs are expensed when incurred. When property
and/or
equipment are sold or retired, their cost and related
accumulated depreciation are eliminated from the accounts and
the resulting gain or loss is reflected in operations.
Impairment of
Long-Lived Assets
The Company periodically evaluates the recoverability of its
property and equipment when events or circumstances indicate
that the asset may be impaired. This evaluation consists of a
comparison of the carrying value of the asset with the
assets expected future cash flows,
F-93
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
FINANCIAL STATEMENTS (Continued)
undiscounted and without interest costs. Estimates of expected
future cash flows represent managements best estimate
based on reasonable and supportable assumptions and projections.
If the expected future undiscounted cash flows exceed the
carrying value of the asset, no impairment is recognized. If
expected future undiscounted cash flows are less than the
carrying value of the asset then impairment is indicated. Such
impairment is measured as the difference between the carrying
value of the asset and its fair market value. During 2009 and
2008, there were no events or changes in circumstances
indicating that the carrying value of the property and equipment
may not be recoverable.
Cash and Cash
Equivalents
All highly liquid investments with a maturity of three months or
less when purchased are considered to be cash equivalents. The
Hotels maintain their cash accounts at various major financial
institutions within the United States of America. At times,
deposits may be in excess of federally insured limits. The
Hotels have not experienced any losses on cash deposits with the
financial institutions.
Restricted
Cash
The Hotel mortgage loan agreements requires the Company to
fund 4% of gross revenues on a monthly basis for
furnishings, fixtures, equipment and general repair maintenance
reserve of the Hotels in an account to be held by the lender
(Replacement Reserves).
In addition, insurance and real estate tax reserves are required
to be deposited into an escrow account to be held by the lenders
(see Note 4).
Deferred
Financing Costs
The Companys deferred financing costs relate to fees and
costs incurred to obtain long-term financing to purchase the
Hotels. These costs are amortized using the straight-line
method, which approximates the effective interest method, over
the life of the applicable borrowing and are included as a
component of interest expense. Capitalized deferred financing
costs are recorded in Hotel receivables and other assets and
totaled $1,296 as of December 31, 2009 and 2008.
Accumulated amortization was $850 and $494 as of
December 31, 2009 and 2008, respectively, and approximately
$90 and $356 will be amortized in the years ending
December 31, 2011 and 2010, respectively.
Revenue
Recognition
Room revenues are recognized the night of occupancy. Cash
received prior to guest arrival is recorded as an advanced
deposit from customers and recognized as revenue at the time of
occupancy.
Other revenues are also recognized for food, beverage, telephone
charges and various ancillary services performed at the time the
service is provided.
Fair value of
Non-Financial Assets and Liabilities
Effective January 1, 2009, the Company adopted a new
accounting pronouncement which affects how fair value is
determined for non-financial assets that are measured at fair
value on a non-recurring basis such as intangibles and
long-lived assets, including the incorporation of market
participant assumption in determining the fair value. The
adoption of this pronouncement did not have a material impact on
the Companys financial position or results of operations.
Income
Taxes
The Company has elected to be a limited liability company for
federal tax purposes. As such, no federal or state income taxes
are payable by the Company and none have been provided for in
the accompanying financial statements. In accordance with
partnership taxation, each of the partners is
F-94
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
FINANCIAL STATEMENTS (Continued)
responsible for reporting its share of taxable income or loss.
The Company analyzed its material tax positions and determined
that it has not taken any uncertain tax positions.
|
|
(3)
|
Investment in
Hotel Properties, net
|
Investment in hotel properties, net, December 31, 2009 and
2008 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
6,718
|
|
|
$
|
6,718
|
|
Building and improvements
|
|
|
50,553
|
|
|
$
|
50,849
|
|
Furniture, fixtures, and equipment
|
|
|
401
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
57,672
|
|
|
|
57,968
|
|
Less: Accumulated depreciation
|
|
|
(4,183
|
)
|
|
$
|
(2,541
|
)
|
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
53,489
|
|
|
$
|
55,427
|
|
|
|
|
|
|
|
|
|
|
During 2009 the Company transferred building improvements valued
at $296 to an affiliate in exchange for a receivable equaling
the carrying value.
The Washington First Loan is collateralized by the Washington
Hotel and is guaranteed by Moody. The Washington First Loan
matures on April 1, 2015, and does not allow for any
prepayment prior to one month from the maturity date. From and
after one month prior to the Maturity Date, the loan may be
prepaid in whole without penalty or premium. The Washington
First Loan bears interest at a fixed rate of 5.84% and requires
monthly interest and principal payments on a
10-year
amortization schedule. The Washington First Loan requires the
Company to maintain a certain debt service coverage ratio. The
Company is in compliance with its covenants as of
December 31, 2009 and 2008.
The Washington First Loan requires the Company to make a monthly
deposit to a tax and insurance escrow fund (Tax and
Insurance Escrow) held by Berkadia Commercial Mortgage
(the Lender) for real estate taxes and insurance related to the
Washington Hotel. At December 31, 2009 and 2008, the Tax
and Insurance Escrow had a balance of $42 and $72, respectively.
These funds are included in restricted cash reserves in the
accompanying financial statements.
The Washington First Loan requires the Company to make a monthly
deposit to a replacement escrow fund for the replacement or
refurbishment of furniture, fixtures, and equipment of the
Washington Hotel. The monthly deposit is equal to
1/12
of 4% of the annual gross revenues of the hotel. The escrow is
held by the Lender. At December 31, 2009 and 2008, the
Replacement Escrow had a balance of $586 and $479, respectively.
These funds are included in the restricted cash reserves in the
accompanying financial statements.
The Altoona First Loan is collateralized by the Altoona Hotel
and is guaranteed by Moody. The Altoona First Loan matures on
April 1, 2016, and does not allow for any prepayment prior
to three months from the maturity date. From and after three
months prior to the Maturity Date, the loan may be prepaid in
whole without penalty or premium. The Altoona First Loan bears
interest at a fixed rate of 5.96% and requires monthly interest
and principal payments on a
10-year
amortization schedule. The Altoona First Loan requires the
Company to maintain a certain debt service coverage ratio. The
Company is in compliance with its covenants as of
December 31, 2009 and 2008.
The Altoona First Loan requires the Company to make a monthly
deposit to a tax and insurance escrow fund (Tax and
Insurance Escrow) held by Berkadia Commercial Mortgage
(the Lender) for real estate taxes and insurance related to the
Hotel. At December 31, 2009 and 2008, the Tax and Insurance
Escrow had a balance of $61 and $42, respectively. These funds
are included in restricted cash reserves in the accompanying
financial statements.
F-95
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
FINANCIAL STATEMENTS (Continued)
The Altoona First Loan requires the Company to make a monthly
deposit to a replacement escrow fund for the replacement or
refurbishment of furniture, fixtures, and equipment of the
Altoona Hotel. The monthly deposit is equal to
1/12
of 4% of the annual gross revenues of the hotel. The escrow is
held by the Lender. At December 31, 2009 and 2008, the
Replacement Escrow had a balance of $361 and $256, respectively.
These funds are included in restricted cash reserves in the
accompanying financial statements.
The White Plains Mortgage Loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
|
|
|
|
December 31,
|
|
|
Interest
|
|
|
|
2009 and 2008
|
|
|
Rate
|
|
|
Mortgage loan
|
|
$
|
12,500,000
|
|
|
|
LIBOR + 1.714
|
%
|
Mezzanine mortgage loan A
|
|
|
7,500,000
|
|
|
|
LIBOR + 2.505
|
%
|
Mezzanine mortgage loan B
|
|
|
5,000,000
|
|
|
|
LIBOR + 3.805
|
%
|
Mezzanine mortgage loan C
|
|
|
2,500,000
|
|
|
|
LIBOR + 3.805
|
%
|
The White Plains Mortgage Loans are collateralized by the White
Plains Hotel and are guaranteed by Moody. The White Plains
Mortgage Loans mature on March 9, 2011, and allow for
prepayment prior to the maturity date for an exit fee of .5% of
the principal balance. The White Plains Mortgage Loan requires
the Company to maintain a certain debt service coverage ratio.
The Company is in compliance with its covenants as of
December 31, 2009 and 2008.
The White Plains Mortgage Loan requires the Company to make a
monthly deposit to a tax and insurance escrow fund (Tax
and Insurance Escrow) held by Citigroup Global Markets
Realty Corp (the White Plains Lender) for real estate taxes and
insurance related to the White Plains Hotel. At
December 31, 2009 and 2008, the Tax and Insurance Escrow
had a balance of $439 and $458, respectively. These funds are
included in the restricted cash reserves in the accompanying
financial statements.
The White Plains Mortgage Loan requires the Company to make a
monthly deposit to a replacement escrow fund for the replacement
or refurbishment of furniture, fixtures, and equipment of the
Hotel. The monthly deposit is equal to
1/12
of 4% of the annual gross revenues of the hotel. The escrow is
held by the Lender. At December 31, 2009 and 2008, the
Replacement Escrow had a balance of $1,625 and $1,296,
respectively. These funds are included in restricted cash
reserves in the accompanying financial statements.
