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REIT Highland Hospitality Corporation Records
2nd Qtr 2005 Net Income of  $4.2 million
for its 20 Hotel Portfolio

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MCLEAN, Va., July 28, 2005 - Highland Hospitality Corporation (NYSE: HIH), a lodging real estate investment trust, or REIT, today reported its consolidated financial results for the quarter ended June 30, 2005.

Consolidated Financial Results

For the second quarter 2005, the Company reported consolidated total revenue of $63.2 million and consolidated net income of $4.2 million, or $.10 per diluted share, compared to consolidated total revenue of $25.3 million and consolidated net income of $2.2 million, or $.05 per diluted share, for the second quarter 2004. Funds from operations, or FFO, which is defined as consolidated net income plus depreciation and amortization, were $9.5 million, or $.24 per diluted share, for the second quarter 2005 compared to $4.3 million, or $.11 per diluted share, for the second quarter 2004. Earnings before interest, income taxes and depreciation and amortization, or EBITDA, were $16.4 million, or $.41 per diluted share, for the second quarter 2005 compared to $4.3 million, or $.11 per diluted share, for the second quarter 2004.

"Our stabilized hotels continued to produce strong RevPAR and EBITDA results in the second quarter 2005 compared to the second quarter 2004, as our portfolio benefited from the continued improvement in the lodging industry," said James L. Francis, Highland's President and Chief Executive Officer. "As well, we were also pleased with the progress that we made during the quarter on our renovation and repositioning efforts which continue at a number of our hotels. We expect to see continued improvement in the performance of our hotel portfolio over the remainder of the year and into 2006 driven by our renovation, repositioning and asset management efforts."

For the six months ended June 30, 2005, the Company reported consolidated total revenue of $113.4 million and consolidated net income of $4.2 million, or $.10 per diluted share, compared to consolidated total revenue of $44.0 million and consolidated net income of $2.8 million, or $.07 per diluted share, for the prior year period. FFO was $14.2 million, or $.36 per diluted share, for the six months ended June 30, 2005 compared to $6.5 million, or $.16 per diluted share, for the prior year period. EBITDA was $24.8 million, or $.63 per diluted share, for the six months ended June 30, 2005 compared to $5.9 million, or $.15 per diluted share, for the prior year period.

Both FFO and EBITDA are non-GAAP financial measures within the meaning of the rules of the Securities and Exchange Commission. Management believes that FFO and EBITDA are key measures of a REIT's financial performance and should be considered along with, but not as an alternative to, net income as a measure of the Company's operating performance. A reconciliation of these non-GAAP financial measures to net income is included in the accompanying financial tables.

Hotel Operating Performance

Included in the following table is information regarding occupancy, average daily rate (ADR) and revenue per available room (RevPAR), the key operating statistics that the Company uses to assess the performance of its domestic hotel properties, for the Company's 18 domestic hotel properties for the second quarter 2005 and 2004. Since 13 of the 18 hotels owned as of June 30, 2005 were acquired at various times in 2004 and 2005, the key operating statistics for the aforementioned 13 hotels reflect the results of operations of the hotels under previous ownership for either a portion of, or the entire, second quarter 2004.
 

    Operating Statistics       
Quarter Ended             Quarter Ended
                               June 30, 2005             June 30, 2004

                           Occ %   ADR    RevPAR    Occ %    ADR    RevPAR

    Stabilized (11 hotels) 77.7% $118.68  $92.24    75.0%   $111.10  $83.28

    Rebranded/Renovated
     (7 hotels)(1)         64.6% $127.18  $82.12    74.3%   $119.52  $88.82

    U.S. Hotel Portfolio
     (18 hotels)           71.1% $122.56  $87.15    74.6%   $115.31  $86.06

    (1) Rebranded/Renovated includes hotels that are currently going through
        significant renovation and/or in the process of changing their
        franchise affiliation.

For the second quarter 2005, RevPAR for the Company's stabilized hotels increased 10.8% to $92.24, versus the same period in 2004. Occupancy increased by 2.7 percentage points to 77.7%, while ADR increased by 6.8%. For the Company's hotels that are being renovated and/or rebranded, RevPAR decreased 7.5% to $82.12, versus the same period in 2004. Occupancy decreased by 9.7 percentage points to 64.6%, while ADR increased by 6.4%. For the Company's U.S. hotel portfolio of 18 hotels, RevPAR increased by 1.3% to $87.15, versus the same period in 2004. Occupancy decreased by 3.5 percentage points to 71.1%, while ADR increased by 6.3% to $122.56.

