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MHI Hospitality Corporation Completes Initial
Public Offering, Reports 2004 Financial Results

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WILLIAMSBURG, Va., March 22, 2005 - MHI Hospitality Corporation (Amex: MDH), a self advised lodging real estate investment trust (REIT), today reported results for the year and period ended December 31, 2004 and its business outlook for 2005. 

Highlights

  • Successful completion of initial public offering of six million shares with additional 700,000 shares exercised of the underwriter's over-allotment option, for net proceeds of $61.3 million.
  • $23 million revolving line of credit with Branch Banking & Trust Company.
  • Acquired six initial hotel properties for aggregate consideration of approximately $15 million in cash, 3,817,036 units of interest in our operating partnership and the assumption of approximately $50.8 million in debt.
  • Acquired leasehold interest in Shell Island Resort for $3.5 million.
  • Declared a quarterly dividend of $0.17 per share payable on April 11, 2005.
Andrew M. Sims, President and CEO of MHI Hospitality Corporation, commented, "We are pleased to have completed successfully our initial public offering.  We believe that given the signs of the lodging industry recovery and the breadth of experience of our management team through numerous industry cycles, we will be able to identify and capitalize on growth opportunities.  Our initial portfolio of full-service upscale and mid scale hotels located in the middle Atlantic and Southeastern United States exemplifies our investment strategy of purchasing and repositioning underperforming hotels below replacement cost.  We are seeing attractive investment opportunities, including both performing and distressed properties, and we are optimistic that execution of our stated strategy will result in enhanced shareholder value."

Operating Results

The company completed its initial public offering on December 21, 2004.  The financial results presented below and in the accompanying table reflect operations of the company from December 21, 2004 through December 31, 2004.

Consolidated Total Revenue was $0.66 million and Consolidated Net Loss was $(2.53) million, or $(0.42) per share, for the eleven day period ended December 31, 2004.  The Consolidated Net Loss reported was primarily attributable to one-time charges relating to the company's initial public offering, including a one-time fee of $2.0 million for the amendment and restructuring of management agreements for our initial hotels, $720,000 in start-up costs, and $1.1 million in other costs related to the organization of the company.  Funds from operations, or FFO, excluding extraordinary items and minority interest, was $(3.97) million, or $(0.66) per share for the period.

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

Balance Sheet/Liquidity

The company used approximately $42.1 million out of the total $61.3 million of net proceeds from its initial public offering to repay outstanding indebtedness, and fund the acquisition of its six initial hotel properties during the period ended December 31, 2004.  The company used an additional $3.5 million in cash proceeds to acquire the leasehold interest in Shell Island Resort, a condominium resort property in Wilmington, NC.  At December 31, 2004, the company had $8.3 million of available cash.

The company, its operating partnership, MHI Hospitality L.P., and its subsidiary, MHI Hospitality TRS Holding, Inc., have obtained a revolving line of credit in the amount of $23 million with Branch Banking & Trust Company.  This line of credit is secured by first mortgages on two of the company's properties, the Holiday Inn Brownstone and the Hilton Philadelphia Airport, and will be used to acquire, repair or renovate properties and for working capital.

As previously announced, the company declared a quarterly dividend of $0.17 per share of common stock payable to shareholders of record on the close of business Tuesday, March 15, 2005.  The dividend will be paid on Monday, April 11, 2005.

Portfolio Update

The company has acquired six initial hotel properties as follows:

Location/Brand                                             Rooms      Purchase Price 
                                                                                   *(In thousands)
Hilton Philadelphia Airport, Philadelphia, PA        331        $26,113
Hilton Savannah DeSoto, Savannah, GA              246         27,280
Holiday Inn Downtown Williamsburg, VA              137          5,093
Holiday Inn Brownstone, Raleigh, NC                  188          9,370
Hilton Wilmington Riverside, Wilmington, DE       274         25,647
Maryland Inn, Laurel, MD                                   207         12,425

* Represents consideration paid in the form of cash, operating partnership units at the offering price of $10 per unit and the assumption of $50.9 million of debt.

Outlook and Market Trends

Management anticipates that RevPAR growth for 2005 will be in the range of
5.0 percent to 6.0 percent.  Given this forecast, management anticipates that for 2005, FFO per share will be in the range of $0.90-$0.95.  Based on the portfolio's strong performance in January and February 2005, management anticipates a solid year operationally, as current results are ahead of historical performance and favorable in comparison to selected lodging indices.  This guidance is based upon the assumption of a continuation of the recovery in the lodging industry.
 
