RevPAR Up 5.8% in the Quarter
|ARLINGTON, Va., February 16, 2005 — MeriStar Hospitality Corporation
(NYSE: MHX), one of the nation’s largest hotel real estate investment trusts
(REIT), today announced financial results for the fourth quarter and year
ended December 31, 2004.
RevPAR for the company’s comparable hotels in the fourth quarter rose 5.8 percent to $64.62 and for the full year 2004 rose 6.4 percent to $69.81, based on rooms not out-of-service due to renovations and the impact of the Florida hurricanes. The improvement resulted primarily from an 8.5 percent increase in average daily rate (ADR) to $101.64 in the fourth quarter, and a 5.0 percent increase in ADR to $100.28 for the full year 2004. Occupancy, based on rooms not out-of-service, decreased 1.6 percentage points to 63.6 percent in the fourth quarter, due in part to a strategy to displace lower-rated contract business, and increased 0.9 percentage points to 69.6 percent for the full year 2004.
"The continued increase in ADR is a strong signal that the hotel industry recovery is gaining momentum," said Paul W. Whetsell, chairman and chief executive officer. "Business travel continues to increase, supported by strong leisure demand and inbound travel particularly in gateway markets and resorts. The ability to raise room rates has a positive impact on hotel operating margins, which improved by approximately 100 basis points in the fourth quarter over the prior year."
Whetsell noted that the company continued to upgrade its portfolio, completing approximately $45 million in renovations at its properties in the 2004 fourth quarter and $125 million for all of 2004. "We have made significant progress on our multi-year renovation program, with the vast majority of the more disruptive work in public spaces behind us. In 2005, we expect to spend $85 million on new projects at our properties in addition to completing approximately $15 million of projects under way at year end. Renovated properties already are showing the positive effects of the work we’ve done." For example, the Crowne Plaza Chicago O’Hare, which was renovated and converted to the brand in 2004, receiving a completely new exterior, expansive landscaping, and remodeled lobby, produced a 12.7 percent RevPAR gain in the fourth quarter of 2004 versus the fourth quarter of 2003.
Results for the three months and full year ending December 31, 2004 and 2003, were as follows:
(b) The full year 2004 results include the impact of an equity compensation adjustment. The company’s subsidiary operating partnership's partnership agreement provides for Profits-Only OP Partnership Units, or POPs. Since July 2004, the company had planned for the dissolution of the plan, pursuant to which POPs are issued. All of the remaining outstanding POPs were eliminated during the fourth quarter. A substantial portion of this adjustment, which was recorded entirely in the third quarter due to a change in accounting, had already been expected to occur in 2004. Had the current accounting been applied from the original grant dates, and taking this adjustment in isolation, our net loss, FFO, adjusted FFO, and adjusted EBITDA would each have been lower for 2004 by $4.0 million. Our net loss, FFO, and adjusted FFO would each have been lower for 2004 by $0.05 per diluted share. See the note regarding the equity compensation adjustment in the Notes to Financial Information.
Adjusted EBITDA grew 33.6 percent from $30.4 million in the fourth quarter 2003 to $40.6 million during the 2004 fourth quarter, despite having 19 fewer hotels at year end. The break-even results of the nine significantly affected hurricane properties were offset by the solid year-over-year growth at the company’s comparable hotels, the impact of the strong earnings from the Marriott Irvine and Ritz-Carlton Pentagon City acquisitions, and the contribution of the recent Radisson Lexington Avenue investment. In addition, the completion of the planned restructuring of its MIP investment enabled the company to resume full earnings recognition of the current return and receive its first payment on the accrued return since 2001. This restructuring allowed the company to recognize previously reserved returns, resulting in an incremental $4 million to adjusted EBITDA.
The company’s Washington, D.C. portfolio recorded strong performances, reporting an average RevPAR increase of 11.9 percent in the fourth quarter and an approximate 19 percent RevPAR increase in January 2005. "We continue to benefit from our significant presence in the Washington market," Whetsell said.
Florida Hotels Update
Business continues to show exceptional growth in Florida, driven by strong leisure travel, favorable exchange rates, and the continued economic recovery. For example, the company’s two open Orlando hotels produced over 30 percent RevPAR gains in January 2005.
Whetsell stated that the company continues to make steady progress on the restoration work currently under way at the properties damaged by hurricanes that struck Florida in the fall, noting that eight of these properties were closed for most of the quarter and a ninth had a substantial number of rooms out of service. "We are diligently working to get these hotels up and running as quickly as possible. We are very bullish about the ability of our Florida properties to produce exceptional results, especially as hurricane-affected properties resume normal operations."