Excluding the two loans assumed by member of the Company (see
note 10), future scheduled debt principal payments at
December 31, 2009 are as follows:
|
|
|
|
|
2010
|
|
$
|
312
|
|
2011
|
|
|
27,832
|
|
2012
|
|
|
352
|
|
2013
|
|
|
373
|
|
2014
|
|
|
395
|
|
2015
|
|
|
4,940
|
|
2016
|
|
|
5,930
|
|
|
|
|
|
|
Total
|
|
$
|
40,134
|
|
|
|
|
|
|
In connection with the acquisition of the Washington Hotel and
the Altoona Hotel affiliates of Moody entered into a financing
agreement collateralized by the hotels with assigned values of
$5,579 and $7,113 respectively. The financing agreement required
interest only payments on the assigned
F-96
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
FINANCIAL STATEMENTS (Continued)
values at one month LIBOR plus 4.7%, (6.09% and 4.93% as of
December 31, 2009 and 2008, respectively). See
(Note 10) for additional information regarding this
financing arrangement.
On December 2, 2009, the Company entered into a $525 note
payable for the White Plains Hotel (the White Plains Note
Payable) with Amegy Bank N.A., which matures on
December 1, 2010. The White Plains Note Payable is
collateralized by the Moodys interest in the Hotel. The
White Plains Note Payable may be repaid in full without any
prepayment fee. The White Plains Note Payable bears interest at
a rate of 5.3% annually and requires monthly interest payments
over the term of the note. All unpaid interest and principal is
due upon maturity.
Future estimated schedule debt principal payments at
December 31, 2009 are as follows:
|
|
|
|
|
2010
|
|
$
|
525
|
|
2011
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525
|
|
|
|
|
|
|
The hotel management agreement for the Altoona and Washington
Hotels expires on February 28, 2017 and renews
automatically for successive one-year terms unless terminated by
Moody or Concord. The agreement requires a base management fee
equal to 4% of Gross Operating Revenues (as defined). The Hotel
management agreement for the White Plains Hotel expired in
February 2008 and currently renews automatically for successive
one-year terms unless terminated by Moody or Concord. The
agreement requires a base management fee equal to 3% of Gross
Operating Revenues (as defined). The agreements also require an
accounting fee of $16 annually.
The White Plains Hotel is subject to a franchise agreement with
Marriott International, Inc to operate under the Residence Inn
brand. The agreement expires on July 18, 2016 and allows
for one ten year renewal period. Under the agreement, royalty
fees are equal to 5% of hotel gross room revenues (as defined),
and marketing fees are equal to 2.5% of hotel gross room
revenues (as defined). The franchise fee expense for the years
ended December 31, 2009 and December 31, 2008 was $439
and $514, respectively.
The Washington Hotel is subject to a fourteen year franchise
agreement with Marriott International, Inc to operate under the
SpringHill Suites brand. The agreement expires on
February 21, 2020 and is not renewable. Under the
agreement, royalty fees are equal to 5% of hotel gross room
revenues (as defined), and marketing fees are equal to 2.5% of
hotel gross room revenues (as defined). The franchise fee
expense for the years ended December 31, 2009 and
December 31, 2008 was $205 and $222, respectively.
The Altoona Hotel is subject to a fourteen year franchise
agreement with Marriott International, Inc to operate under the
Courtyard brand. The agreement expires on August 31, 2021
and allows for one ten year renewal period. Under the agreement,
royalty fees are equal to 5.5% of hotel gross room revenues (as
defined), and marketing fees are equal to 2% of hotel gross room
revenues (as defined). The franchise fee expense for the years
ended December 31, 2009 and December 31, 2008 was $197
and $226, respectively.
The Moody Operator is an affiliate of the Company and provides
asset management services for the Hotels. The terms of the asset
management agreement requires payments equal to .5%, 1%
F-97
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
FINANCIAL STATEMENTS (Continued)
and 2% of Gross Operating Revenues (as defined) for the Altoona,
Washington and White Plains Hotels, respectively. For the years
ended December 31, 2009 and 2008, the affiliate received
asset management fees of approximately $309 and $345.
|
|
(9)
|
Commitments and
Contingencies
|
The nature of the operations of the Hotel exposes the Company to
the risk of claims and litigation in the normal course of
business. Although the outcome of these matters cannot be
determined, management does not expect the ultimate resolution
of these matters to have a material adverse effect on the
financial position, operations, or liquidity of the Company.
The Altoona Hotel is committed to a ground lease with the Blair
County Convention and Sports Facility Authority. The term of the
agreement expires on April 30, 2029 with 12 additional
terms of five years each. The lease rate is based on the
quarterly average room occupancy of the hotel as follows:
|
|
|
Avg Occupancy
|
|
Lease Amount
|
|
> 85%
|
|
Base Rent
|
85% but less than 90%
|
|
$4/room/day
|
90% but less than 100%
|
|
$5/room/day
|
100%
|
|
$6/room/day
|
Base rent is equal to $5,500 per month, which shall be increased
on an annual basis by two and one-half percent (2.5%).
The following is a schedule of the minimum future obligation
payments required under the ground lease (in thousands):
|
|
|
|
|
2010
|
|
|
82
|
|
2011
|
|
|
84
|
|
2012
|
|
|
87
|
|
2013
|
|
|
89
|
|
2014
|
|
|
91
|
|
Thereafter
|
|
|
1,992
|
|
|
|
|
|
|
Total
|
|
|
2,425
|
|
|
|
|
|
|
The White Plains Hotel is part of a condominium known as
La Reserva Condominium (the Condominium). The
Condominium is comprised of 143 residential units and four
commercial units. The four commercial units are owned by the
Company and are part of the White Plains Hotel. The White Plains
Hotel is comprised of 129 of the residential units owned by the
Company and four residential units leased by the Company from
unaffiliated third party owners. The remaining 10 residential
units are owned and occupied by unaffiliated third party owners.
The Company leases 4 residential units in the White Plains hotel
from individual owners (the Condo Owner). The lease
agreements are for 6 years with a one-time 5 year
renewal option. The White Plains Hotel shall have the right to
sublease the Unit to any third party (a Hotel Guest)
for such rent and on such terms as the White Plains Hotel may
determine. Each Condo Owner may reserve the Unit for seven
(7) days in any calendar quarter or two (2) weeks in
any calendar year. The White Plains Hotel will have no
obligation to pay Rent during such period. Each Condo Owner is
also obligated to reimburse the White Plains Hotel for
renovations that were completed in 2008 monthly. Minimum
annual rents payable to the Condo Owner are approximately $70
per year and amounts receivable from the Condo Owner for its
renovation reimbursements are approximately $11 per year,
subject to a balloon repayment at the end of the lease term of
any remaining reimbursements.
F-98
MOODY NATIONAL
THREE PROPERTY PORTFOLIO
NOTES TO
FINANCIAL STATEMENTS (Continued)
The White Plains Hotel is responsible for paying assessments to
the Condominium Association on a monthly basis for all
residential units owned and leased. The White Plains Hotel
provides certain services to the Condominium Association for
housekeeping, maintenance and certain other services and
receives compensation from the Condominium Association for said
services. The net of assessment paid and reimbursements received
is reflected in condominium fees on the Combined Statements of
Operations.
On May 18, 2010, Moody entered into a purchase and sale
agreement with Chatham Lodging Trust for the sale of the Hotels
and the Lessee for a purchase price of $43.2 million which
includes the assumption of loan debt of $12.4 million.
On August 24, 2010, the sale of the Altoona and Washington
Hotels was completed for the purchase price plus customary
pro-rated amounts and closing costs. During the six months ended
June 30, 2010, the members of the Company assumed $12,690
of the Companys debt.
On September 23, 2010, the sale of the White Plains Hotel
was completed for the purchase price plus customary pro-rated
amounts and closing costs.
The Company has evaluated the need for disclosures
and/or
adjustments resulting from subsequent events through
October 26, 2010, the date the financial statements were
available to be issued.