For the second quarter 2005, the Company's 18 domestic hotel properties contributed $60.9 million of total revenue and $18.1 million of hotel operating income. Included in the following table is the hotel operating income and hotel operating income margin for the Company's 18 domestic hotel properties for the second quarter 2005 and 2004. Since 13 of the 18 hotels owned as of June 30, 2005 were acquired at various times in 2004 and 2005, the hotel operating income and hotel operating income margin for the aforementioned 13 hotels reflect the results of operations of the hotels under previous ownership for either a portion of, or the entire, second quarter 2004.
 


Hotel Operating Income and Margins    
Quarter Ended          Quarter Ended
                                          June 30, 2005          June 30, 2004

                                          $(1)      %             $(1)      %

    Stabilized (11 hotels)               $10.1    32.4%          $8.0    28.4%

    Rebranded/Renovated (7 hotels)(2)     $8.0    26.9%          $9.5    29.2%

    U.S. Hotel Portfolio (18 hotels)     $18.1    29.7%         $17.5    28.8%

    (1) In millions
    (2) Rebranded/Renovated includes hotels that are currently going through
        significant renovation and/or in the process of changing their
        franchise affiliation.
 

For the second quarter 2005, hotel operating income for the Company's stabilized hotels increased 26.3% to $10.1 million versus the same period in 2004 and hotel operating income margin increased by 4.0 percentage points to 32.4%. For the Company's hotels that are being renovated and/or rebranded, hotel operating income decreased 15.8% to $8.0 million versus the same period in 2004 and hotel operating income margin decreased by 2.3 percentage points to 26.9%. For the Company's U.S. hotel portfolio of 18 hotels, hotel operating income increased by 3.4% to $18.1 million versus the same period in 2004 and hotel operating income margin increased by 0.9 percentage points to 29.7%.

Acquisition Activity/Investment Outlook

On April 15, 2005, the Company acquired the 332-room Tucancun Beach Resort and Villas in Cancun, Mexico, for approximately $32.5 million. Barcelo Hotels and Resorts, a global lodging company based in Palma de Mallorca, Spain, will manage the hotel as an all-inclusive resort under the Barcelo brand name pursuant to the terms of the management agreement. Barcelo Hotels & Resorts operates 130 hotels and resorts in 14 countries across four continents, including eight hotels in Mexico. For the second quarter 2005, Tucancun Beach Resort and Villas contributed $2.3 million to the Company's consolidated total revenue, which is approximately 16.1% more than total revenues for the hotel for the comparable period in 2004.

On July 14, 2005, the Company acquired the 410-room Wyndham Palm Springs hotel in Palm Springs, California for approximately $57 million. The Company financed the acquisition with approximately $37 million of first mortgage debt from CIGNA Investments with a fixed rate of interest of 5.35%, along with proceeds from its term loan facility. The Company has selected Crestline Hotels & Resorts, Inc. to manage the property under a Wyndham-license agreement.

Mr. Francis stated, "We are excited about our recent acquisitions considering the highly competitive hotel market in the U.S. We continue to actively pursue investment opportunities in the U.S., but will be prudent in spending capital given the competitive hotel acquisition environment. With respect to our first investment in Mexico, we believe that Barcelo's ability to efficiently market and operate the Tucancun Beach Resort and Villas will help to generate significant current returns and create value over time for our shareholders. We believe that our ability to leverage our strategic alliance with Barcelo Hotels and Resorts provides us with a competitive advantage in markets such as Mexico and the Caribbean."

Balance Sheet/Liquidity

As of June 30, 2005, the Company had $15.8 million of cash and cash equivalents and $26.2 million of restricted cash. Total assets were $734.2 million, including $644.5 million of net investment in hotel properties, long- term debt was $356.0 million, and stockholders' equity was $343.2 million.

During the second quarter 2005, the Company generated $9.7 million of cash flow from its operations, used $44.8 million in net investing activities, including $12.1 million in hotel capital expenditures, and obtained $7.2 million through net financing activities.

As of July 27, 2005, the Company had approximately $20 million of cash and cash equivalents. In addition, the Company had $10 million of remaining borrowing capacity under its term loan facility after drawing $25 million in July 2005 to fund a portion of the Wyndham Palm Springs hotel acquisition.

Dividend Update

During the second quarter 2005, the Company declared a dividend of $.14 per share payable to its stockholders of record as of June 30, 2005. The dividend was paid on July 15, 2005. The level of future dividends will continue to be determined by the Company's quarterly operating results, general economic conditions, capital requirements and other operating trends.

2005 Outlook

Based on the Company's current hotel operating trends, the status of the Company's renovation and repositioning program, and the Company's investment outlook, the Company estimates that for the third quarter 2005:

    - Total revenues will range between $59.5 - $63.2 million;
    - Corporate EBITDA will range between $13.2 - $14.2 million;
    - Earnings per diluted share will range between $.02 - $.04; and
    - FFO per diluted share will range between $.17 - $.19.