Acquisitions and Dispositions
During the 2004 fourth quarter, MeriStar continued to make selective investments to seek solid returns with attractive growth potential, a key element of the company’s strategy to redefine its asset base. In October, the company acquired an interest in the landmark, 705-room Radisson Lexington Avenue Hotel in Midtown Manhattan. The $50 million structured investment includes a loan that will provide MeriStar with a $5.75 million cumulative annual preferred return and a 49.99 percent equity participation.
"This is an excellent property in one of the strongest markets in the country and it has already exceeded our expectations," Whetsell said. "RevPAR in the fourth quarter grew 17.6 percent year-over-year, and we were able to report more than $800,000 of equity participation in our adjusted EBITDA."
The Ritz-Carlton Pentagon City, which the company acquired in May, had a strong fourth quarter and full year, achieving RevPAR gains of 9.9 percent and 11.7 percent, respectively. The Marriott Irvine, acquired in June, began a complete guestroom renovation during the fourth quarter of 2004. The renovation, which includes such key guest areas as an expanded fitness center and concierge lounge, should position the hotel for strong performance in 2005.
The company sold three hotels in the fourth quarter, bringing the total to 21 dispositions in 2004 and an aggregate of 36 since January 2003. "We have essentially completed our non-core asset disposition program and reinvested those proceeds in strategic acquisitions, capital improvements to our existing portfolio, and debt repayments," Whetsell remarked. "Over the past two years, we have reshaped our portfolio into a stronger group of hotels with higher growth potential and have positioned it to take greater advantage of the recovery in the lodging industry, which we have been experiencing." Excluding the nine most significantly affected hurricane properties, RevPAR for the total year-end 2004 portfolio was 16.6 percent higher than the RevPAR for the total portfolio held at December 31, 2003.
Donald D. Olinger, chief financial officer, noted that the company continued to improve its balance sheet in 2004. "We were able to reduce our borrowing costs by over 40 basis points year-over-year by completing an interest rate swap on our $303 million CMBS loan and placing low fixed-rate mortgages on our two hotel acquisitions this year." The company also repurchased approximately $100 million in senior notes and $49 million in subordinated notes in 2004.
In January 2005, the company placed a 5.84 percent fixed-rate, 10-year, $38 million mortgage on the Hilton Crystal City hotel at National Airport. "Initially, the proceeds will be used to fund capital expenditures to repair hurricane damage to other properties due to the time lag in receiving insurance payments," stated Olinger. "Ultimately, we will use the proceeds for selective investment opportunities or to pay down higher interest rate debt. We will continue to look for opportunities to improve our leverage ratios and credit statistics in 2005."
2005 Outlook and Guidance
The company estimates 2005 RevPAR improvement of 7.5 percent to 8.5 percent on its comparable hotels and a 100 to 150 basis point increase in hotel operating margins. For the first quarter of 2005 the company expects RevPAR increases of 4.0 percent to 5.0 percent and hotel operating margin increases of 50 to 100 basis points. Total company revenue will continue to be impacted in the first quarter and full year 2005 by the closures of the hurricane-affected properties. Additionally, adjusted EBITDA and FFO results for the 2005 first quarter will be impacted by the timing of recognition of business interruption insurance for hurricane-affected properties. "We have comprehensive property and business interruption insurance which we expect to cover most of the losses resulting from the hurricanes," Olinger added. "While it is difficult to predict the timing or exact amounts of recognition of the insurance claims during the year, we remain confident in our estimates of full year EBITDA."
Current expected results for the first quarter and full year 2005 include:
(In thousands, except per share amounts)
RECONCILIATION OF NET LOSS TO FUNDS FROM OPERATIONS (a)
(In thousands, except per share amounts)
(b) Net loss for the year ended December
31, 2004 includes an adjustment of $4.0 million related to a change in
accounting treatment for an equity compensation plan. See "Equity Compensation
Adjustment" in the notes to the financial information.
(b) Net loss for the year ended December 31, 2004 includes an adjustment of $4.0 million related to a change in accounting treatment for an equity compensation plan. See "Equity Compensation Adjustment" in the notes to the financial information.
(c) Depreciation and amortization includes the write-off
of deferred financing costs totaling $(0.02) million and $1.5 million for
the quarter ended December 31, 2004 and 2003, respectively, and $1.7 million
and $3.3 million for the year ended December 31, 2004 and 2003, respectively,
related to our early extinguishments of debt during these periods.