F-99
NEW ROC HOTELS,
LLC
(A Limited
Liability Company)
Balance Sheets
September 30, 2010 and December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Reviewed)
|
|
|
(Audited)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
318,014
|
|
|
$
|
297,551
|
|
Accounts and guest receivables, net of allowance for
uncollectible accounts
|
|
|
132,735
|
|
|
|
61,645
|
|
Escrows:
|
|
|
|
|
|
|
|
|
Taxes and insurance
|
|
|
271,312
|
|
|
|
170,926
|
|
Replacement reserve
|
|
|
195,237
|
|
|
|
69,526
|
|
|
|
|
|
|
|
|
|
|
Total escrows
|
|
|
466,549
|
|
|
|
240,452
|
|
Inventory
|
|
|
27,275
|
|
|
|
26,332
|
|
Prepaid expenses
|
|
|
53,327
|
|
|
|
54,592
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
997,900
|
|
|
|
680,572
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Property and equipment, at cost, net of accumulated depreciation
|
|
|
16,619,844
|
|
|
|
17,264,883
|
|
Other assets
|
|
|
|
|
|
|
|
|
Deferred costs air rights, net of accumulated
amortization
|
|
|
2,569,867
|
|
|
|
2,619,927
|
|
Deferred financing costs, net of accumulated amortization
|
|
|
17,501
|
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
2,587,368
|
|
|
|
2,665,191
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
20,205,112
|
|
|
$
|
20,610,646
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
146,472
|
|
|
$
|
137,803
|
|
Accrued expenses
|
|
|
173,206
|
|
|
|
99,914
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
319,678
|
|
|
|
237,717
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Mortgage note payable
|
|
|
16,800,000
|
|
|
|
16,800,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,119,678
|
|
|
|
17,037,717
|
|
Members equity
|
|
|
3,085,434
|
|
|
|
3,572,929
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Members Equity
|
|
$
|
20,205,112
|
|
|
$
|
20,610,646
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-100
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Statements of Operations
For the Nine
Month Periods Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
(Reviewed)
|
|
|
(Reviewed)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Room revenues
|
|
$
|
4,422,382
|
|
|
$
|
4,219,787
|
|
Telephone revenue
|
|
|
5,205
|
|
|
|
6,597
|
|
Other revenues
|
|
|
213,613
|
|
|
|
182,346
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
4,641,200
|
|
|
|
4,408,730
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Departmental costs:
|
|
|
|
|
|
|
|
|
Room expense
|
|
|
1,028,502
|
|
|
|
923,958
|
|
Telephone expense
|
|
|
9,686
|
|
|
|
10,886
|
|
|
|
|
|
|
|
|
|
|
Total departmental costs
|
|
|
1,038,188
|
|
|
|
934,844
|
|
|
|
|
|
|
|
|
|
|
Gross operating profit
|
|
|
3,603,012
|
|
|
|
3,473,886
|
|
General and administrative:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
530,569
|
|
|
|
538,411
|
|
Energy expenses
|
|
|
298,766
|
|
|
|
259,963
|
|
Franchise expenses
|
|
|
337,753
|
|
|
|
326,280
|
|
Property taxes and insurance
|
|
|
495,937
|
|
|
|
461,315
|
|
Property operations, repairs and maintenance
|
|
|
296,310
|
|
|
|
235,322
|
|
Sales and marketing expenses
|
|
|
202,794
|
|
|
|
179,938
|
|
Management fees
|
|
|
181,812
|
|
|
|
142,489
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
|
2,343,941
|
|
|
|
2,143,718
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,382,129
|
|
|
|
3,078,562
|
|
|
|
|
|
|
|
|
|
|
Income from operations, before depreciation,
|
|
|
|
|
|
|
|
|
amortization and interest
|
|
|
1,259,071
|
|
|
|
1,330,168
|
|
Other income and (expenses):
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(775,563
|
)
|
|
|
(847,588
|
)
|
Interest expense
|
|
|
(704,503
|
)
|
|
|
(696,064
|
)
|
|
|
|
|
|
|
|
|
|
Total other income and (expenses), net
|
|
|
(1,480,066
|
)
|
|
|
(1,543,652
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(220,995
|
)
|
|
$
|
(213,484
|
)
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-101
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Statement of Changes in Members Equity
For the Nine Month Period Ended September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis R.
|
|
|
|
|
|
|
|
|
|
Cappelli
|
|
|
Cappelli Family
|
|
|
Kylie
|
|
|
|
|
|
|
Hotels, LLC
|
|
|
Partnership
|
|
|
Cappelli
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reviewed)
|
|
|
Percentage ownership
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
Profit and loss percentage
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
100
|
%
|
Balance at December 31, 2009
|
|
$
|
(543,352
|
)
|
|
$
|
1,372,093
|
|
|
$
|
2,744,188
|
|
|
$
|
3,572,929
|
|
Net loss
|
|
|
(220,995
|
)
|
|
|
|
|
|
|
|
|
|
|
(220,995
|
)
|
Distributions
|
|
|
(266,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(266,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
(1,030,847
|
)
|
|
$
|
1,372,093
|
|
|
$
|
2,744,188
|
|
|
$
|
3,085,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-102
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Statements of Cash Flows
For the Nine Month Periods Ended September 30, 2010 and
2009
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
(Reviewed)
|
|
|
(Reviewed)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(220,995
|
)
|
|
$
|
(213,484
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
697,740
|
|
|
|
681,344
|
|
Amortization of intangible assets
|
|
|
50,060
|
|
|
|
50,059
|
|
Amortization of debt issue costs
|
|
|
27,763
|
|
|
|
116,185
|
|
(Increase) decrease in accounts and guest receivables
|
|
|
(71,090
|
)
|
|
|
3,229
|
|
Deposits to escrow for insurance and real estate taxes
|
|
|
(517,744
|
)
|
|
|
(502,588
|
)
|
Releases from escrow for insurance and real estate taxes
|
|
|
417,358
|
|
|
|
384,038
|
|
Increase in inventories
|
|
|
(943
|
)
|
|
|
(288
|
)
|
Decrease in prepaid assets
|
|
|
1,265
|
|
|
|
71,736
|
|
Increase in accounts payable
|
|
|
8,669
|
|
|
|
59,040
|
|
Increase in other accrued liabilities
|
|
|
73,292
|
|
|
|
12,222
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
686,370
|
|
|
|
874,977
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
465,375
|
|
|
$
|
661,493
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Deposits to escrow for repairs and replacements
|
|
$
|
(210,655
|
)
|
|
$
|
(210,655
|
)
|
Releases from escrow for repairs and replacements
|
|
|
84,944
|
|
|
|
291,745
|
|
Purchases of fixed assets
|
|
|
(52,701
|
)
|
|
|
(356,255
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(178,412
|
)
|
|
|
(275,165
|
)
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Distributions to members
|
|
|
(266,500
|
)
|
|
|
(825,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(266,500
|
)
|
|
|
(825,000
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
20,463
|
|
|
|
(438,672
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
297,551
|
|
|
|
822,369
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
318,014
|
|
|
$
|
383,697
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
(704,503
|
)
|
|
$
|
(696,064
|
)
|
|
|
|
|
|
|
|
|
|
F-103
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial Statements
September 30, 2010
|
|
NOTE 1
|
NATURE OF
ORGANIZATION
|
The New Roc Hotels, LLC (the Company) was incorporated in the
State of New York for the purpose of operating a hotel known as
Residence Inn by Marriott (Property), a 124-room hotel located
in New Rochelle, New York.
The Company operates in one geographic market: New Rochelle, New
York. Accordingly, the Companys ability to meet its
obligations is dependent on the tourism and business conditions
in the New York metropolitan area. Management believes that the
risk arising from this concentration is mitigated by the
scarcity of reasonably-priced, quality hotel rooms in the
immediate area, the market being one of the largest in the world
and the Propertys proximity near many important
entertainment and sports venues.
|
|
NOTE 2
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
A summary of the major accounting policies followed by the
Company is set forth below:
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
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
Basis of
Accounting
The Company prepares its financial statements on the accrual
basis of accounting, in accordance with generally accepted
accounting principles.
Cash and
Cash Equivalents
The Company considers all highly-liquid debt instruments,
purchased with a maturity of three months or less, to be cash
equivalents
Escrows
Under the terms of the mortgage and management agreements, the
Company is required to establish escrow reserve accounts to
cover the costs of real estate taxes, insurance, replacements
and renewals related to the furniture, fixtures and equipment,
and certain repairs and maintenance to the hotel.
Accounts
and Guest Receivable
Accounts receivable are stated at the amount billed to the
customer plus any accrued and unpaid interest. The Company
considers guest receivables to be delinquent after thirty days,
and begin collection activities on that date. The delinquent
receivables at September 30, 2010 and December 31,
2009, aggregated $7,648 and $25,257, respectively.
Allowance
for Doubtful Accounts
The Company provides for probable uncollectible amounts through
a provision for bad debt expense and an adjustment to a
valuation allowance based on its assessment of the current
status of individual accounts. Balances that are still
outstanding after management has used reasonable collection
efforts are written off though a charge to the valuation
allowance and a credit to accounts receivable. Changes in the
valuation allowance have not been material to the financial
statements.
F-104
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
Allowance for doubtful accounts was $0 and $2,000 as of
September 30, 2010 and December 31, 2009, respectively.
Inventory
Inventory of food, beverages and supplies are stated at the
lower of cost or market using the
first-in,
first-out method.
Fair
Value
The Company does not value any of its assets or liabilities at
fair value, under Financial Accounting Standards Board (FASB)
Statement No. 157, Fair Value Measurements.
Deferred
Costs
Deferred costs represent costs incurred in connection with the
purchase and development of the property, and in obtaining its
long-term financing. These costs are being amortized on a
straight-line basis as follows:
|
|
|
|
|
|
|
Years
|
|
|
Finance costs
|
|
|
2-20
|
|
Air rights
|
|
|
55
|
|
Fixed
Assets and Depreciation
Property, hotel furniture and equipment are recorded at cost.
Depreciation of real property is computed using the
straight-line method over a
40-year
estimated useful life. Depreciation of furniture, fixtures and
equipment is provided over the estimated economic lives of the
related assets, using the straight-line method over five to
seven years. Maintenance and repair costs are charged to expense
when incurred. At the time fixed assets are retired or otherwise
disposed of, the fixed assets and related accumulated
depreciation or amortization accounts are relieved of the
applicable amounts, and any gain or loss is credited or charged
to income.
Depreciation expense was $697,740 and $681,344 for nine month
periods ended September 30, 2010 and 2009, respectively.