 

MHI HOSPITALITY CORPORATION AND PREDECESSOR 
CONSOLIDATED AND COMBINED BALANCE SHEETS
                                             MHI          The          The
                                         Hospitality  Predecessor  Predecessor
                                        December 31, December 31, December 31,
                                            2004         2003         2002
            ASSETS
      Investment in hotel properties,
       net                              $78,418,173  $27,941,021  $27,718,222
      Cash and cash equivalents           8,314,353       67,365      154,381
      Restricted real estate tax
       escrows                              637,627      728,452      792,737
      Accounts receivable                 1,161,159      527,436      673,561
      Accounts receivable-affiliate         400,216    1,007,154      754,650
      Prepaid expenses, inventory and
       other assets                       1,602,633      260,397      279,898
      Shell Island lease purchase         3,500,000            -            -
      Deferred financing costs, net         198,083      225,631      227,289

    TOTAL ASSETS                        $94,232,244  $30,757,456  $30,600,738
 

         LIABILITIES & OWNERS' EQUITY
      Mortgage loans                    $25,753,188  $29,640,738  $30,548,250
      Note payable related party          2,000,000            -            -
      Short term loans/lines of credit            -      450,000      300,000
      Accounts payable and accrued
       expenses                           5,177,184    2,706,169    2,748,754
      Advance Deposits                      336,302      127,688       81,761
      Due to affiliate                      100,000            -            -

        Total liabilities                33,366,674   32,924,595   33,678,765

    Minority Interest in Operating
     Partnership                         21,118,257            -            -
    Commitments and contingencies (see
     Note 9)

    OWNERS' EQUITY
      Preferred stock, par value
       $0.01, 1,000,000 shares
       authorized, 0 shares
       issued and outstanding                     -            -            -
      Common stock, par value $0.01,
       49,000,000 shares authorized,
       6,000,000 shares
        issued and outstanding               60,000            -            -
      Additional paid in capital         42,221,535            -            -
      Accumulated deficit                (2,534,222)           -            -
      Owners' equity accounts                     -   (2,167,139)  (3,078,027)

        TOTAL OWNERS' EQUITY             39,747,313   (2,167,139)  (3,078,027)

    TOTAL LIABILITIES AND OWNERS'
     EQUITY                             $94,232,244  $30,757,456  $30,600,738
 

                         MHI HOSPITALITY CORPORATION
              CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
                               MHI          The
                           Hospitality  Predecessor
                           Period From  Period From      The          The
                          December 21,  January 1,   Predecessor  Predecessor
                             2004 to      2004 to    Year Ended   Year Ended
                           December 31, December 20, December 31, December 31,
                               2004        2004         2003         2002

    Revenue
       Rooms department       $438,603  $16,859,415  $15,828,663  $15,660,065
       Food and beverage
        department             191,609    8,123,306    7,772,413    7,412,848
       Other operating
        departments             28,946      889,144      834,130      886,114
                                                  -            -            -
          Total revenue        659,158   25,871,865   24,435,206   23,959,027

    EXPENSES
    Hotel operating expenses
       Rooms department        156,380    4,336,704    4,143,106    3,920,916
       Food and beverage
        department             196,817    5,767,897    5,563,915    5,398,453
       Other operating
        departments             10,174      454,037      416,213      420,284
       Indirect                608,706    9,692,125    9,417,723    9,181,786
                                                  -            -            -
          Total hotel
           operating
           expenses            972,077   20,250,763   19,540,957   18,921,439

    Depreciation and
     amortization              172,899    1,714,734    2,045,250    2,236,136
    Corporate general and
     administrative
       Startup costs           722,550            -            -            -
       Management
        restructuring fee    2,000,000            -            -            -
       Other                 1,080,068            -            -            -

          Total operating
           expenses          4,947,594   21,965,497   21,586,207   21,157,575
    OPERATING INCOME
     < LOSS >               (4,288,436)   3,906,368    2,848,999    2,801,452
    Other income (expense)
       Interest expense        (57,437)  (2,228,427)  (2,369,422)  (2,481,528)
       Interest income             340        1,753        3,668        9,379
       Income  < loss > from
        minority interests                    -      (90,877)    (190,177)    (226,478)
       Gain (loss) on
        disposal of assets           -            -       (1,135)           -
    Income < loss > before
     minority interest in
       operating
       partnership and
       income taxes         (4,345,533)   1,588,817      291,933      102,825

    Minority Interest in predecessor company             -     (595,539)    (152,097)    (224,864)
    Minority interest in
     operating partnership   1,611,311            -            -            -
    Income tax benefit         200,000            -            -            -

    Net income  < loss >   $(2,534,222)    $993,278     $139,836    $(122,039)
 

    Loss per share               (0.42)         -            -            -

    Number of shares
     outstanding             6,000,000          -            -            -
 

