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PART
II
ITEM
5 ITEM 6
ITEM 7 ITEM 7A
ITEM 8 ITEM
9
ITEM
7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
($
in thousands, except per share amounts)
Winston Hotels, Inc.
("WHI") operates so as to qualify as a real estate investment
trust ("REIT") for federal income tax purposes. During 1994,
WHI completed an initial public offering of its common stock
("Common Stock"), utilizing the majority of the proceeds to
acquire one hotel and a general partnership interest (as the sole
general partner) in WINN Limited Partnership (the
"Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine additional hotel properties. These ten
hotels were acquired from affiliates of WHI. WHI and the Partnership
(collectively the "Company") began operations as a REIT on
June 2, 1994. As of December 31, 2000, WHI’s ownership in the
Partnership was 92.86% (see Note 6 to the consolidated financial
statements).
During 1995 and 1996, WHI
completed follow-on Common Stock offerings, as well as a Preferred Stock
offering in September 1997, and invested the net proceeds from these
offerings in the Partnership. The Partnership utilized the proceeds to
acquire 28 additional hotel properties. The Company owned 31 hotels as
of December 31, 1996 and acquired seven hotels in 1997 (collectively the
"1997 Hotels"). During 1998, the Company added 13 additional
properties to its portfolio, five of which were internally developed
(the "1998 Hotels"). During 2000, the Company sold two hotels.
As of December 31, 2000, the Company owned 49 hotel properties (the
"Current Hotels"), in 12 states, having an aggregate of 6,723
rooms.
The Company also owns a
49% ownership interest in three joint ventures, two of which each own an
operating hotel and a third which owns a hotel under development and
expected to open in July 2001, collectively (the "Joint Venture
Hotels"). The Joint Venture Hotels consist of a Hilton Garden Inn
located in Windsor, CT, a Hampton Inn located in Ponte Vedra, FL and a
Hilton Garden Inn, currently under construction, located in Evanston,
IL. Additionally, the Company has provided mezzanine financing to two
unrelated parties for two other hotels in which the Company will have no
ownership interest.
As of December 31, 2000,
the Company leased 47 of the 49 Current Hotels to CapStar Winston
Company, L.L.C. ("CapStar Winston"), a wholly owned subsidiary
of MeriStar Hotels and Resorts, Inc. ("MeriStar"), one of the
Current Hotels to Bristol Hotel Tenant Company, a wholly owned
subsidiary of Bass PLC of London ("Bass") and one of the
Current Hotels to Secaucus Holding Corporation, a wholly owned
subsidiary of Prime Hospitality Corp. ("Prime"). CapStar
Winston also currently leases one Joint Venture Hotel located in Ponte
Vedra, FL and has signed a lease agreement to lease the Joint Venture
Hotel located in Evanston, IL, to be opened in July 2001. Bass also
currently leases the Joint Venture Hotel located in Windsor, CT. All 49
of the Current Hotels were leased pursuant to separate percentage
operating lease agreements that provide for rent payments based, in
part, on revenues from the Current Hotels (the "Percentage
Leases"). Under the terms of the Percentage Leases, the lessees are
obligated to pay the Company the greater of base rent or percentage rent
("Percentage Rent"). The Percentage Leases are designed to
allow the Company to participate in the growth in revenues at the
Current Hotels by requiring that a portion of each Current Hotel’s
room revenues in excess of specified amounts will be paid to the Company
as Percentage Rent.
CapStar Winston is a
wholly owned subsidiary of MeriStar Hotels and Resorts, Inc. ("MeriStar").
As of December 31, 2000, MeriStar, the nation’s largest independent
hotel management company, leased or managed 222 hotels with 48,054 rooms
in 34 states, the District of Columbia, Canada, Puerto Rico and the U.S.
Virgin Islands.
Results of Operations
For the periods ended
December 31, 2000 and 1999, the differences in operating results are
primarily attributable to the adoption of Staff Accounting Bulletin No.
