| MARYLAND | 001-31775 | 86-1062192 | ||
| (State of Incorporation) | (Commission File Number) | (I.R.S. Employer | ||
| Identification Number) |
| 14185 Dallas Parkway, Suite 1100 | ||
| Dallas, Texas | 75254 | |
| (Address of principal executive offices) | (Zip code) |
| o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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4
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| ASSETS |
||||
Property and equipment, net |
$ | 17,053 | ||
Accounts receivable |
140 | |||
Inventory |
54 | |||
Prepaid expenses and other |
45 | |||
Cash and cash equivalents |
541 | |||
Total assets |
$ | 17,833 | ||
| LIABILITIES AND NET ASSETS |
||||
Liabilities: |
||||
Accounts payable |
$ | 201 | ||
Due to Marriott International, Inc. |
5 | |||
Deferred management fees |
1,426 | |||
Property improvement fund — due to Host LP |
12 | |||
Accrued expenses |
227 | |||
Other liabilities |
39 | |||
Total liabilities |
1,910 | |||
Net assets |
15,923 | |||
Total liabilities and net assets |
$ | 17,833 | ||
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Revenues: |
||||
Rooms |
$ | 7,219 | ||
Food and beverage |
2,384 | |||
Other |
225 | |||
Total revenues |
9,828 | |||
Operating costs and expenses: |
||||
Rooms |
1,752 | |||
Food and beverage |
1,666 | |||
Hotel departmental expenses |
234 | |||
Other hotel operating costs |
2,796 | |||
Real estate taxes and other taxes |
234 | |||
Depreciation and amortization |
877 | |||
Management fees |
734 | |||
Other |
35 | |||
Total operating costs and expenses |
8,328 | |||
Income before income taxes |
1,500 | |||
Income tax provision |
(331 | ) | ||
Net income |
$ | 1,169 | ||
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Balance at January 1, 2005 |
$ | 16,250 | ||
Net income |
1,169 | |||
Distributions |
(1,496 | ) | ||
Balance at December 30, 2005 |
$ | 15,923 | ||
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OPERATING ACTIVITIES: |
||||
Net income |
$ | 1,169 | ||
Depreciation and amortization |
877 | |||
Changes in operating accounts: |
||||
Accounts receivable |
21 | |||
Due to Marriott International, Inc. |
62 | |||
Inventory |
(32 | ) | ||
Prepaid expenses and other |
(11 | ) | ||
Accounts payable |
3 | |||
Deferred management fees |
284 | |||
Accrued expenses |
(36 | ) | ||
Other liabilities |
13 | |||
Cash provided by operating activities |
2,350 | |||
INVESTING ACTIVITIES: |
||||
Additions to property and equipment |
(858 | ) | ||
Change in property improvement fund — due to Host LP |
32 | |||
Cash used in investing activities |
(826 | ) | ||
FINANCING ACTIVITIES: |
||||
Distributions to owners, net |
(1,496 | ) | ||
Increase in cash and cash equivalents |
28 | |||
Cash and cash equivalents at: |
||||
Beginning of year |
513 | |||
End of year |
$ | 541 | ||
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| 1. | THE BUSINESS AND BASIS OF PRESENTATION | |
| The combined financial statements of Marriott at Research Triangle Park (the Hotel), have been prepared pursuant to the purchase and sale agreement between the owner, Host Marriott, L.P. (Host LP) and Ashford Hospitality Limited Partnership (Ashford). All of the interests in the Hotel as of December 30, 2005 are either directly or indirectly owned by Host LP. | ||
| These combined financial statements present the financial position, results of operations, and the cash flows of the Hotel by combining the accounts of Host LP, pertaining to the Hotel, the accounts of Host LP’s taxable Real Estate Investment Trust Subsidiary (TRS) which leases the Hotel and the working capital and operating accounts of the Hotel as of December 30, 2005 and for the fiscal year ended December 30, 2005 and, accordingly, reflect the financial position, results of operations and cash flows for the Hotel. The Hotel’s accounting periods are four weeks in duration, and there are 13 periods in a fiscal year. The rental income received by the owner is eliminated against the lease expense of the TRS. All excess cash generated by the Hotel is distributed to the owner of the Hotel. | ||
| The Hotel has 225 rooms and is operated under a long-term management agreement by a subsidiary of Marriott International, Inc., or MII. (Notes 4 and 6) | ||
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
| Basis of Accounting | ||
| The assets and liabilities in these financial statements are recorded in accordance with U.S. generally accepted accounting principles. | ||