Advertising
Costs
The costs of advertising, promotion and marketing programs are
charged to operations in the period incurred and are included as
operating expenses in the accompanying statements of operations
Income
Taxes
The Company has elected for income tax purposes to be treated as
a partnership. Accordingly, federal and state income taxes have
not been provided, as the Companys income or loss is
passed through and reported by the members on their individual
tax returns. The Company has determined that there are no
uncertain positions required to be disclosed or recorded under
Accounting Standards Codification 740, Accounting for
Uncertainty in Income Taxes.
Subsequent
Events
The Company has evaluated the financial statements for
subsequent events that could require accrual or disclosure
through the financial statement report date
of .
F-105
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
|
|
NOTE 3
|
PROPERTY AND
EQUIPMENT
|
Property and equipment consists of the following at
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Building
|
|
$
|
20,338,974
|
|
|
$
|
20,338,974
|
|
Equipment
|
|
|
5,377,816
|
|
|
|
5,325,115
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
25,716,790
|
|
|
|
25,664,089
|
|
Less accumulated depreciation
|
|
|
(9,096,946
|
)
|
|
|
(8,399,206
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,619,844
|
|
|
$
|
17,264,883
|
|
|
|
|
|
|
|
|
|
|
The Company has an air rights lease with the City of New
Rochelle. The Company paid a one-time payment of $3,203,750 and
has an annual base rent of $10. The lease initially expires on
December 1, 2047. During 2007, the Company extended the
lease with an additional payment of $75,000. The lease extension
expires on December 1, 2062. The additional payment is
amortized over the life of the lease extension.
Deferred costs and accumulated amortization are as follows at
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Period
|
|
|
Air Rights
|
|
$
|
3,278,750
|
|
|
$
|
708,883
|
|
|
|
55 years
|
|
Financing Costs
|
|
|
388,617
|
|
|
|
388,617
|
|
|
|
2 years
|
|
Franchise Expense
|
|
|
50,000
|
|
|
|
32,499
|
|
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,717,367
|
|
|
$
|
1,129,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Period
|
|
|
Air Rights
|
|
$
|
3,278,750
|
|
|
$
|
658,823
|
|
|
|
55 years
|
|
Financing Costs
|
|
|
388,617
|
|
|
|
363,354
|
|
|
|
2 years
|
|
Franchise Expense
|
|
|
50,000
|
|
|
|
29,999
|
|
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,717,367
|
|
|
$
|
1,052,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-106
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
The annual amortization of deferred costs is expected to be as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended
|
|
|
|
|
Financing
|
|
|
Franchise
|
|
|
|
|
September 30,
|
|
Air Rights
|
|
|
Costs
|
|
|
Expense
|
|
|
Total
|
|
|
2011
|
|
$
|
66,746
|
|
|
$
|
|
|
|
$
|
3,333
|
|
|
$
|
70,079
|
|
2012
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
|
70,079
|
|
2013
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
|
70,079
|
|
2014
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
|
70,079
|
|
2015
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
|
70,079
|
|
Thereafter
|
|
|
2,236,137
|
|
|
|
|
|
|
|
836
|
|
|
|
2,236,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,569,867
|
|
|
$
|
|
|
|
$
|
17,501
|
|
|
$
|
2,587,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5-
GARAGE LEASE AGREEMENT
The Company has an agreement with the town of New Rochelle to
lease 128 parking spaces in a municipal parking garage for their
guests and employees. The annual base rent for the lease is $10
plus the Companys proportionate share of the citys
adopted budget for the operation, management and maintenance of
the garage and the proportionate share of the established
reserve fund for the cost of capital repairs. The lease expires
December 1, 2037 and has an option to extend to
December 1, 2104.
The lease has been accounted for as an operating lease, rent and
expense was $95,067 and $94,572 for nine month periods ended
September 30, 2010 and 2009, respectively.
The following is a schedule by years of future minimum rental
payments required under operating leases in excess of one year
as of September 30, 2010:
|
|
|
|
|
For the Period Ended
|
|
|
|
September 30,
|
|
Amount
|
|
|
2011
|
|
$
|
95,507
|
|
2012
|
|
|
95,507
|
|
2013
|
|
|
95,507
|
|
2014
|
|
|
95,507
|
|
2015
|
|
|
95,507
|
|
Thereafter
|
|
|
2,101,154
|
|
|
|
|
|
|
Total
|
|
$
|
2,578,689
|
|
|
|
|
|
|
|
|
NOTE 6
|
MORTGAGE
NOTE PAYABLE
|
During 2008, the Company borrowed $16,800,000 pursuant to a loan
agreement with CIBC, Inc. The mortgage bears an interest rate of
5.45% and is collateralized by the Property and related real
estate and equipment. The loan was extended on December 18,
2009 and is interest-only for the entire duration of the loan.
The entire outstanding principal of the note, together with all
accrued and unpaid interest, shall be due and payable on
November 30, 2011. Interest expense was $704,503 and
$696,064 for the nine month periods ended September 30,
2010 and 2009, respectively.
Annual maturities of long-term debt are as follows:
|
|
|
|
|
2011
|
|
$
|
16,800,000
|
|
|
|
|
|
|
Total
|
|
$
|
16,800,000
|
|
|
|
|
|
|
F-107
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
|
|
NOTE 7
|
HOTEL
MANAGEMENT AGREEMENT
|
The Company has entered into a management agreement with Urgo
Hotels, LLC to manage the operations of the Property.
The management fee is 3% of adjusted gross revenues and
additional fees, which will vary depending on the Property
achieving certain profit goals. The management fee was $181,812
and $142,489 for the nine month periods ended September 30,
2010 and 2009, respectively.
Eligible employees of the Company participate in a defined
contribution plan maintained by the Company, as described in
section 401(k) of the Internal Revenue Code (IRC).
Employees are eligible to participate after nine months of
employment. Employees may make contributions to the plan up to
the maximum amount allowed by the Internal Revenue Code if they
wish. Through September 1, 2009 the employer matched
employee contributions dollar for dollar the first 3% of an
employees gross salary and 50% of the next 2% of an
employees salary, not to exceed a maximum of 4%. The
matching provision was amended in 2009 whereby future employer
contributions were strictly discretionary. The Company made did
not make any contributions for the nine month periods ended
September 30 2010 and 2009.
F-108
INDEPENDENT
AUDITORS REPORT
New Roc Hotels, LLC
(A limited liability company)
New Rochelle, New York
We have audited the accompanying balance sheets of New Roc
Hotels, LLC (a limited liability company) as of
December 31, 2009 and 2008, and the related statements of
operations, cash flows and changes in members equity for
the years then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
fairly present, in all material respects, the financial position
of New Roc Hotels, LLC as of December 31, 2009 and 2008 and
the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America.