101 ("SAB 101"). SAB 101 was issued by the Securities and
Exchange Commission in December 1999 and adopted by the Company
effective January 1, 2000. SAB 101 requires that a lessor not recognize
contingent rental income until annual specified hurdles have been
achieved by the lessees. As a result of SAB 101, the Company recognized
an additional $221 of percentage lease revenue for the year 2000. Had
the Company not adopted SAB 101, the Company would have reported
percentage lease revenue totaling $62,209 for 2000, a decrease of $28
versus percentage lease revenue for 1999 totaling $62,237. SAB 101 has
no impact on the Company’s Funds From Operations ("FFO"), or
its interim or annual cash flow from its third party lessees, and
therefore, on its ability to pay dividends. For the periods ended
December 31, 1999 and 1998, the differences in operating results are
primarily attributable to the full year of operations of the 1998 Hotels
in 1999 versus the partial year of operations in 1998. The Company sold
its Comfort Suites hotel in London, Kentucky in February 2000 and its
Hampton Inn hotel in Duncanville, Texas in September 2000, resulting in
a total net loss of $850. The table below outlines the Company’s hotel
properties owned as of December 31, 2000, 1999 and 1998.
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December 31, 2000
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December 31, 1999
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December 31, 1998
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Acquisitions |
Properties |
Acquisitions |
Properties |
Acquisitions* |
Properties |
|
|
during |
owned at |
during |
owned at |
during |
owned at |
|
Type of Hotel
|
the year
|
year end
|
the year
|
year end
|
the year
|
year end
|
|
Limited-service hotels |
-- |
29** |
-- |
31 |
1 |
31 |
|
Extended-stay hotels |
-- |
9 |
-- |
9 |
6 |
9 |
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Full-service hotels |
--
|
11
|
--
|
11
|
6
|
11
|
|
Total |
--
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49
|
--
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51
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13
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51
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* Five of the total 13
hotels added in 1998 were internally developed properties.
** The Company sold 2
hotels during 2000 as noted above.
In order to present a more
meaningful comparison of operations, the following comparisons are
presented:
The Company:
-
actual operating results
for the year ended December 31, 2000 versus actual operating results for
the year ended December 31, 1999;
-
actual operating results for the year
ended December 31, 1999 versus actual operating results for the year ended
December 31, 1998;
-
actual operating results for the year ended December
31, 1999 versus pro forma operating results for the year ended December
31, 1998, as if the addition of the 1998 Hotels occurred on the later of
January 1, 1998 or the hotel opening date (the Company made no
acquisitions in 1999, therefore the pro forma 1999 results of operations
would be identical to the actual 1999 results of operations);
CapStar Winston Company,
L.L.C.:
-
actual operating results
for the year ended December 31, 2000 versus actual operating results for
the year ended December 31, 1999;
-
actual operating results for the year
ended December 31, 1999 versus actual operating results for the year ended
December 31, 1998.
The Company
Actual - Year ended
December 31, 2000 versus Actual - Year ended December 31, 1999
The Company had revenues of
$63,719 in 2000, consisting of $62,430 of percentage lease revenues and
$1,289 of interest, joint venture and other income. Percentage lease
revenues increased $193 in 2000 from $62,237 in 1999. This increase was
primarily attributable to an increase in lease revenue due to the Company’s
adoption of SAB 101 effective January 1, 2000, which resulted in
additional lease revenue recognition of $221. Had the Company not adopted
SAB 101, lease revenue for 2000 would have been $62,209, a decrease of $28
from its 1999 lease revenue of $62,237. This decrease was primarily due to
a decrease of $1,348 in percentage lease revenue generated from the 1997
Hotels due to competitive pressures resulting in lower occupancy rates.
This decrease also included a decrease of $421 in percentage lease revenue
from the two hotels sold during 2000. This decrease was offset by an
increase of $1,741 in percentage lease revenue generated from the 1998
Hotels due to higher occupancy rates and average daily rates. Most of the
1998 Hotels are full service, up scale hotels, while the 1997 Hotels are
mostly limited service hotels.