               MHI HOSPITALITY AND CORPORATION AND PREDECESSOR
              CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
                                   MHI         The
                               Hospitality  Predecessor
                               Period From  Period From    The         The
                               December 21, January 1, Predecessor Predecessor
                                 2004 to      2004 to  Year Ending Year Ending
                                 December     December    December    December
                                    31,          20,         31,         31,
                                   2004         2004        2003        2002
    Cash Flows from Operating Activities:
      Net Income (Loss)        $(2,534,222)   $993,278   $139,836   $(122,039)
      Adjustments to reconcile
       net income (loss) to
       net cash used in
       operating activities:
        Depreciation and
         amortization              172,899   1,714,734  2,045,250   2,236,136
        Deferred income taxes     (200,000)
        Equity in net (income)
         loss of partnership
         investments                     -      90,877    190,177     226,478
        Minority interest in
         operating partnership  (1,611,311)    595,539    152,097     224,864
        (Gain)/Loss on disposal
          of property and
          equipment                      -           -      1,135           - Changes in assets and liabilities:
          Restricted Cash                -      90,825     64,285    (100,218)
          Accounts receivable     (413,689)   (220,034)   146,125    (112,753)
          Inventory and prepaid expenses               (541,702)    (34,682)    15,100     (92,690)
          Other assets, net of
           accumulated
           amortization           (585,355)    (78,822)   (47,310)    (17,184) Accounts payable and accrued expenses      2,606,641    (135,627)   (42,028)   (174,611)
          Accrued expenses
          Advance deposits         126,092      82,522     45,928         548
        Net cash provided by
         (used in) operating
          activities            (2,980,647)  3,098,610  2,710,595   2,068,531
 

    Cash flows from investing
     activities:
      Acquisition of hotel
       properties              (54,620,919)          -          -           -
      Acquisition of
       leasehold interest       (3,500,000)          -          -           -
      Improvements and
       additions to hotel
       properties                        -    (927,689)(1,278,647) (1,213,987)
      Proceeds from sale of
       assets                            -           -          -           -

        Net Cash used in
         investing activities  (58,120,919)   (927,689)(1,278,647) (1,213,987)

    Cash flows from financing
     activities:
      Proceeds from sale
       of common stock          60,000,000           -          -           -
      Payment of issuance
       costs related to sale
       of common stock          (5,192,627)          -          -           - Members' capital contributed              13,470,248      60,000  1,123,454     158,077 Members' capital distributed                       -  (2,462,169)  (320,501)   (474,000)
      Capital contributed to
       Brownestone Partners, LLC         -     (60,000)(1,118,953)   (158,077)
      Distributions received
       from Brownestone Partners,
       LLC                               -      95,389          -           -
      Minority party distributions       -           -   (184,000)   (276,000)
      Payments to related party  1,138,298   (431,360)   (252,505)    811,381
      Proceeds from borrowing            -  2,000,000     150,000           -
      Payment of loans                   - (1,234,500)   (759,217)   (992,846)
      Proceeds from capital lease obligations                       -          -           -           - Payment of capital lease obligations                       -    (57,811)   (157,242)   (200,677)
         Net cash provided by
          (used in) financing
          activities            69,415,919 (2,090,451) (1,518,964) (1,132,142)

           Net increase
            (decrease)in cash    8,314,353     80,470     (87,016)   (277,598)
           Cash and cash
            equivalents at the
            beginning of the
            period                       -     67,365     154,381     431,979

      Cash at the end of
        the year                $8,314,353   $147,835     $67,365    $154,381
  Supplemental disclosures:
    Cash paid during the year
     for interest                   $2,804 $2,228,427  $2,369,422  $1,789,493
 

                 MHI HOSPITALITY CORPORATION AND PREDECESSOR
                 CONSOLIDATED AND COMBINED FFO RECONCILIATION

    The following table reconciles net loss to FFO for the period from December 21, 2004 through December 31, 2004:

                               MHI         The
                           Hospitality  Predecessor
                           Period From  Period From     The          The
                           December 21,  January 1,  Predecessor  Predecessor
                              2004 to     2004 to    Year Ended   Year Ended
                           December 31, December 20, December 31, December 31,
                               2004         2004         2003        2002

    Net income (loss)      $(2,534,221)   $993,278     $139,836   $(122,039)
      Add minority
      interest              (1,611,311)    595,539      152,097     224,864
      Add depreciation and
       amortization            172,899   1,714,734    2,045,250   2,236,136
      Add loss on disposal of
       property                      -           -        1,135           -

    FFO                    $(3,972,633) $3,303,551   $2,338,318  $2,338,961
 

    Funds from Operations, FFO, is used by industry analysts and investors as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non- cash items such as real estate asset depreciation and amortization, and after adjustment for any minority interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required GAAP presentations, has improved the understanding of the operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company's real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.
 

About MHI Hospitality Corporation

MHI Hospitality Corporation is a self-advised lodging REIT focused on the
acquisition, redevelopment and management of midscale and upscale full service hotels in the mid-Atlantic and southeastern United States.  Currently, the portfolio consists of six properties for a total of 1,381 rooms, the majority of which operate under the Hilton and Holiday Inn brands. 

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. 

Contact:
MHI Hospitality Corporation
http://www.mhihospitality.com
Also See: Owner of Six Hotels, MHI Hospitality Looks to Raise $54 million with REIT IPO / December 2004


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