In addition, based on the financial results for the first half of 2005, estimated third quarter 2005 financial results, and the Company's projection of the impact of the renovations and acquisition timing on its operations for the remainder of the year, the Company now estimates that for the full year 2005:

    - Total revenues will range between $237.8 - $252.5 million;
    - Corporate EBITDA will range between $54.9 - $56.5 million;
    - Earnings per diluted share will range between $.21 - $.25; and
    - FFO per diluted share will range between $.78 - $.82.

Mr. Francis stated, "We continue to be encouraged by the performance of our stabilized hotel portfolio and we anticipate significant growth from our renovated properties during the remainder of this year and into 2006. Our positive outlook remains intact regarding the strength of the rebound in our properties once the renovations are complete. We are adjusting our FFO range for 2005 downward slightly to reflect the seasonality of our latest acquisition, the 410-room Wyndham Palm Springs hotel, in Palms Springs, California. As a result of acquiring the hotel in its off-peak season, the Wyndham Palm Springs hotel will have a $.02 to $.03 FFO per diluted share negative impact to our prior FFO guidance for the full year 2005. However, on a full year basis in 2006, we expect that the Wyndham Palm Springs hotel will be accretive to FFO. We are pleased with the continued strength of the lodging industry recovery and we believe that our portfolio will be well positioned to benefit from the improved fundamentals."
 

HIGHLAND HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

                                             June 30, 2005   December 31, 2004

    ASSETS
    Investment in hotel properties, net           $644,526          $578,715
    Asset held for sale                              3,000             3,000
    Deposits on hotel property
     acquisitions                                   11,000             8,714
    Cash and cash equivalents                       15,808            75,481
    Restricted cash                                 26,165            38,710
    Accounts receivable, net                        13,157             7,010
    Prepaid expenses and other assets               15,155             8,279
    Deposits on loan applications                    1,034                 -
    Deferred financing costs, net                    4,341             4,732
     Total assets                                 $734,186          $724,641
 

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Long-term debt                                $356,004          $342,854
    Accounts payable and accrued expenses           19,298            17,140
    Dividends/distributions payable                  5,726             5,726
    Other liabilities                                2,985             3,122
     Total liabilities                             384,013           368,842

    Minority interest in operating partnership       6,949             8,321
    Commitments and contingencies

    Preferred stock, $.01 par value;
     100,000,000 shares authorized; no shares
     issued at June 30, 2005 and December 31,
     2004                                                -                 -
    Common stock, $.01 par value; 500,000,000
     shares authorized; 40,154,699 shares and
     40,002,011 shares issued at June 30, 2005
     and December 31, 2004, respectively               401               400
    Additional paid-in capital                     368,191           366,856
    Treasury stock, at cost; 81,548 shares and
     71,242 shares at June 30, 2005 and
     December 31, 2004, respectively                  (912)             (801)
    Unearned compensation                           (4,636)           (6,182)
    Cumulative dividends in excess of net income   (19,820)          (12,795)
     Total stockholders' equity                    343,224           347,478

     Total liabilities and stockholders' equity   $734,186          $724,641
 
 
 

                       HIGHLAND HOSPITALITY CORPORATION
                    CONSOLIDATED STATEMENTS OF OPERATIONS
               (in thousands, except share and per share data)

                                   Three Months             Six Months
                                   Ended June 30,          Ended June 30,
                                  2005        2004        2005        2004

    REVENUE
    Rooms                         $41,262     $16,430     $73,896     $28,543
    Food and beverage              19,769       7,897      35,430      13,784
    Other                           2,214         927       4,080       1,661
     Total revenue                 63,245      25,254     113,406      43,988

    EXPENSES
    Hotel operating expenses:
     Rooms                          8,717       3,518      16,625       6,090
     Food and beverage             12,144       5,740      23,100      10,488
     Other direct                   1,077         594       2,083       1,077
     Indirect                      22,405       8,688      41,663      15,826
      Total hotel operating
       expenses                    44,343      18,540      83,471      33,481
    Depreciation and amortization   5,306       2,132      10,014       3,726
    Corporate general and
     administrative:
     Stock-based compensation         884         884       1,657       1,590
     Other                          1,620       1,472       3,431       2,963
    Total operating expenses       52,153      23,028      98,573      41,760

    Operating income               11,092       2,226      14,833       2,228

    Interest income                   201         294         518         675
    Interest expense                5,942         336      11,217         646
    Foreign currency exchange
     gain                              40           -          40           -

    Income before income taxes
     and minority interest in
     operating partnership          5,391       2,184       4,174       2,257

    Income tax benefit (expense)   (1,115)         26         104         567
    Minority interest in
     operating partnership            (86)        (52)        (84)        (66)