Real estate taxes and
property and casualty insurance expenses incurred in 2000 were $6,630, an
increase of $274 from $6,356 in 1999. Real estate taxes increased $131 due
to increased rates and property values in 2000. Property insurance
increased $143 due primarily to property coverage premium increases.
General and administrative expenses remained constant from $4,236 in 1999
to $4,323 in 2000. Interest expense increased $978 to $13,491 in 2000 from
$12,513 in 1999, primarily due to an increase in the annual
weighted-average interest rate of 0.72% from 7.05% in 1999 to 7.77% in
2000 and a decrease in capitalized interest of $137 from $163 in 1999 to
$26 in 2000, offset by a decrease in weighted average borrowings from
$178,038 in 1999 to $173,213 in 2000. Depreciation expense increased $527
to $21,092 in 2000 from $20,565 in 1999, primarily due to depreciation
related to renovations and capital additions completed during 2000 and the
second half of 1999 offset by disposals of two hotels sold during 2000.
Amortization expense
increased $99 to $933 in 2000 from $834 in 1999. The increase is primarily
attributable to twelve months of amortization in 2000 of deferred
financing costs associated with the Company’s new $140,000 line of
credit, which originated in February 1999, versus eleven months of
amortization in 1999.
| Actual -
Year ended December 31, 1999 versus Actual - Year ended December 31,
1998
The Company
had revenues of $62,670 in 1999, consisting of $62,237 of percentage
lease revenues and $433 of interest and other income. Percentage lease
revenues increased $7,292, or 13.3%, in 1999 from $54,945 in 1998. This
increase was primarily attributable to an increase in lease revenues
from the 1998 Hotels due to a full year of operations in 1999 versus a
partial year of operations in 1998, partially offset by a decrease of
$1,160 in lease revenue generated from the 1997 Hotels, which decrease
was primarily attributable to competitive pressures.
Real estate
taxes and property and casualty insurance expenses incurred in 1999 were
$6,356, an increase of $1,094 from $5,262 in 1998. The increase was
primarily attributable to a full year of operations for the 1998 Hotels
in 1999 versus a partial year in 1998. General and administrative
expenses increased $347 to $4,236 in 1999 from $3,889 in 1998. The
increase was primarily attributable to an increase in the number of
employees and related compensation expense throughout the year, costs
associated with efforts to form joint ventures and costs associated with
efforts to sell certain hotels. Interest expense increased $4,199 to
$12,513 in 1999 from $8,314 in 1998, primarily due to an increase in
weighted-average outstanding borrowings from $127,776 in 1998 to
$178,038 in 1999, and a decrease of capitalized interest of $1,350 from
$1,513 in 1998 to $163 in 1999. Annual weighted-average interest rates
decreased 0.58% from 7.63% in 1998 to 7.05% in 1999. Depreciation
expense increased $4,176 to $20,565 in 1999 from $16,389 in 1998,
primarily due to depreciation related to the 1998 Hotels and renovations
completed during 1999 and 1998. Amortization expense increased $369 to
$834 in 1999 from $465 in 1998. The increase is primarily attributable
to an increase in amortization of deferred financing costs associated
with the Company’s new $140,000 line of credit, which originated in
February 1999, and the Company’s $71,000 GE Capital Corporation loan
which originated in November 1998.
Actual - Year ended
December 31, 1999 versus Pro Forma - Year ended December 31, 1998
The Company
had revenues of $62,670 for the year ended December 31, 1999, consisting
of $62,237 of percentage lease revenues and $433 of interest and other
income. Percentage lease revenues increased $5,356, or 9.4%, to $62,237
in 1999 from $56,881 in 1998. This increase was primarily attributable
to the opening of 10 hotel properties in 1998 (the "1998 New
Hotels"), partially offset by a decrease of $935 in lease revenue
generated from the hotels owned as of December 31, 1997, which decrease
was primarily attributable to competitive pressures.