| Use of Estimates in the Preparation of Financial Statements | ||
| The preparation of financial statements 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
| Revenues | ||
| Revenues from operations of the Hotel are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other departmental revenues such as telephone and gift shops. | ||
| Property and Equipment | ||
| Property and equipment is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for building and improvements and three to ten years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives of the assets. | ||
| Management assesses impairment of real estate properties based on whether it is probable that estimated undiscounted future cash flows from each individual property are less than its net book value. If a property is impaired, a loss is recorded for the difference between the fair value and net book value of the hotel. No adjustment was necessary for the fiscal year ended December 30, 2005. |
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| Income Taxes | ||
| Provisions for federal and state income taxes in the accompanying financial statements are based on the pre-tax income of the TRS. The effective tax rate applied to the pre-tax income of the TRS was 39.5% for the fiscal year ended December 30, 2005. The liability for income taxes is transferred to Host LP and treated as an adjustment to capital distributions in the accompanying financial statements. | ||
| Application of New Accounting Standard | ||
| In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (“FIN 47”), which clarified the term “conditional asset retirement obligation” as used in FASB Statement No. 143. Adoption of FIN 47 was required for fiscal years ending after December 15, 2005. A conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. As a result of the issuance of this statement, we will recognize the fair value of the liability for a conditional asset retirement obligation when incurred, which is generally upon acquisition, construction, or development and (or) through the normal operation of the asset, if sufficient information exists to reasonably estimate the fair value of the obligation. The adoption of this interpretation did not have a material impact on our financial position or results of operations. | ||
| Cash and Cash Equivalents | ||
| All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents. | ||
| 3. | PROPERTY AND EQUIPMENT | |
| Property and equipment consists of the following (in thousands): |
Land |
$ | 2,979 | ||
Building and leasehold improvements |
15,754 | |||
Furniture and equipment |
2,939 | |||
Construction in progress |
376 | |||
| 22,048 | ||||
Less accumulated depreciation |
(4,995 | ) | ||
| $ | 17,053 | |||
| 4. | MANAGEMENT AGREEMENTS | |
| The Hotel is managed by MII pursuant to a long-term management agreement, which expires on December 31, 2009, with five successive renewal options of ten years each. Pursuant to the terms of the management agreement, the manager earns a base management fee of 3% of hotel sales and 20% of net house profit as an incentive management fee. Payment of the incentive management fee is limited by available cash flow as defined in the management agreement. Incentive management fees of approximately $284,000 for 2005 were deferred because the available cash flow as defined, was less than 20% of net house profit. |
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| The management agreement provides for the establishment of a property improvement fund to cover the cost of replacements and renewals of furniture and fixtures at the Hotel. Contributions to the property improvement fund are based on 6% of Hotel sales. Contributions to the property improvement fund for the fiscal year ended December 30, 2005 were approximately $589,000. | ||
| Host LP maintains a commingled property improvement fund on behalf of various hotels owned directly or indirectly by Host LP and managed by MII. Expenditures from the property improvement fund on the Hotel’s behalf have exceeded contributions to the property improvement fund by the Hotel as of December 30, 2005. As such, the amount by which expenditures have exceeded contributions for the Hotel is included in “Property improvement fund — Due to Host LP” on the balance sheet as of December 30, 2005. | ||
| 5. | TRS LEASE | |