DeLeon & Stang, CPAs
Gaithersburg, Maryland
October 27, 2010
100 Lakeforest Blvd., Suite 650 Gaithersburg,
MD 20877 Phone 301-948-9825
Fax 301-948-3220
e-mail:
info@deleonandstang.com www.deleonandstang.com
F-109
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
297,551
|
|
|
$
|
822,369
|
|
Accounts and guest receivables, net of allowance for
uncollectible accounts
|
|
|
61,645
|
|
|
|
105,357
|
|
Escrows:
|
|
|
|
|
|
|
|
|
Taxes and insurance
|
|
|
170,926
|
|
|
|
135,750
|
|
Replacement Reserve
|
|
|
69,526
|
|
|
|
212,106
|
|
|
|
|
|
|
|
|
|
|
Total escrows
|
|
|
240,452
|
|
|
|
347,856
|
|
Due from affiliate
|
|
|
|
|
|
|
29,033
|
|
Inventory
|
|
|
26,332
|
|
|
|
25,775
|
|
Prepaid expenses
|
|
|
54,592
|
|
|
|
90,695
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
680,572
|
|
|
|
1,421,085
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Property and equipment, at cost, net of accumulated depreciation
|
|
|
17,264,883
|
|
|
|
17,776,984
|
|
Other assets
|
|
|
|
|
|
|
|
|
Deferred costs air rights, net of accumulated
amortization
|
|
|
2,619,927
|
|
|
|
2,686,673
|
|
Deferred financing costs, net of accumulated amortization
|
|
|
45,264
|
|
|
|
200,178
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
2,665,191
|
|
|
|
2,886,851
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
20,610,646
|
|
|
$
|
22,084,920
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
137,803
|
|
|
$
|
93,628
|
|
Accrued expenses
|
|
|
99,914
|
|
|
|
160,859
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
237,717
|
|
|
|
254,487
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Mortgage note payable
|
|
|
16,800,000
|
|
|
|
16,800,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,037,717
|
|
|
|
17,054,487
|
|
Members equity
|
|
|
3,572,929
|
|
|
|
5,030,433
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Members Equity
|
|
$
|
20,610,646
|
|
|
$
|
22,084,920
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-110
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Room revenues
|
|
$
|
5,561,935
|
|
|
$
|
6,782,868
|
|
Telephone revenue
|
|
|
8,861
|
|
|
|
20,019
|
|
Other revenues
|
|
|
193,914
|
|
|
|
395,672
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,764,710
|
|
|
|
7,198,559
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Departmental costs:
|
|
|
|
|
|
|
|
|
Room expense
|
|
|
1,249,665
|
|
|
|
1,534,922
|
|
Telephone expense
|
|
|
15,767
|
|
|
|
23,180
|
|
|
|
|
|
|
|
|
|
|
Total departmental costs
|
|
|
1,265,432
|
|
|
|
1,558,102
|
|
|
|
|
|
|
|
|
|
|
Gross operating profit
|
|
|
4,499,278
|
|
|
|
5,640,457
|
|
General and administrative:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
715,181
|
|
|
|
732,303
|
|
Energy expenses
|
|
|
319,085
|
|
|
|
441,605
|
|
Franchise expenses
|
|
|
425,459
|
|
|
|
509,996
|
|
Property taxes and insurance
|
|
|
611,171
|
|
|
|
571,743
|
|
Property operations, repairs and maintenance
|
|
|
332,811
|
|
|
|
343,662
|
|
Sales and marketing expenses
|
|
|
250,269
|
|
|
|
233,383
|
|
Management fees
|
|
|
182,928
|
|
|
|
286,865
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
|
2,836,904
|
|
|
|
3,119,557
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,102,336
|
|
|
|
4,677,659
|
|
|
|
|
|
|
|
|
|
|
Income from operations, before depreciation, amortization and
interest
|
|
|
1,662,374
|
|
|
|
2,520,900
|
|
Other income and (expenses):
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(1,135,777
|
)
|
|
|
(1,102,395
|
)
|
Interest expense
|
|
|
(930,069
|
)
|
|
|
(933,782
|
)
|
Write off of deferred financing costs
|
|
|
|
|
|
|
(423,427
|
)
|
Interest income
|
|
|
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expenses), net
|
|
|
(2,065,846
|
)
|
|
|
(2,457,784
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(403,472
|
)
|
|
$
|
63,116
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis R.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cappelli
|
|
|
|
|
|
|
|
|
|
Cappelli
|
|
|
Family
|
|
|
Kylie
|
|
|
|
|
|
|
Hotels, LLC
|
|
|
Partnership
|
|
|
Cappelli
|
|
|
Total
|
|
|
Percentage ownership December 31, 2009
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
Profit and loss percentage December 31, 2009
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
100
|
%
|
Balance at December 31, 2007
|
|
$
|
10,501,983
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,501,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of net income January through April 2008
|
|
|
21,057
|
|
|
|
|
|
|
|
|
|
|
|
21,057
|
|
Distributions January through April 2008
|
|
|
(5,034,666
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,034,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2008
|
|
|
5,488,374
|
|
|
|
|
|
|
|
|
|
|
|
5,488,374
|
|
Member Interest Transfer at May 1, 2008
|
|
|
(4,116,281
|
)
|
|
|
1,372,093
|
|
|
|
2,744,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 1, 2008
|
|
|
1,372,093
|
|
|
|
1,372,093
|
|
|
|
2,744,188
|
|
|
|
5,488,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of net income May through December 2008
|
|
|
42,059
|
|
|
|
|
|
|
|
|
|
|
|
42,059
|
|
Distributions May through December 2008
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
914,152
|
|
|
|
1,372,093
|
|
|
|
2,744,188
|
|
|
|
5,030,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of 2009 net loss
|
|
|
(403,472
|
)
|
|
|
|
|
|
|
|
|
|
|
(403,472
|
)
|
2009 Distributions
|
|
|
(1,054,032
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,054,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
(543,352
|
)
|
|
$
|
1,372,093
|
|
|
$
|
2,744,188
|
|
|
$
|
3,572,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-112
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(403,472
|
)
|
|
$
|
63,116
|
|
Adjustments to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
914,118
|
|
|
|
902,449
|
|
Amortization of intangible assets
|
|
|
66,746
|
|
|
|
66,746
|
|
Amortization of debt issue costs
|
|
|
154,913
|
|
|
|
133,200
|
|
Write off of deferred financing costs
|
|
|
|
|
|
|
423,427
|
|
Decrease in accounts and guest receivables
|
|
|
43,712
|
|
|
|
3,530
|
|
Decrease (increase) in prepaid assets
|
|
|
36,102
|
|
|
|
(82,508
|
)
|
Deposits to escrow for insurance and real estate taxes
|
|
|
639,323
|
|
|
|
762,202
|
|
Releases from escrow for insurance and real estate taxes
|
|
|
(674,499
|
)
|
|
|
(644,148
|
)
|
Decrease (increase) in inventories
|
|
|
(557
|
)
|
|
|
37,012
|
|
Increase (decrease) in accounts payable
|
|
|
44,175
|
|
|
|
(40,690
|
)
|
Increase (decrease) in other accrued liabilities
|
|
|
(60,945
|
)
|
|
|
(109,169
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
759,616
|
|
|
|
1,452,051
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
739,537
|
|
|
$
|
1,515,167
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Deposits to escrow for repairs and replacements
|
|
$
|
(280,873
|
)
|
|
$
|
(266,925
|
)
|
Releases from escrow for repairs and replacements
|
|
|
423,455
|
|
|
|
62,258
|
|
Purchases of fixed assets
|
|
|
(402,017
|
)
|
|
|
(77,112
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(259,435
|
)
|
|
|
(281,779
|
)
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Decrease (increase) in due from affiliate
|
|
|
29,033
|
|
|
|
(20,079
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
16,800,000
|
|
Increase in financing costs
|
|
|
|
|
|
|
(303,160
|
)
|
Repayment of long-term debt
|
|
|
|
|
|
|
(12,511,093
|
)
|
Distributions to members
|
|
|
(1,054,032
|
)
|
|
|
(5,534,666
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,024,999
|
)
|
|
|
(1,568,998
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(524,818
|
)
|
|
|
(335,610
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
822,369
|
|
|
|
1,157,979
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
297,551
|
|
|
$
|
822,369
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
930,069
|
|
|
$
|
944,513
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Financial Statements
F-113
For the Years
Ended December 31, 2009 and 2008
|
|
NOTE 1
|
NATURE OF
ORGANIZATION
|
The New Roc Hotels, LLC (the Company) was incorporated in the
State of New York for the purpose of operating a hotel known as
Residence Inn by Marriott (Property), a 124-room hotel located
in New Rochelle, New York.
The Company operates in one geographic market: New Rochelle, New
York. Accordingly, the Companys ability to meet its
obligations is dependent on the tourism and business conditions
in the New York metropolitan area. Management believes that the
risk arising from this concentration is mitigated by the
scarcity of reasonably-priced, quality hotel rooms in the
immediate area, the market being one of the largest in the world
and the Propertys proximity near many important
entertainment and sports venues.
Organization
and Partnership Agreement
During 2008, the Company changed the structure of its ownership.
Under the third amended and restated operating agreement of New
Roc Hotels, LLC, Donald J. Urgo & Associates, LLC
withdrew as a member of the Company leaving Cappelli Hotels, LLC
with one hundred percent (100%) of the membership interest.
Effective May 1, 2008 Cappelli Hotels, LLC assigned 50% of
its rights, title and interest to Kylie Cappelli and 25% of its
rights, title and interest to the Louis R. Cappelli Family
Limited Partnership.
|
|
NOTE 2
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
A summary of the major accounting policies followed by the
Company is set forth below:
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
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
Basis of
Accounting
The Company prepares its financial statements on the accrual
basis of accounting, in accordance with generally accepted
accounting principles.
Cash and
Cash Equivalents
The Company considers all highly-liquid debt instruments,
purchased with a maturity of three months or less, to be cash
equivalents
Escrows
Under the terms of the mortgage and management agreements, the
Company is required to establish escrow reserve accounts to
cover the costs of real estate taxes, insurance, replacements
and renewals related to the furniture, fixtures and equipment,
and certain repairs and maintenance to the hotel.
Accounts
and Guest Receivable
Accounts receivable are stated at the amount billed to the
customer plus any accrued and unpaid interest. The Company
considers guest receivables to be delinquent after thirty days,
and begin
F-114
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
collection activities on that date. The delinquent receivables
at December 31, 2009 and 2008 aggregated $25,257 and
$25,353, respectively.
Allowance
for Doubtful Accounts
The Company provides for probable uncollectible amounts through
a provision for bad debt expense and an adjustment to a
valuation allowance based on its assessment of the current
status of individual accounts. Balances that are still
outstanding after management has used reasonable collection
efforts are written off though a charge to the valuation
allowance and a credit to accounts receivable. Changes in the
valuation allowance have not been material to the financial
statements.
Inventory
Inventory of food, beverages and supplies are stated at the
lower of cost or market using the
first-in,
first-out method.
Fair Value
The Company does not value any of its assets or liabilities at
fair value, under Financial Accounting Standards Board (FASB)
Statement No. 157, Fair Value Measurements.
Deferred
Costs
Deferred costs represent costs incurred in connection with the
purchase and development of the property, and in obtaining its
long-term financing. These costs are being amortized on a
straight-line basis as follows:
|
|
|
|
|
Years
|
|
Finance costs
|
|
2-20
|
Air rights
|
|
55
|
Fixed
Assets and Depreciation
Property, hotel furniture and equipment are recorded at cost.
Depreciation of real property is computed using the
straight-line method over a
40-year
estimated useful life. Depreciation of furniture, fixtures and
equipment is provided over the estimated economic lives of the
related assets, using the straight-line method over five to
seven years. Maintenance and repair costs are charged to expense
when incurred. At the time fixed assets are retired or otherwise
disposed of, the foxed assets and related accumulated
depreciation or amortization accounts are relieved of the
applicable amounts, and any gain or loss is credited or charged
to income.