Real estate
taxes and property and casualty insurance expenses incurred in 1999 were
$6,356, an increase of $722 from $5,634 in 1998. The increase was
primarily attributable to the 1998 New Hotels and an increase in tax
rates and assessed values in 1999. General and administrative expenses
increased $338 to $4,236 in 1999 from $3,898 in 1998. The increase was
primarily attributable to an increase in the number of employees and
related compensation expense throughout the year, costs associated with
efforts to form joint ventures and costs associated with efforts to sell
certain hotels. Interest expense increased $3,602 to $12,513 in 1999
from $8,911 in 1998. The increase was primarily due to an increase in
weighted-average borrowings from $137,932 in 1998 to $178,038 in 1999,
and a decrease of capitalized interest of $1,350 from $1,513 in 1998 to
$163 in 1999. Annual weighted-average interest rates decreased 0.58%
from 7.63% in 1998 to 7.05% in 1999. Depreciation expense increased
$3,845 to $20,565 in 1999 from $16,720 in 1998, primarily due to
additional depreciation related to the 1998 New Hotels and renovations
completed during 1999 and 1998. Amortization expense increased $372 to
$834 in 1999 from $462 in 1998. The increase is primarily attributable
to an increase in amortization of deferred financing costs associated
with the Company’s new $140,000 line of credit, which originated in
February 1999, and the Company’s $71,000 GE Capital Corporation loan,
which originated in November 1998.
CapStar Winston Company, L.L.C.
Actual – Year ended December 31,
2000 versus Actual – Year ended December 31, 1999
CapStar Winston had room revenues of $126,884 in 2000, a decrease of
$687 from $127,571 in 1999. The decrease in room revenues was primarily
due to the sale of the Comfort Suites in London, Kentucky by the Company
in February 2000, the sale of the Hampton Inn in Duncanville, Texas in
September 2000, and a decrease in occupancy rates from 71.0% to 68.6%.
Although room revenues decreased, RevPar increased 0.3% due to a
decrease in total rooms available. Food and beverage revenue increased
$176 to $8,191 in 2000 from $8,015 in 1999. This increase was due to a
rise in room service, lounge, and banquet related revenues.Telephone and
other operating departments revenue increased $344 to $6,473 in 2000
from $6,129 in 1999 due to a rise in revenues from movies/videos and
banquet production for limited service hotels.
CapStar Winston had total expenses in 2000 of $161,803, an increase of
$20,975 from $140,828 in 1999. The increase was primarily attributable
to an asset impairment charge of $21,658 to adjust goodwill from the
purchase transaction with Winston. This charge is a non-cash adjustment
to the carrying value of those assets. This increase is partially offset
by a decrease in expenses attributable to the sale of the Comfort Suites
in London, Kentucky in February 2000 and the sale of the Hampton Inn in
Duncanville, Texas in September 2000.
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Actual
- Year ended December 31, 1999 versus Actual - Year ended December 31,
1998
Total revenue increased $16,082 or 12.8%, to $141,715 from
$125,633. This increase was
primarily related to an increase in room revenues of $14,120 or 12.4%,
to $127,571 from $113,451. The
increase in room revenues was due to an increase of $14,058 for the 1998
Hotels and an increase of $62 for all other hotels. Food and beverage revenue increased $1,802 to $8,015 in 1999 from
$6,213 in 1998, primarily due to increased revenue from the 1998 Hotels.
Total expenses increased $15,790 or 12.6%, to $140,828 from
$125,038. This increase was
primarily related to increased expenses generated by the 1998 Hotels.
Net income increased $292, to $887 from $595, primarily driven by
the operating results of the 1998 Hotels.