| The TRS, as the lessee of the Hotel (Lessee), is responsible for paying all of the expenses of operating the Hotel, including all personnel costs, utility costs and general repair and maintenance of the Hotel. The Lessee is also responsible for all fees payable to MII, including base and incentive management fees and chain service payments, with respect to periods covered by the term of the lease. The Lessee is not obligated to bear the cost of any capital improvements or capital repairs to the Hotel or the other expenses borne by Host LP such as real estate taxes, personal property taxes, casualty insurance on the Hotel, required expenditures for replacement of furniture and fixtures (including maintaining the property improvement fund) and capital expenditures. The tax provision recognized in these combined financial statements is based upon the pre-tax income of the TRS. The Hotel does not have deferred tax assets or deferred tax liabilities as of December 30, 2005. | ||
| 6. | SUBSEQUENT EVENTS | |
| On February 24, 2006, Ashford purchased Host LP’s rights, title and interest in the Hotel for approximately $28 million. | ||
| In connection with the sale of the Hotel to Ashford, the management agreement with MII was terminated and Ashford engaged Remington Lodging and Hospitality, L.P. (Remington) to manage the Hotel. The initial term of the management agreement with Remington is ten years and expires on February 25, 2016, with extensions at Remington’s option for three successive seven-year terms and one four-year term. There were no cancellation costs associated with the termination of the management agreement with MII. | ||
| Pursuant to the terms of the agreement, Remington earns a base management fee of the greater of $10,000 or 3% of gross revenues annually and an incentive management fee, which is calculated as the lesser of 1% of gross revenues or the amount that Gross Operating Profit (as defined in the management agreement) exceeds Budgeted Gross Operating Profit. | ||
| The management agreement also provides for the establishment of a property improvement fund to cover the cost of replacements and renewals of furniture and fixtures at the Hotel. Contributions to the property improvement fund are based on 4% of gross revenues. | ||
| Additionally, MII entered into a franchise agreement with Ashford upon their purchase of the Hotel. The initial term of the franchise agreement is 20 years, expiring on February 25, 2026. MII earns fees from Ashford under the agreement as follows: (i) an initial fee of $82,500 at inception of the agreement (ii) a franchise fee of 6% of gross room revenues and 3% of gross food and beverage revenues and (iii) advertising, promotion, sales and marketing fees of 1% of gross room sales and additional costs of centralized advertising or marketing programs used for all MII branded hotels. |
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| (a) | (b) | (c) | (d) | |||||||||||||||||||||
| Marriott RTP | Marriott RTP | Public | Debt | |||||||||||||||||||||
| Historical | Historical | Acquisition | Offering | Paid Down | Pro Forma | |||||||||||||||||||
| December 31, | Balance | Pro Forma | Pro Forma | Pro Forma | December 31, | |||||||||||||||||||
| 2005 | Sheet | Adjustments | Adjustments | Adjustments | 2005 | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Investment in hotel properties, net |
$ | 1,066,962 | $ | 17,053 | (a) | $ | 11,147 | (1) | $ | — | $ | — | $ | 1,095,162 | ||||||||||
Cash and cash equivalents |
57,995 | 541 | (a) | (29,066 | )(1) | 128,600 | (2) | (105,000 | )(3) | 53,070 | ||||||||||||||
Restricted cash |
27,842 | — | — | — | — | 27,842 | ||||||||||||||||||
Accounts receivable, net of allowance |
21,355 | 140 | (a) | 195 | (1) | — | — | 21,690 | ||||||||||||||||
Inventories |
1,186 | 54 | (a) | (24 | )(1) | — | — | 1,216 | ||||||||||||||||
Assets held for sale |
157,579 | — | — | — | — | 157,579 | ||||||||||||||||||
Notes receivable |
108,305 | — | — | — | — | 108,305 | ||||||||||||||||||
Deferred costs, net |
14,046 | — | 83 | (1) | — | — | 14,129 | |||||||||||||||||
Prepaid expenses |
9,662 | — | 4 | (1) | — | — | 9,666 | |||||||||||||||||
Intangible assets, net |
4,014 | — | — | — | — | 4,014 | ||||||||||||||||||
Other assets |
1,181 | 45 | (a) | (17 | )(1) | — | — | 1,209 | ||||||||||||||||
Due from hotel managers |
12,750 | — | — | — | — | 12,750 | ||||||||||||||||||
Total assets |
$ | 1,482,877 | $ | 17,833 | $ | (17,678 | ) | $ | 128,600 | $ | (105,000 | ) | $ | 1,506,632 | ||||||||||
Liabilities and Owners’ Equity |