Depreciation expense was $914,118 and $902,449 for 2009 and
2008, respectively.
Advertising
Costs
The costs of advertising, promotion and marketing programs are
charged to operations in the year incurred and are included as
operating expenses in the accompanying statements of operations
Income
Taxes
The Company has elected for income tax purposes to be treated as
a partnership. Accordingly, federal and state income taxes have
not been provided, as the Companys income or loss is
passed through and reported by the members on their individual
tax returns. The Company has determined that there are no
uncertain positions required to be disclosed or recorded under
Accounting Standards Codification 740, Accounting for
Uncertainty in Income Taxes.
F-115
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
Subsequent
Events
The Company has evaluated the financial statements for
subsequent events that could require accrual or disclosure
through the financial statement report date of October 27,
2010.
|
|
NOTE 3
|
PROPERTY AND
EQUIPMENT
|
Property and equipment consists of the following at
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Building
|
|
$
|
20,338,974
|
|
|
$
|
20,242,943
|
|
Equipment
|
|
|
5,325,115
|
|
|
|
5,019,129
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
25,664,089
|
|
|
|
25,262,072
|
|
Less accumulated depreciation
|
|
|
(8,399,206
|
)
|
|
|
(7,485,088
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,264,883
|
|
|
$
|
17,776,984
|
|
|
|
|
|
|
|
|
|
|
The Company has an air rights lease with the City of New
Rochelle. The Company paid a one-time payment of $3,203,750 and
has an annual base rent of $10. The lease initially expires on
December 1, 2047. During 2007, the Company extended the
lease with an additional payment of $75,000. The lease extension
expires on December 1, 2062. The additional payment is
amortized over the life of the lease extension.
In connection with the 2008 refinancing of the Companys
mortgage debt (Note 6), previously deferred fees of
$423,427 were written off to amortization expense during the
year ended December 31, 2008.
Deferred costs and accumulated amortization are as follows at
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Period
|
|
|
Air Rights
|
|
$
|
3,278,750
|
|
|
$
|
658,823
|
|
|
|
55 years
|
|
Financing Costs
|
|
|
388,617
|
|
|
|
363,354
|
|
|
|
2 years
|
|
Franchise Expense
|
|
|
50,000
|
|
|
|
29,999
|
|
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,717,367
|
|
|
$
|
1,052,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Accumulated
|
|
|
Amortization
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Period
|
|
|
Air Rights
|
|
$
|
3,278,750
|
|
|
$
|
592,077
|
|
|
|
55 years
|
|
Financing Costs
|
|
|
388,617
|
|
|
|
211,773
|
|
|
|
2 years
|
|
Franchise Expense
|
|
|
50,000
|
|
|
|
26,666
|
|
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,717,367
|
|
|
$
|
830,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-116
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
The annual amortization of deferred costs is expected to be as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
Franchise
|
|
|
|
|
|
|
Air Rights
|
|
|
Costs
|
|
|
Expense
|
|
|
Total
|
|
|
2010
|
|
$
|
66,746
|
|
|
$
|
25,263
|
|
|
$
|
3,333
|
|
|
$
|
95,342
|
|
2011
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
$
|
70,079
|
|
2012
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
$
|
70,079
|
|
2013
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
$
|
70,079
|
|
2014
|
|
|
66,746
|
|
|
|
|
|
|
|
3,333
|
|
|
$
|
70,079
|
|
Thereafter
|
|
|
2,286,197
|
|
|
|
|
|
|
|
3,336
|
|
|
|
2,289,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,619,927
|
|
|
$
|
25,263
|
|
|
$
|
20,001
|
|
|
$
|
2,665,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5
GARAGE LEASE AGREEMENT
The Company has an agreement with the town of New Rochelle to
lease 128 parking spaces in a municipal parking garage for their
guests and employees. The annual base rent for the lease is $10
plus the Companys proportionate share of the citys
adopted budget for the operation, management and maintenance of
the garage and the proportionate share of the established
reserve fund for the cost of capital repairs.
The lease has been accounted for as an operating lease, rent and
expense for the years ended December 31, 2009 and 2008 was
$126,092 and $109,779, respectively.
|
|
NOTE 6
|
MORTGAGE
NOTE PAYABLE
|
During 2008, the Company borrowed $16,800,000 pursuant to a loan
agreement with CIBC, Inc. The mortgage bears an interest rate of
5.45% and is collateralized by the Hotel and related real estate
and equipment. The loan was extended on December 18, 2009
and is interest-only for the entire duration of the loan. The
entire outstanding principal of the note, together with all
accrued and unpaid interest, shall be due and payable on
November 30, 2011. Interest expense was $930,069 for 2009
and $933,782 for 2008.
Annual maturities of long-term debt are as follows:
|
|
|
|
|
2010
|
|
$
|
|
|
2011
|
|
|
16,800,000
|
|
|
|
|
|
|
Total
|
|
$
|
16,800,000
|
|
|
|
|
|
|
|
|
NOTE 7
|
RELATED PARTY
TRANSACTIONS
|
Due from affiliate consists of net advances to an affiliate of a
Member of $29,033 at December 31, 2008. The advances were
non-interest bearing and fully repaid during 2009.
|
|
NOTE 8
|
HOTEL
MANAGEMENT AGREEMENT
|
The Company has entered into a management agreement with Urgo
Hotels, LLC to manage the operations of the Property.
The management fee is 3% of adjusted gross revenues and
additional fees, which will vary depending on the
Propertys achieving certain profit goals. The management
fee was $182,928 and $286,865 for the years ended
December 31, 2009 and 2008, respectively.
F-117
NEW ROC HOTELS,
LLC
(A Limited Liability Company)
Notes to the Financial
Statements (Continued)
Eligible employees of the Company participate in a defined
contribution plan maintained by the Company, as described in
section 401(k) of the Internal Revenue Code (IRC).
Employees are eligible to participate after six months of
employment. Employees may make contributions to the plan up to
the maximum amount allowed by the Internal Revenue Code if they
wish. Through June 1, 2009 the employer matched employee
contributions dollar for dollar the first 3% of an
employees gross salary and 50% of the next 2% of an
employees salary, not to exceed a maximum of 4%. The
matching provision was amended in 2009 whereby future employer
contributions were strictly discretionary. The company made
contributions of $0 and $21,423 for 2009 and 2008, respectively.
|
|
NOTE 10
|
COMMITMENTS
AND CONTINGENCIES
|
Franchise
Agreement
On December 21, 2000, the Company entered into a franchise
agreement with Marriot Corporation (Marriot) for the use of its
trade name for an initial term of 20 years with an option
to renew for an additional 10 years. The following fees are
payable quarterly:
a. 5% of gross room revenue, as defined
b. 2.5% of gross room revenue, as defined, which is paid
into a fund for the purposes of paying marketing and advertising
costs in connection with the operation or promotion of the
Property.
The franchise expense paid was $425,459 and $509,996 for the
years ended December 31, 2009 and 2008, respectively.
Contingencies
The Company is involved in various legal actions and claims
arising in the ordinary course of its business. Management
believes that current litigation and claims will be resolved
without any material effect on the Companys financial
position.
|
|
NOTE 11
|
SUBSEQUENT
EVENT
|
Sale of
Hotel
On October 4, 2010 the Company sold the Property to Chatham
New Rochelle RI, LLC for $21,000,000. Chatham New Rochelle RI,
LLC received the building, all of its contents and a portion of
the guest receivables and also assumed the mortgage payable to
CBIC, Inc. in the amount of $16,800,000.
F-118
4,000,000 Shares
Common
Shares
Prospectus
February , 2011
Barclays Capital
UBS Investment Bank
FBR Capital Markets
Morgan Keegan
Credit Agricole CIB
Piper Jaffray
Stifel Nicolaus
Weisel
JMP Securities
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 31.
|
Other Expenses of
Issuance and Distribution.
|
The following table sets forth the costs and expenses of the
sale and distribution of the securities being registered, all of
which are being borne by the Registrant.
|
|
|
|
|
SEC registration fee
|
|
$
|
10,695
|
|
FINRA filing fee
|
|
|
15,500
|
|
NYSE listing fee
|
|
|
38,640
|
|
Printing and engraving fees
|
|
|
145,000
|
|
Legal fees and expenses
|
|
|
250,000
|
|
Accounting fees and expenses
|
|
|
150,000
|
|
Transfer agent and registrar fees
|
|
|
1,500
|
|
|
|
|
|
|
Total
|
|
$
|
611,335
|
|
|
|
|
|
|
All expenses, except the Securities and Exchange Commission
registration fee and FINRA filing fee, are estimated.
|
|
Item 32.
|
Sales to Special
Parties.
|
On October 29, 2009, we issued 1,000 common shares to
Jeffrey H. Fisher in connection with the formation and initial
capitalization of our company for an aggregate purchase price of
$10,000. We redeemed the shares from Mr. Fisher for $10,000
upon completion of our initial public offering.