Liquidity
and Capital Resources
The Company finances its operations from operating cash flow,
which is principally derived from Percentage Leases. For the year ended December 31, 2000, cash flow provided by
operating activities was $39,589 and funds from operations, which is
equal to net income before allocation to minority interest (excluding
gains/losses on sales of operating property), plus adjustments for
unconsolidated joint ventures, plus depreciation, less preferred share
distributions, plus the change in deferred revenue resulting from SAB
101, was $31,268. Under
federal income tax law provisions applicable to REITs prior to January
1, 2001, the Company was required to distribute at least 95% of its
taxable income to maintain its tax status as a REIT. For taxable years beginning after December 31, 2000, the taxable
income distribution requirement has been lowered to 90%. In 2000, the Company declared distributions of $25,861 to its
shareholders. The
Company intends to fund cash distributions to shareholders out of cash
flow from operating activities. The
Company may incur, or cause the Partnership to incur, indebtedness to
meet distribution requirements imposed on the Company under the Internal
Revenue Code (including the requirement that a REIT distribute to its
shareholders annually at least 90% of its taxable income) to the extent
that available capital and cash flow from the Company’s investments
are insufficient to make such distributions.
The Company’s net cash used in investing activities during the
year ended December 31, 2000 totaled $10,231, consisting of cash out
flows for mezzanine financing, capital expenditures, renovation of
hotels and investments in joint ventures, offset by proceeds from the
sale of two hotels.
During 2000, the Company provided $1,080 in mezzanine financing
to Noble Investment Group, LLC (“Noble”) to develop a Hilton Garden
Inn in Atlanta (Sugarloaf), GA (the “Sugarloaf Hotel”). The Company receives monthly interest at annual rates based on
30-day LIBOR plus 7.36% until the earlier of (a) prepayment of the loan,
(b) the initial maturity date of December 5, 2001, or (c) a period equal
to the lesser of (1) the maturity date of the borrower’s qualified
refinancing less 60 days, or (2) five years from June 30, 2000, the date
of the loan. In February
2001, the Company provided another mezzanine loan totaling $2,186 to
Noble to develop a Hilton Garden Inn in Tampa, FL (the “Tampa
Hotel”). The Company
receives monthly interest at annual rates based on 30-day LIBOR plus
8.44% until the earlier of (a) prepayment of the loan, (b) the initial
maturity date of January 1, 2004, or (c) a period equal to the lesser of
(1) the maturity date of the borrower’s qualified refinancing less 60
days, or (2) five years from February 2, 2001, the date of the loan. Both loans are subject to prepayment penalties during the first
three years. Once each
hotel opens, the Company also earns interest equal to 2% of gross
revenues, 25% of which is paid and the remainder is accrued (“Accrued
Interest”). On the
earlier of prepayment or the maturity date of each loan, the Company
also shall receive the greater of the Accrued Interest or, with respect
to the Sugarloaf Hotel, 15% of the appreciation in value, and with
respect to the Tampa Hotel, 20% of the appreciation in value. In addition to earning interest income, the Company also
provides development and purchasing services to Noble during the
hotels’ construction stage for additional fee income. The Company is co-developing the Sugarloaf Hotel and developing
the Tampa Hotel. During
2000, these fees totaled $137, all related to services provided for the
Sugarloaf Hotel. Both the Sugarloaf Hotel and the Tampa Hotel are owned 100%
by unaffiliated single purpose entities (the “Borrowers”). The Company holds collateral equal to 100% of the ownership
interest in the Borrowers. The
Borrowers are required to make initial equity investments equal to 20%
of the total cost of the respective hotel, and there are certain default
provisions under which the Company can step in and take control of the
Borrowers.
During 2000, the Company spent $7,373 or 5.5% of the lessees’
room revenue, in connection with the renovation of its Current Hotels. Per the Percentage Leases, the Company is required to spend 5% of
room revenues for its hotels (7% of room revenues and food and beverage
revenues for one of its full service hotels) for periodic capital
improvements and the refurbishment and replacement of furniture,
fixtures and equipment at its Current Hotels. These capital expenditures are funded from operating cash flow,
and possibly from borrowings under the Company’s $140,000 line of
credit (the “Line”), sources which are expected to be adequate to
fund such capital requirements. These
capital expenditures are in addition to amounts spent on normal repairs
and maintenance which have approximated 5.1% and 5.5% of room revenues
in 2000 and 1999, respectively, and are paid by the lessees.