||||||||||||||||||||||||
Indebtedness |
$ | 908,623 | $ | — | $ | — | $ | — | $ | (105,000 | )(3) | $ | 803,623 | |||||||||||
Capital leases payable |
453 | — | — | — | — | 453 | ||||||||||||||||||
Accounts payable |
9,984 | 201 | (a) | (114 | )(1) | — | — | 10,071 | ||||||||||||||||
Accrued expenses |
21,054 | 227 | (a) | (159 | )(1) | — | — | 21,122 | ||||||||||||||||
Other liabilities |
— | 39 | (a) | (39 | )(1) | — | — | — | ||||||||||||||||
Dividends payable |
13,703 | — | — | — | — | 13,703 | ||||||||||||||||||
Deferred income |
729 | — | — | — | — | 729 | ||||||||||||||||||
Due to affiliates |
7,039 | 1,443 | (a) | (1,443 | )(1) | — | — | 7,039 | ||||||||||||||||
Total liabilities |
961,585 | 1,910 | (1,755 | ) | — | (105,000 | ) | 856,740 | ||||||||||||||||
Commitments & contingencies |
— | — | — | — | — | — | ||||||||||||||||||
Minority interest |
87,969 | — | — | — | — | 87,969 | ||||||||||||||||||
Preferred stock — Series B |
75,000 | — | — | — | — | 75,000 | ||||||||||||||||||
Preferred stock — Series A |
23 | — | — | — | — | 23 | ||||||||||||||||||
Common stock |
438 | — | — | 121 | (2) | — | 559 | |||||||||||||||||
Additional paid-in capital |
403,919 | — | — | 128,479 | (2) | — | 532,398 | |||||||||||||||||
Unearned compensation |
(4,792 | ) | — | — | — | — | (4,792 | ) | ||||||||||||||||
Accumulated other comprehensive income loss |
1,372 | — | — | — | — | 1,372 | ||||||||||||||||||
Accumulated deficit |
(42,637 | ) | 15,923 | (a) | (15,923 | )(1) | — | — | (42,637 | ) | ||||||||||||||
Total owners’ equity |
$ | 358,323 | $ | 15,923 | $ | (15,923 | ) | $ | 128,600 | $ | — | $ | 486,923 | |||||||||||
Total liabilities and owners’ equity |
$ | 1,482,877 | $ | 17,833 | $ | (17,678 | ) | $ | 128,600 | $ | (105,000 | ) | $ | 1,506,632 | ||||||||||
| (a) | Represents the Marriott at Research Triangle Park historical Balance Sheet at December 30, 2005. | ||
| (b) | Represents pro forma adjustments to reflect the acquisition of the Marriott at Research Triangle Park on February 24, 2006. | ||
| (c) | Represents pro forma adjustments to reflect the follow-on public offering on January 25, 2006. | ||
| (d) | Represents pro forma adjustments to reflect the pay down of debt with proceeds from the public offering completed on January 25, 2006. | ||
| (1) | Represents management’s estimate of the allocation of the purchase price, including closing costs. | ||
| (2) | Represents cash received and common shares issued from the public offering completed January 25, 2006. | ||
| (3) | Represents the pay down of debt with proceeds from the public offering completed on January 25, 2006. |
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| (a) | (b) | (c) | ||||||||||||||||||||||
| Miscellaneous | Marriott | Marriott | (d) | Adjusted | ||||||||||||||||||||
| Historical | Acquisitions | RTP | RTP | Debt | Pro Forma | |||||||||||||||||||
| December 31, | Pro Forma | Historical | Pro Forma | Pro Forma | December 31, | |||||||||||||||||||
| 2005 | Adjustments | Income Statement | Adjustments | Adjustments | 2005 | |||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Rooms |
$ | 250,571 | 65,546 | (4) | 7,219 | (6) | — | — | $ | 323,336 | ||||||||||||||
Food and beverage |
52,317 | 12,155 | (4) | 2,384 | (6) | — | — | 66,856 | ||||||||||||||||
Other |
14,181 | 2,157 | (4) | 225 | (6) | — | — | 16,563 | ||||||||||||||||
Total hotel revenue |
317,069 | 79,858 | 9,828 | — | — | 406,755 | ||||||||||||||||||
Interest income from notes receivable |
13,323 | — | — | — | — | 13,323 | ||||||||||||||||||
Asset management fees |
1,258 | — | — | — | — | 1,258 | ||||||||||||||||||
Total Revenue |
331,650 | 79,858 | 9,828 | — | — | 421,336 | ||||||||||||||||||
Expenses |
||||||||||||||||||||||||
Hotel operating expenses |
||||||||||||||||||||||||
Rooms |
56,991 | 14,513 | (4) | 1,752 | (6) | — | — | 73,256 | ||||||||||||||||
Food and beverage |
39,711 | 8,710 | (4) | 1,666 | (6) | — | — | 50,087 | ||||||||||||||||
Other direct |
5,420 | 862 | (4) | 234 | (6) | — | — | 6,516 | ||||||||||||||||
Indirect |
99,804 | 19,567 | (4) | 2,727 | (6) | 128 | (7) | — | 122,226 | |||||||||||||||
Management fees |
11,547 | 4,179 | (4) | 734 | (6) | (439 | )(8) | — | 16,021 | |||||||||||||||
Property taxes, insurance, and other |
17,248 | 4,005 | (4) | 338 | (6) | — | — | 21,591 | ||||||||||||||||
Depreciation & amortization |
30,286 | 11,407 | (5) | 877 | (6) | 434 | (5) | — | 43,004 | |||||||||||||||