On November 3, 2009, Mr. Fisher subscribed to purchase
$10,000,000 of our common shares at a price per share of $20.00
the offering price in our initial public offering. These shares
were issued to Mr. Fisher concurrently with the closing of
our initial public offering.
|
|
Item 33.
|
Recent Sales of
Unregistered Securities.
|
We have issued the following securities that were not registered
under the Securities Act of 1933, as amended (the
Securities Act):
On October 29, 2009, we issued 1,000 common shares to
Jeffrey H. Fisher in connection with the formation and initial
capitalization of our company for an aggregate purchase price of
$10,000. We redeemed the shares from Mr. Fisher for $10,000
upon completion of our initial public offering.
On November 3, 2009, Mr. Fisher subscribed to purchase
500,000 of our common shares at a price per share of $20.00 the
offering price in our initial public offering. These shares were
issued to Mr. Fisher concurrently with the closing of our
initial public offering.
The shares were issued in reliance on the exemption set forth in
Section 4(2) of the Securities Act and Rule 506 of
Regulation D thereunder.
|
|
Item 34.
|
Indemnification
of Trustees and Officers.
|
Maryland law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the
liability of its trustees and officers to the trust and its
shareholders for money damages except for liability resulting
from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active or deliberate
dishonesty established by a final judgment as being material to
the cause of action. Our declaration of trust contains a
provision which limits the liability of our trustees and
officers to the maximum extent permitted by Maryland law.
Our declaration of trust permits us and our bylaws obligate us,
to the maximum extent permitted by Maryland law, to indemnify
and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former
trustee or officer or (b) any individual who, while a
trustee or officer and at our request, serves or has served
another real estate investment trust, corporation, partnership,
limited liability company, joint venture, trust, employee
benefit plan or any other enterprise as a director, trustee,
officer, member, manager or partner and who is made or is
II-1
threatened to be made a party to the proceeding by reason of his
or her service in any such capacity, from and against any claim
or liability to which that individual may become subject or
which that individual may incur by reason of his or her service
in any such capacity and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a
proceeding. Our declaration of trust and bylaws also permit us
to indemnify and advance expenses to any person who served a
predecessor of our company in any of the capacities described
above and to any employee or agent of our company or a
predecessor of our company. Maryland law requires us to
indemnify a trustee or officer who has been successful, on the
merits or otherwise, in the defense of any proceeding to which
he is made a party by reason of his service in that capacity.
The Maryland General Corporation Law permits a Maryland real
estate investment trust to indemnify and advance expenses to its
trustees, officers, employees and agents to the same extent as
permitted for directors and officers of Maryland corporations.
The Maryland General Corporation Law permits a corporation to
indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with
any proceeding to which they may be a party by reason of their
service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and
(i) was committed in bad faith or (ii) was a result of
active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal
proceeding, the director or officer has reasonable cause to
believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment
in a suit by or in the right if the corporation or if the
director or officer was adjudged to be liable for an improper
personal benefit, unless in either case a court orders
indemnification and then only for expenses. In accordance with
the Maryland General Corporation Law and our bylaws, our bylaws
require us, as a condition to advancing expenses, to obtain
(a) a written affirmation by the trustee or officer of his
or her good faith belief that he or she has met the standard of
conduct necessary for indemnification and (b) a written
statement by or on his or her behalf to repay the amount paid or
reimbursed by us if it shall ultimately be determined that the
standard of conduct was not met.
We have entered into indemnification agreements with our
trustees and our executive officers providing for procedures for
indemnification by us to the fullest extent permitted by law and
advancements by us of certain expenses and costs relating to
claims, suits or proceedings arising from their service to us.
We have obtained an insurance policy under which our trustees
and executive officers will be insured, subject to the limits of
the policy, against certain losses arising from claims made
against such trustees and officers by reason of any acts or
omissions covered under such policy in their respective
capacities as trustees or officers, including certain
liabilities under the Securities Act of 1933.
We have been advised that the SEC has expressed the opinion that
indemnification of trustees, officers or persons otherwise
controlling a company for liabilities arising under the
Securities Act of 1933 is against public policy and is therefore
unenforceable.
|
|
Item 35.
|
Treatment of
Proceeds from Shares Being Registered.
|
None of the net proceeds will be credited to an account other
than the appropriate capital share account.
|
|
Item 36.
|
Financial
Statements and Exhibits.
|
(a) Financial Statements. See
page F-1
for an index of the financial statements included in the
Registration Statement.
II-2
(b) Exhibits. The following exhibits are
filed as part of, or incorporated by reference into, this
registration statement on
Form S-11:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement by and among Chatham Lodging
Trust, Chatham Lodging, L.P. and the Underwriters named therein
|
|
3
|
.1
|
|
Form of Amended and Restated Declaration of Trust of Chatham
Lodging
Trust(1)
|
|
3
|
.2
|
|
Form of Bylaws of Chatham Lodging
Trust(1)
|
|
3
|
.3
|
|
Agreement of Limited Partnership of Chatham Lodging,
L.P.(1)
|
|
5
|
.1
|
|
Opinion of Venable LLP
|
|
8
|
.1
|
|
Tax opinion of Hunton & Williams LLP
|
|
10
|
.1
|
|
Chatham Lodging Trust Equity Incentive
Plan(2)
|
|
10
|
.2(a)
|
|
Form of Employment Agreement between Chatham Lodging Trust and
Jeffrey H.
Fisher(1)
|
|
10
|
.2(b)
|
|
Form of Employment Agreement between Chatham Lodging Trust and
Peter
Willis(1)
|
|
10
|
.2(c)
|
|
Form of Employment Agreement between Chatham Lodging Trust and
Dennis M. Craven
|
|
10
|
.3
|
|
Subscription Agreement, dated November 3, 2009, between
Jeffrey H. Fisher and Chatham Lodging
Trust(3)
|
|
10
|
.4(a)
|
|
Purchase and Sale Agreement and Escrow Instructions, dated
November 16, 2009, by and among Chatham Lodging Trust and
certain affiliates of RLJ Development, LLC, for six Homewood
Suites
hotels(4)
|
|
10
|
.4(b)
|
|
First Amendment to Purchase and Sale Agreement and Escrow
Instructions for six Homewood Suites hotels, dated
December 24,
2009(1)
|
|
10
|
.5
|
|
Agreement of Purchase and Sale, dated as of May 18, 2010,
by and among Chatham Lodging Trust, as purchaser, and certain
affiliates of Moody National Companies, as sellers, for the
Residence Inn by Marriott, White Plains, NY; Hampton
Inn & Suites Houston Medical Center,
Houston, TX; SpringHill Suites by Marriott, Washington, PA; and
Courtyard by Marriott, Altoona,
PA(2)
|
|
10
|
.6
|
|
Agreement of Purchase and Sale, dated as of June 17, 2010,
by and among Chatham Lodging Trust, as purchaser, and Holtsville
Hotel Group LLC and FB Holtsville Utility LLC, as sellers, for
the Residence Inn Long Island Holtsville, Holtsville,
NY(2)
|
|
10
|
.7
|
|
Agreement of Purchase and Sale, dated as of August 6, 2010,
by and between Chatham Lodging Trust, as purchaser, and New Roc
Hotels, LLC, as seller, for the Residence Inn New Rochelle,
New Rochelle, NY
|
|
10
|
.8
|
|
Agreement of Purchase and Sale, dated as of August 18,
2010, by and among Chatham Lodging Trust, as purchaser, and
Royal Hospitality Washington, LLC and Lee Estates, LLC, as
sellers, for the Homewood Suites Carlsbad, Carlsbad, CA
|
|
10
|
.9
|
|
Form of Indemnification Agreement between Chatham Lodging Trust
and its officers and
trustees(1)
|
|
10
|
.10
|
|
Form of LTIP Unit Vesting
Agreement(1)
|
|
10
|
.11
|
|
Form of Share Award Agreement for
Trustees(1)
|
|
10
|
.12
|
|
Form of Share Award Agreement for
Officers(2)
|
|
10
|
.13
|
|
Form of IHM Hotel Management
Agreement(3)
|
|
10
|
.14
|
|
Credit Agreement, dated as of October 12, 2010, among
Chatham Lodging Trust, Chatham Lodging, L.P., as borrower, the
lenders and other guarantors party thereto and Barclays Bank
PLC, as administrative
agent(5)
|
|
21
|
.1
|
|
List of Subsidiaries of Chatham Lodging Trust
|
|
23
|
.1
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Chatham Lodging Trust
|
|
23
|
.2
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Initial Acquisition Hotels
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
23
|
.3
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Hampton Inn & Suites Houston,
TX
|
|
23
|
.4
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Residence Inn Holtsville, NY
|
|
23
|
.5
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Courtyard by Marriott Altoona, PA,
SpringHill Suites Washington, PA and Residence Inn White Plains,
NY
|
|
23
|
.6
|
|
DeLeon and Stang Consent to include Report on Financial
Statements of Residence Inn New Rochelle, NY
|
|
23
|
.7
|
|
Venable LLP Consent (included in Exhibit 5.1)
|
|
23
|
.8
|
|
Hunton & Williams LLP Consent (included in
Exhibit 8.1)
|
|
|
|
(1) |
|
Incorporated by reference to Amendment No. 4 to the
Registrants Registration Statement on
Form S-11
filed with the SEC on February 12, 2010 (File
No. 333-162889). |
|
(2) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
filed with the SEC on August 13, 2010 (File
No. 001-34693). |
|
(3) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-11
filed with the SEC on November 4, 2009 (File
No. 333-162889). |
|
(4) |
|
Incorporated by reference to Amendment No. 1 to the
Registrants Registration Statement on
Form S-11
filed with the SEC on December 7, 2009 (File
No. 333-162889). |
|
(5) |
|
Incorporated by reference to the Registrants Current
Report on Form 8-K filed with the SEC on October 18,
2010. |
(a) The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
trustees, officers or controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or
controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby further undertakes
that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance under Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-11
and has duly caused this Amendment No. 3 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Palm Beach, State of Florida on the 2nd day of
February, 2011.