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During 1999, the Company entered into a
joint venture agreement with Regent Partners, Inc. (the “Regent Joint
Venture”) to jointly develop and own upscale hotel properties. The Regent Joint Venture consists of two separate joint ventures,
each of which owns one hotel. The
first hotel developed under the Regent Joint Venture was a full service
158-room Hilton Garden Inn in Windsor, CT, and was opened in September
2000. The second hotel,
currently under development, is a 177-room Hilton Garden Inn in
Evanston, IL, and is scheduled to open in July 2001. The Company has the right to acquire Regent’s interests in
each project subject to the provisions of the Regent Joint Venture. The Company owns a 49% ownership interest in the Regent Joint
Venture. Additionally, in
April 2000, the Company entered into a joint venture agreement with
Marsh Landing Investment, LLC to jointly develop an $8.5 million,
118-room Hampton Inn in Ponte Vedra, FL. This hotel was opened in December 2000. The Company owns 49% of the joint venture, and Marsh Landing
Investment, LLC, a company owned by Charles M. Winston and James H.
Winston, owns the remaining 51%. Both
Charles M. Winston and James H. Winston serve on the Company’s Board
of Directors. The Company has the right to acquire Marsh Landing
Investment, LLC’s interest subject to the provisions of the joint
venture agreement.
During 2000, the Company invested $6,999 in cash in the three
joint ventures. Under the
terms of the joint ventures, the Company has provided, and will continue
to provide property development, purchasing and, upon opening of the
hotel, on-going asset management services for additional fee income. 51%
of such fee income is recognized as revenue, and 49% as a reduction of
investment in the joint ventures. Such
income earned during 2000 totaled $308. Under the terms of the operating agreement for each joint
venture, the Company must approve all major decisions, including
refinancing or selling the respective hotels, making loans, changes in
partners’ interests, entering into contracts of $25,000 or more, and
purchasing or acquiring assets.
The Company sold its Comfort Suites hotel in London, KY and its
Hampton Inn hotel in Duncanville, TX during 2000. The total proceeds were $5,461. The Company also is considering the sale of certain other
non-core hotels that lie outside the Company’s upscale segment focus
and plans to use the proceeds to reduce debt, invest in hotel
properties, or provide mezzanine loans.
The Company's net cash used in financing activities during the
year ended December 31, 2000 totaled $29,219. This net use of cash was
primarily due to the payment of distributions to shareholders of $25,839
and the payment of distributions to the Partnership’s minority
interest of $1,454. This
amount also includes principal payments totaling $1,103 related to the
Company’s $71,000 fixed rate note, and a net decrease in amounts
outstanding under the $140,000 line of credit (the “Line”) of $700. The Line is collateralized with 28 of the Current Hotels. As of December 31, 2000, total outstanding debt on the Line was
$103,800. In accordance
with the provisions of the Line, the Company’s availability under the
Line totaled approximately $27,000. The Line requires the Company to maintain certain financial
ratios including maximum leverage, minimum interest coverage and minimum
fixed charge coverage, as well as certain levels of unsecured and
secured debt and tangible net worth, all of which the Company was in
compliance with as of December 31, 2000.
In August 2000, the Company announced that its Board of Directors
authorized the Company to purchase up to 1,000,000 shares of its Common
Stock. In making the
determination of whether or not to buy shares of Common Stock,
management thoroughly analyzes the yield on such a buyback versus the
yield from alternative uses of capital.
Management also considers that when borrowing under the Line to
purchase Common Stock, the Company’s availability under the Line is
permanently impaired. To date, the Company has determined that a Common Stock
buyback is not in the best interest of its shareholders.
On December 18, 2000, the Company
completed an interest rate swap on $50,000 of its outstanding variable
rate debt under the Line. This
transaction effectively replaced the Company’s variable interest rate
based on 30-day LIBOR on $50,000 of outstanding debt under the Line with
a fixed interest rate of 5.915% until December 18, 2002. The Line’s interest rate spread is currently 1.45%, equaling a
fixed rate of 7.365% on $50,000 until December 18, 2002.