Corporate general and administrative |
14,523 | — | — | — | — | 14,523 | ||||||||||||||||||
Total Operating Expenses |
275,530 | 63,243 | 8,328 | 123 | — | 347,224 | ||||||||||||||||||
Operating Income |
56,120 | 16,615 | 1,500 | (123 | ) | — | 74,112 | |||||||||||||||||
Interest income |
1,027 | — | — | — | — | 1,027 | ||||||||||||||||||
Interest expense and amortization and write-off of loan costs |
(44,207 | ) | — | — | — | (10,475 | )(9) | (54,682 | ) | |||||||||||||||
Loss on debt extinguishment |
(10,000 | ) | — | — | — | — | (10,000 | ) | ||||||||||||||||
Net Income (Loss) before Minority Interest and Income Taxes |
2,940 | 16,615 | 1,500 | (123 | ) | (10,475 | ) | 10,457 | ||||||||||||||||
Income tax benefit (expense) |
2,650 | (355 | )(1) | (331 | )(6) | 307 | (1) | — | (1) | 2,271 | ||||||||||||||
Minority interest |
(1,159 | ) | (3,255 | )(3) | — | (273 | )(3) | 2,116 | (3) | (2,571 | ) | |||||||||||||
Net Income (Loss) from Continuing Operations |
4,431 | 13,005 | 1,169 | (89 | ) | (8,359 | ) | 10,157 | ||||||||||||||||
Income from discontinued operations |
7,473 | 6,590 | (4) | — | — | — | 14,063 | |||||||||||||||||
Income taxes related to discontinued operations |
(2,467 | ) | (1,551 | )(3) | — | — | — | (4,018 | ) | |||||||||||||||
Net Income (Loss) |
$ | 9,437 | 18,044 | 1,169 | (89 | ) | (8,359 | ) | $ | 20,202 | ||||||||||||||
Preferred dividends |
(10) | (11,908 | ) | |||||||||||||||||||||
Net Income Applicable to Common Shareholders |
$ | 8,294 | ||||||||||||||||||||||
Basic and diluted: |
||||||||||||||||||||||||
Income from continuing operations per share available
to common shareholders |
$ | (0.03 | ) | |||||||||||||||||||||
Income from discontinued operations per share |
$ | 0.18 | ||||||||||||||||||||||
Net income per share available to common shareholders |
$ | 0.15 | ||||||||||||||||||||||
Weighted average shares outstanding |
$ | 55,253 | ||||||||||||||||||||||
| (a) | Represents pro forma adjustments to reflect the below acquisitions and related debt and equity offerings as if such transactions occurred at the beginning of the period presented. |
| 1) | acquisition of FGS Properties on March 16, 2005 | ||
| 2) | acquisition of Hilton Santa Fe on March 22, 2005 | ||
| 3) | acquisition of CNL Properties on June 17, 2005 | ||
| 4) | acquisition of Hyatt Dulles on October 28, 2005 |
| (b) | Represents the historical Statement of Operations for the Marriott at Research Triangle Park for the year ended December 30, 2005. | |
| (c) | Represents pro forma adjustments to reflect the acquisition of the Marriott at Research Triangle Park on February 24, 2006 as if such transaction occurred at the beginning of the period presented. | |
| (d) | Represents pro forma adjustments to reflect additional interest expense associated with borrowings incurred to fund these acquisitions as if such debt was outstanding the entire period presented. | |
| (1) | Represents pro forma income tax benefit (expense) related to these transactions. | |
| (2) | Represents pro forma weighted average shares considering all shares and units issued to fund these acquisitions. | |
| (3) | Pro forma minority interest represents 20.20% of the net income (loss) before minority interest. | |
| (4) | Represents the acquired entities estimated unaudited statements of operations for the periods preceding their acquisitions. | |
| (5) | Represents additional depreciation expense associated with the acquired entities based on preliminary purchase price allocations. | |
| (6) | Represents the historical audited financial statements of Marriott at Research Triangle Park. | |
| (7) | Represents miscellaneous additional expenses expected to be incurred on a pro forma basis, including incentive management fees. | |
| (8) | Represents a reduction in management fees expected to be incurred on a pro forma basis. Only base management fees shown here. | |
| (9) | Represents additional interest expense associated with borrowings to fund these acquisitions as if such acquisitions closed at the beginning of the period presented. | |
| (10) | Represents pro forma dividends on Series A & B preferred stock as if such shares were outstanding the entire period presented. |
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| ASHFORD HOSPITALITY TRUST, INC. |
||||
| By: | /s/ DAVID J. KIMICHIK | |||
| David J. Kimichik | ||||
| Chief Financial Officer | ||||
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