(In millions, except per share amounts)
(a) Forecasted net loss does not include any possible future losses on asset impairments, gains or losses on the sale of assets, gains or losses on early extinguishment of debt, or gains or losses on property damage insurance recoveries; therefore, forecasted funds from operations is equivalent to forecasted adjusted funds from operations.
FORECASTED RECONCILIATION OF NET LOSS TO EBITDA
(a) Forecasted net loss does not include any possible future losses on asset impairments, gains or losses on the sale of assets, gains or losses on early extinguishment of debt, or gains or losses on property damage insurance recoveries.
NOTES TO FINANCIAL INFORMATION
Funds From Operations
Substantially all of our non-current assets consist of real estate, and, in accordance with accounting principles generally accepted in the United States, or GAAP, those assets are subject to straight-line depreciation, which reflects the assumption that the value of real estate assets, other than land, will decline ratably over time. That assumption is often not true with respect to the actual market values of real estate assets (and, in particular, hotels), which fluctuate based on economic, market and other conditions. As a result, management and many industry investors believe the presentation of GAAP operating measures for real estate companies to be more informative and useful when other measures, adjusted for depreciation and amortization, are also presented.
In an effort to address these concerns, the National Association of Real Estate Investment Trusts, or NAREIT, adopted a definition of Funds From Operations, or FFO. NAREIT defines FFO as net income (computed in accordance with GAAP) excluding gains or losses from sales of real estate, real estate-related depreciation and amortization, and after comparable adjustments for our portion of these items related to unconsolidated partnerships and joint ventures. Extraordinary items and cumulative effect of changes in accounting principles as defined by GAAP are also excluded from the calculation of FFO. As defined by NAREIT, FFO also does not include reductions from asset impairment charges. The SEC, however, recommends that FFO include the effect of asset impairment charges, which is the presentation we have adopted for all historical presentations of FFO. We believe FFO is an indicative measure of our operating performance due to the significance of our hotel real estate assets and provides beneficial information to investors.
Adjusted FFO represents FFO excluding the effects of gains or losses on early extinguishments of debt, write-offs of deferred financing costs and, in accordance with the NAREIT definition of FFO, asset impairment charges. We exclude the effects of gains or losses on early extinguishments of debt, write-offs of deferred financing costs and asset impairment charges because we believe that including them in Adjusted FFO does not fully reflect the operating performance of our remaining assets. We believe Adjusted FFO is useful for the same reasons we believe that FFO is useful, but we also believe that Adjusted FFO enables us and the investor to consider our operating performance without considering the items we exclude from our definition of Adjusted FFO, which have no cash effect in the periods considered.
Consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization
EBITDA represents consolidated earnings before interest, income taxes, depreciation and amortization and includes operations from the assets included in discontinued operations. We further adjust EBITDA for the effect of capital market transactions that would result in a gain or loss on early extinguishments of debt, as well as the earnings effect of asset dispositions and any impairment assessments, resulting in the measure that we refer to as "Adjusted EBITDA." We exclude the effect of gains or losses on early extinguishments of debt as well as the earnings effect of asset dispositions and impairment assessments because we believe that including them in Adjusted EBITDA does not fully reflect the operating performance of our remaining assets.
We also believe Adjusted EBITDA provides useful information to investors regarding our financial condition and results of operations because Adjusted EBITDA is useful in evaluating our operating performance. Furthermore, we use Adjusted EBITDA to provide a measure of performance that can be isolated on an asset by asset basis to determine overall property performance. We believe that the rating agencies and a number of our lenders also use Adjusted EBITDA for those purposes. We also use Adjusted EBITDA as one measure in determining the value of acquisitions and dispositions.