    Net income                     $4,190      $2,158      $4,194      $2,758
 

    Earnings per share:

     Numerator:
      Net income                   $4,190      $2,158      $4,194      $2,758
      Less: dividends on unvested
       restricted common stock        (86)       (116)       (172)       (116)
      Net income after dividends
       on unvested restricted
       common stock                $4,104      $2,042      $4,022      $2,642

     Denominator:
      Weighted average number
       of common shares
       outstanding - basic     39,454,542  39,084,890  39,415,855  39,082,449
      Weighted average number
       of common shares
       outstanding - diluted   39,664,272  39,295,778  39,591,866  39,358,064

     Earnings per share:
      Basic                         $0.10       $0.05       $0.10       $0.07
      Diluted                       $0.10       $0.05       $0.10       $0.07
 
 

                       HIGHLAND HOSPITALITY CORPORATION
                RECONCILIATION OF FFO AND EBITDA TO NET INCOME
                    (in thousands, except per share data)
 

    2005 AND 2004 RESULTS

    The following table reconciles FFO to net income for the three and six
    months ended June 30, 2005 and 2004:

                                           Three Months      Six Months
                                           Ended June 30,   Ended June 30,
                                           2005     2004    2005     2004

        Net income                         $4,190  $2,158   $4,194  $2,758
        Adjustment: Depreciation and
         amortization                       5,306   2,132   10,014   3,726
        FFO                                $9,496  $4,290  $14,208  $6,484

        FFO per share:
            Basic                           $0.24   $0.11    $0.36   $0.17
            Diluted                         $0.24   $0.11    $0.36   $0.16
 

    The following table reconciles EBITDA to net income for the three and six
    months ended June 30, 2005 and 2004:

                                           Three Months      Six Months
                                           Ended June 30,   Ended June 30,
                                           2005     2004    2005     2004

        Net income                         $4,190  $2,158   $4,194  $2,758
        Adjustments: Depreciation and
                      amortization          5,306   2,132   10,014   3,726
                     Interest expense       5,942     336   11,217     646
                     Interest income         (201)   (294)    (518)   (675)
                     Income tax expense
                      (benefit)             1,115     (26)    (104)   (567)
        EBITDA                            $16,352  $4,306  $24,803  $5,888

        EBITDA per share:
            Basic                           $0.41   $0.11    $0.63   $0.15
            Diluted                         $0.41   $0.11    $0.63   $0.15
 
 

                       HIGHLAND HOSPITALITY CORPORATION
                RECONCILIATION OF FFO AND EBITDA TO NET INCOME
                    (in thousands, except per share data)
 

    2005 GUIDANCE

    The following table reconciles FFO to net income for the third quarter
    2005 and full year 2005:

                                           Third Quarter 2005  Full Year 2005
                                             Low     High       Low     High

          Net income                          $603   $1,419   $8,450  $10,072
          Adjustment: Depreciation and
           amortization                      5,950    5,950   22,264   22,264
          FFO                               $6,553   $7,369  $30,714  $32,336

          FFO per diluted share (1)          $0.17    $0.19    $0.78    $0.82
 

    The following table reconciles EBITDA to net income for the third quarter
     2005 and full year 2005:

                                           Third Quarter 2005  Full Year 2005
                                             Low     High       Low     High

          Net income                          $603   $1,419   $8,450  $10,072
          Adjustments: Depreciation and
                        amortization         5,950    5,950   22,264   22,264
                       Interest expense      6,915    6,915   25,378   25,378
                       Interest income        (341)    (341)  (1,498)  (1,498)
                       Income tax expense      108      253      281      312
          EBITDA                           $13,235  $14,196  $54,875  $56,528
 

    (1) the weighted average number of common shares outstanding used to
        determine FFO per diluted share was approximately 39,525,000.
 
 
 

Highland Hospitality Corporation is a self-advised lodging real estate investment trust, or REIT, focused on hotel investment primarily in the United States. The Company currently owns 20 hotel properties with an aggregate of 5,885 rooms in 11 states and Mexico. 

Certain statements and assumptions in this press release contain or are based upon "forward-looking" information and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "will likely result," "may," "anticipate," "estimate," "should," "expect," "believe," "intend," or similar expressions, are intended to identify forward-looking statements, which include statements concerning our outlook for the hotel industry, acquisition plans, and our dividend policy. 

Contact:

Highland Hospitality Corporation
http://www.highlandhospitality.com
 

Also See: Highland Hospitality Corporation Reports Net Income of $4.3 million For the Year Ended December 31, 2004; Expecting Improvements in 2005 Driven by Renovation, Repositioning / February 2005
Newly Formed REIT, Highland Hospitality Corporation, Acquires First Three Properties for $71 million / December 2003

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