CHATHAM LODGING TRUST
|
|
|
|
By:
|
/s/ Jeffrey
H. Fisher
|
Jeffrey H. Fisher
(Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 has been signed below by the following
person in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
/s/ Jeffrey
H. Fisher
Jeffrey
H. Fisher
|
|
Chief Executive Officer and Trustee
(Principal Executive Officer)
|
|
February 2, 2011
|
|
|
|
|
|
/s/ Dennis
M. Craven
Dennis
M. Craven
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
February 2, 2011
|
|
|
|
|
|
*
Jack
P. DeBoer
|
|
Trustee
|
|
February 2, 2011
|
|
|
|
|
|
*
Glen
R. Gilbert
|
|
Trustee
|
|
February 2, 2011
|
|
|
|
|
|
*
C.
Gerald Goldsmith
|
|
Trustee
|
|
February 2, 2011
|
|
|
|
|
|
*
Robert
Perlmutter
|
|
Trustee
|
|
February 2, 2011
|
|
|
|
|
|
*
Rolf
E. Ruhfus
|
|
Trustee
|
|
February 2, 2011
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Dennis
M. Craven
Dennis
M. Craven,
As Attorney-in-Fact
|
|
|
|
|
II-5
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement by and among Chatham Lodging
Trust, Chatham Lodging, L.P. and the Underwriters named therein
|
|
3
|
.1
|
|
Form of Amended and Restated Declaration of Trust of Chatham
Lodging
Trust(1)
|
|
3
|
.2
|
|
Form of Bylaws of Chatham Lodging
Trust(1)
|
|
3
|
.3
|
|
Agreement of Limited Partnership of Chatham Lodging,
L.P.(1)
|
|
5
|
.1
|
|
Opinion of Venable LLP
|
|
8
|
.1
|
|
Tax opinion of Hunton & Williams LLP
|
|
10
|
.1
|
|
Chatham Lodging Trust Equity Incentive
Plan(2)
|
|
10
|
.2(a)
|
|
Form of Employment Agreement between Chatham Lodging Trust and
Jeffrey H.
Fisher(1)
|
|
10
|
.2(b)
|
|
Form of Employment Agreement between Chatham Lodging Trust and
Peter
Willis(1)
|
|
10
|
.2(c)
|
|
Form of Employment Agreement between Chatham Lodging Trust and
Dennis M. Craven
|
|
10
|
.3
|
|
Subscription Agreement, dated November 3, 2009, between
Jeffrey H. Fisher and Chatham Lodging
Trust(3)
|
|
10
|
.4(a)
|
|
Purchase and Sale Agreement and Escrow Instructions, dated
November 16, 2009, by and among Chatham Lodging Trust and
certain affiliates of RLJ Development, LLC, for six Homewood
Suites
hotels(4)
|
|
10
|
.4(b)
|
|
First Amendment to Purchase and Sale Agreement and Escrow
Instructions for six Homewood Suites hotels, dated
December 24,
2009(1)
|
|
10
|
.5
|
|
Agreement of Purchase and Sale, dated as of May 18, 2010,
by and among Chatham Lodging Trust, as purchaser, and certain
affiliates of Moody National Companies, as sellers, for the
Residence Inn by Marriott, White Plains, NY; Hampton
Inn & Suites Houston Medical Center,
Houston, TX; SpringHill Suites by Marriott, Washington, PA; and
Courtyard by Marriott, Altoona,
PA(2)
|
|
10
|
.6
|
|
Agreement of Purchase and Sale, dated as of June 17, 2010,
by and among Chatham Lodging Trust, as purchaser, and Holtsville
Hotel Group LLC and FB Holtsville Utility LLC, as sellers, for
the Residence Inn Long Island Holtsville, Holtsville,
NY(2)
|
|
10
|
.7
|
|
Agreement of Purchase and Sale, dated as of August 6, 2010,
by and between Chatham Lodging Trust, as purchaser, and New Roc
Hotels, LLC, as seller, for the Residence Inn New Rochelle, New
Rochelle, NY
|
|
10
|
.8
|
|
Agreement of Purchase and Sale, dated as of August 18,
2010, by and among Chatham Lodging Trust, as purchaser, and
Royal Hospitality Washington, LLC and Lee Estates, LLC, as
sellers, for the Homewood Suites Carlsbad, Carlsbad, CA
|
|
10
|
.9
|
|
Form of Indemnification Agreement between Chatham Lodging Trust
and its officers and
trustees(1)
|
|
10
|
.10
|
|
Form of LTIP Unit Vesting
Agreement(1)
|
|
10
|
.11
|
|
Form of Share Award Agreement for
Trustees(1)
|
|
10
|
.12
|
|
Form of Share Award Agreement for
Officers(2)
|
|
10
|
.13
|
|
Form of IHM Hotel Management
Agreement(3)
|
|
10
|
.14
|
|
Credit Agreement, dated as of October 12, 2010, among
Chatham Lodging Trust, Chatham Lodging, L.P., as borrower, the
lenders and other guarantors party thereto and Barclays Bank
PLC, as administrative
agent(5)
|
|
21
|
.1
|
|
List of Subsidiaries of Chatham Lodging Trust
|
|
23
|
.1
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Chatham Lodging Trust
|
|
23
|
.2
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Initial Acquisition Hotels
|
II-6
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
23
|
.3
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Hampton Inn & Suites Houston,
TX
|
|
23
|
.4
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Residence Inn Holtsville, NY
|
|
23
|
.5
|
|
PricewaterhouseCoopers LLP Consent to include Report on
Financial Statements of Courtyard by Marriott Altoona, PA,
SpringHill Suites Washington, PA and Residence Inn White Plains,
NY
|
|
23
|
.6
|
|
DeLeon and Stang Consent to include Report on Financial
Statements of Residence Inn New Rochelle, NY
|
|
23
|
.7
|
|
Venable LLP Consent (included in Exhibit 5.1)
|
|
23
|
.8
|
|
Hunton & Williams LLP Consent (included in
Exhibit 8.1)
|
|
|
|
(1) |
|
Incorporated by reference to Amendment No. 4 to the
Registrants Registration Statement on
Form S-11
filed with the SEC on February 12, 2010 (File
No. 333-162889). |
|
(2) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
filed with the SEC on August 13, 2010 (File
No. 001-34693). |
|
(3) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-11
filed with the SEC on November 4, 2009 (File
No. 333-162889). |
|
(4) |
|
Incorporated by reference to Amendment No. 1 to the
Registrants Registration Statement on
Form S-11
filed with the SEC on December 7, 2009 (File
No. 333-162889). |
|
(5) |
|
Incorporated by reference to the Registrants Current
Report on Form 8-K filed with the SEC on October 18, 2010. |
II-7
exv23w1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form S-11 of our report dated March
10, 2010 relating to the consolidated balance sheet of Chatham Lodging Trust (a development stage
company), which appears in such Registration Statement. We also consent to the reference to us
under the headings Experts and Selected Financial Data in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 1, 2011
exv23w2
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form S-11 of Chatham Lodging Trust
of our report dated March 4, 2010 relating to the combined financial statements of RLJ Billerica
Hotel, LLC, RLJ Brentwood Hotel, LLC, RLJ Bloomington Hotel, LLC, RLJ Dallas Hotel Limited
Partnership, RLJ Farmington Hotel, LLC, and RLJ Maitland Hotel, LLC (collectively the Initial
Acquisition Hotels), which appears in such Registration Statement. We also consent to the
reference to us under the heading Experts in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 1, 2011
exv23w3
Exhibit 23.3
CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Form S-11 of Chatham Lodging
Trust of our report dated September 20, 2010 relating to the combined financial statements of Moody
National 1715 OST Houston S, LLC and Moody National 1715 OST Houston MT, LLC, which appears in such
Registration Statement. We also consent to the reference to us under the heading Experts in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 1, 2011
exv23w4
Exhibit 23.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Form S-11 of Chatham Lodging
Trust of our report dated October 19, 2010 relating to the financial statements of Holtsville Hotel
Group, LLC which appears in such Registration Statement. We also consent to the reference to us
under the heading Experts in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 1, 2011
exv23w5
Exhibit 23.5
CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Form S-11 of Chatham Lodging
Trust of our report dated October 26 , 2010 relating to the financial statements of the Moody
National Three Property Portfolio which appears in such Registration Statement. We also consent to
the reference to us under the heading Experts in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 1, 2011
exv23w6
Exhibit 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby consent to the inclusion in this Registration Statement on Form S-11 of Chatham Lodging
Trust of our report dated October 27, 2010 relating to the financial statements of New Roc Hotels,
LLC which appears in such Registration Statement. We also consent to the reference to us under the
heading Experts in such Registration Statement.
/s/ DeLeon & Stang, CPAs
Gaithersburg, Maryland
February 1, 2011