Comparable Hotel Operating Results and Statistics
We present certain operating statistics (i.e., RevPAR, ADR and average occupancy) and operating results (revenues, expenses and operating profit) for the periods included in this report on a comparable hotel basis as supplemental information for investors. We define our comparable hotels as properties (i) that are owned by us and the operations of which are included in our consolidated results for the entirety of the reporting periods being compared, (ii) that have not sustained substantial property damage during the reporting periods being compared, and (iii) that are not planned for disposition as of the end of the period. Of the 73 hotels that we owned as of December 31, 2004, 60 have been classified as comparable hotels. The operating results of nine hotels significantly affected by the hurricanes in Florida in August and September 2004, two hotels planned for disposition, and the two hotels acquired in 2004, that we owned as of December 31, 2004 are excluded from comparable hotel results for these periods. In addition, the operating statistics for the quarter and year ended December 31, 2004 exclude room nights that were out of service during the periods due to renovations and the impact of the Florida hurricanes at our 60 comparable hotels.We present these comparable hotel operating results by eliminating corporate-level revenues and expenses, as well as depreciation and amortization and loss on asset impairments. We eliminate corporate-level revenues and expenses to arrive at property-level results because we believe property-level results provide investors with supplemental information into the ongoing operating performance of our hotels and the effectiveness of management in running our business on a property-level basis. We eliminate depreciation and amortization because, even though depreciation and amortization are property-level expenses, these non-cash expenses, which are based on historical cost accounting for real estate assets, implicitly assume that the value of real estate assets diminishes over time. Because real estate values have historically risen or fallen with market conditions, many industry investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We eliminate loss on asset impairments because these non-cash expenses are primarily related to our non-comparable properties, and do not reflect the operating performance of our comparable assets.
As a result of the elimination of corporate-level costs and expenses and depreciation and amortization, the comparable hotel operating results we present do not represent our total revenues, expenses or operating profit and should not be used to evaluate our performance as a whole. Management compensates for these limitations by separately considering the impact of these excluded items to the extent that they are material to operating decisions or assessments of our operating performance. Our consolidated statements of operations include such amounts, all of which should be considered by investors when evaluating our performance.
We present these hotel operating results on a comparable hotel basis because we believe that doing so provides investors and management with useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners. In particular, these measures assist management and investors in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations at comparable hotels (which represent the vast majority of our portfolio) or from other factors, such as the effect of acquisitions or dispositions. While management believes that presentation of comparable hotel results is a "same store" supplemental measure that provides useful information in evaluating the ongoing performance of the Company, this measure is not used to allocate resources or to assess the operating performance of each of these hotels, as these decisions are based on data for individual hotels and are not based on comparable hotel results. For these reasons, we believe that comparable hotel operating results, when combined with the presentation of GAAP operating profit, revenues and expenses, provide useful information to investors and management.
Equity Compensation Adjustment
Our 2004 results included a credit of $4.0 million for the reversal of compensation expense recorded in prior periods related to the termination of an equity linked compensation plan. During July 2004, our Board of Directors authorized the dissolution of the equity compensation plan, and consequently, we had expected that the majority of this income would be recognized in the third and fourth quarters of 2004 upon the dissolution. In resolving issues related to the plan, it was determined that the plan should appropriately be accounted for as a variable plan, rather than as a fixed plan, and as a result, we recognized this adjustment in the third quarter of 2004.
The $4.0 million adjustment relates to the 2000, 2001, 2002 and 2003 fiscal years. Because this adjustment is a one-time compensation expense reduction, our 2004 compensation expense and results are not fully comparable to our 2003 compensation expense and results. This adjustment is included in the "General and administrative, corporate" line in our Consolidated Statements of Operations. Had variable accounting been applied from grant date, our net loss would have been $100.3 million ($(1.19) per dilutive share) for the year ended December 31, 2004. This adjustment had no impact to fourth quarter 2004 results.
The company has provided additional information on the fourth quarter and full year results and more detail on its portfolio in the Supplemental Earnings Release Financial Information which can be found at www.meristar.com/PDFs/4Q2004financials.pdf.
Arlington, Va.-based MeriStar Hospitality Corporation owns 73 principally upscale, full-service hotels in major markets and resort locations with 20,319 rooms in 22 states and the District of Columbia. The company owns hotels under such internationally known brands as Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson. For more information about MeriStar Hospitality, visit the company’s Web site: www.meristar.com.
This press release contains forward-looking statements about MeriStar Hospitality Corporation, including those statements regarding future operating results, the timing and composition of revenues, expected levels of capital expenditures, and expected proceeds from asset sales, among others.
Sr. Director, Finance and Investor Relations
|Also See:||MeriStar, Which Owns 89 Hotels, Reports Full-Year 2003 Net Loss of $388 million Compared with a Loss of $161 million a Year Earlier; Full-year RevPAR Declines 3% / Hotel Operating Statistics / February 2004|
|MeriStar to Spend Approximately $225 million On Renovations At Its Core 73 Hotel Properties Over the Next Two Years; Taking Advantage of Size and Scale to Accelerate Renovations and Reduce Costs / February 2004|
|MeriStar to acquire the Ritz-Carlton Pentagon City in Arlington, Va. for $93 million / April 2004|