The Company had $68,872 in debt at
December 31, 2000 that was subject to a fixed interest rate and fixed
monthly payments with GE Capital Corporation. This debt, a ten-year loan with a 25-year amortization period
carries an interest rate of 7.375% for the first 10 years. All unpaid principal and interest are due on December 1, 2008.
The GE Capital loan is collateralized with 14 of the Company’s
Current Hotels.
The Company intends to continue to seek additional mezzanine loan
opportunities and to acquire and develop additional hotel properties
that meet its investment criteria and is continually evaluating such
opportunities. It is
expected that future mezzanine loans and hotel acquisitions will be
financed, in whole or in part, from additional follow-on offerings, from
borrowings under the Line, from joint venture agreements, from the net
sale proceeds of hotel properties and/or from the issuance of other debt
or equity securities. There
can be no assurances that the Company will make any further mezzanine
loans or any investment in additional hotel properties, or that any
hotel development will be undertaken, or if commenced, that it will be
completed on schedule or on budget. Further, there can be no assurances that the Company will be able
to obtain any additional financing.
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Recently
Issued Accounting Standard
In June 1998, Financial
Accounting Standard Board issued SFAS No. 133 (“SFAS 133”),
“Accounting for Derivative Instruments and Hedging Activities,” as
amended, which is required to be adopted in years beginning after June
15, 2000. The Company
adopted SFAS 133 effective January 1, 2001. SFAS 133 requires the Company to recognize all derivatives on
the balance sheet at fair value. If
the derivative is a hedge, depending on the nature of the hedge, changes
in the fair value of the derivative will either be offset against the
change in fair value of the hedged asset, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Any ineffective portion of a derivative’s change in fair value
will be immediately recognized in earnings and any derivatives that are
not hedges must be adjusted to fair value through earnings. Based on the Company’s derivative positions at December 31,
2000, it will report a liability of $245 for the fair value of its
interest rate swap and a corresponding offset in other comprehensive
income upon its adoption of SFAS 133 effective January 1, 2001. The Company will also, upon adoption, report a reduction in an
asset of $23 for the fair value of its interest rate cap and a
corresponding offset in the Consolidated Statement of Income.
Seasonality
The Company’s operations
historically have been seasonal in nature, reflecting higher REVPAR
during the second and third quarters. This seasonality and the structure of the Percentage Leases,
which provide for a higher percentage of room revenues above the minimum
equal quarterly levels to be paid as Percentage Rent, can be expected to
cause fluctuations in the Company's receipt of quarterly lease revenue
under the Percentage Leases. SAB
101, which requires that a lessor not recognize contingent rental income
until annual specified hurdles
have been achieved by the lessee, effectively defers recognition by the
Company of a significant portion of percentage lease revenue from the
first and second quarters, to the third and fourth quarters of the
calendar year. SAB
101 has no impact on the Company’s FFO, or its interim or annual cash
flow from its third party lessees, and therefore, on its ability to pay
dividends (see Note 2 to the Company’s consolidated financial
statements).
Forward
Looking Statements
This report contains certain
“forward looking” statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. You
can identify these statements by use of words like “may,”
“will,” “expect,” “anticipate,” “estimate,” or
“continue” or similar expressions. These statements represent the Company’s judgment and are
subject to risks and uncertainties that could cause actual operating
results to differ materially from those expressed or implied in the
forward looking statements, including but not limited to the following
risks: properties held for sale will not sell, financing risks,
development risks including the risks of construction delays and cost
overruns, lower than expected occupancy and average daily rates,
non-issuance or delay of issuance of governmental permits, zoning
restrictions, the increase of development costs in connection with
projects that are not pursued to completion, non-payment of mezzanine
loans, and other risk factors described in Exhibit 99.1 attached to this
report.
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