PART I
Item 1.
Business
Organization
MHI Hospitality Corporation (the Company) is a self-advised real estate investment trust (REIT) that was formed in August 2004 to own and manage a portfolio of full-service upper up-scale,
up-scale and mid-scale hotels located in primary and secondary markets in the Mid-Atlantic, Midwest and Southeastern United States. On December 21, 2004, we successfully completed our initial public offering and elected to be treated as a
self-advised real estate investment trust (REIT) for federal income tax purposes. We conduct our business through MHI Hospitality, L.P., our operating partnership, of which we are the general partner. Our Company owns approximately 64.9%
of the partnership units in our operating partnership. Limited partners (including our officers and certain of our directors) own the remaining operating partnership units.
As of March 14, 2008, our portfolio consists of eight full-service upper up-scale and mid-scale hotels with 1,971 rooms. Six hotels, with a total of
1,537 rooms, operate under well-known brands such as Hilton, Crowne Plaza and Holiday Inn. Two properties are under development. The first property, a 186-room full-service upper up-scale hotel is expected to re-open as a Sheraton in April 2008. The
other property, a 250-room full-service upper up-scale hotel is expected to re-open as a Crowne Plaza in the first quarter 2009. We own a minority interest in a Crowne Plaza hotel through a joint venture as well as leasehold interests in the
commercial spaces of the Shell Island Resort, a condominium resort property.
Our initial public offering consisted of the sale of
6,000,000 shares of common stock at a price of $10.00 per share resulting in gross proceeds of $60.0 million and net proceeds (after deducting underwriting discounts and offering expenses) of approximately $54.8 million. On January 19, 2005,
the Company sold an additional 700,000 shares of common stock at a price of $9.30 per share, net of the underwriting discount, as a result of the exercise of the underwriters over-allotment option, resulting in additional net proceeds of
approximately $6.5 million. The total net proceeds from the initial public offering and the exercise of the underwriters over-allotment option were approximately $61.3 million.
In order for us to qualify as a REIT, we cannot directly manage or operate our hotels. Therefore, our hotel properties are leased to MHI Hospitality TRS,
LLC, our TRS Lessee, which in turn has engaged MHI Hotels Services, LLC (MHI Hotels Services), an eligible independent management company, to manage our hotels. Our TRS Lessee is a wholly owned subsidiary of MHI Hospitality TRS Holding,
Inc. (MHI Holding, and collectively, MHI TRS). MHI TRS is a taxable REIT subsidiary for federal income tax purposes.
Our corporate office is located at 4801 Courthouse Street, Suite 201, Williamsburg, Virginia 23188. Our telephone number is (757) 229-5648.
Our Properties
In connection with our initial public offering, the Company acquired six hotel properties for aggregate
consideration of approximately $15.0 million in cash, 3,817,036 units of interest in our operating partnership and the assumption of approximately $50.8 million in debt. The six initial hotel properties, the Hilton Philadelphia Airport, the Holiday
Inn Brownstone, the Holiday Inn Downtown Williamsburg, the Hilton Wilmington Riverside, the Hilton Savannah DeSoto and the Holiday Inn Laurel West (formerly the Best Western Maryland Inn), are located in Pennsylvania, Maryland, Georgia, Virginia and
North Carolina. On July 22, 2005, we acquired our seventh hotel, the Crowne Plaza Jacksonville (formerly, the Hilton Jacksonville Riverfront) located in Jacksonville, Florida, for $22.0 million.
During 2006, we sold the Holiday Inn Downtown Williamsburg for $4.75 million. We also purchased the Louisville Ramada Riverfront Inn located in
Jeffersonville, Indiana for approximately $7.7 million including transfer costs and are conducting extensive renovations with plans to re-open the property in April 2008 as the Sheraton Louisville Riverside.
4
During 2007, through our joint venture with The Carlyle Group (Carlyle), we acquired a 25%
indirect, non-controlling interest in the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida for approximately $75.8 million including transfer costs. We also purchased a hotel formerly known as the Tampa
Clarion Hotel in Tampa, Florida for approximately $13.8 million including transfer costs and are conducting extensive renovation with plans to re-open the property in the first quarter 2009 as the Crowne Plaza Tampa Westshore.
The Company also owns two leasehold interests in the Shell Island Resort, a 160-unit condominium resort property in Wrightsville Beach, North Carolina,
which were purchased for $3.5 million with the proceeds of the initial public offering. Our operating partnership entered into sublease arrangements to sublease our entire leasehold interests in the property at Shell Island to affiliates of our
management company. The management company operates the property as a hotel and manages a rental program for the benefit of the condominium unit owners. Our operating partnership receives fixed annual rent and incurs annual lease expenses in
connection with the subleases of such property.
See Item 2 of this Form 10-K for additional detail on our properties.
Our Strategy
We intend to enhance stockholder value
by pursuing attractive lodging investments, whereby we can achieve superior risk-adjusted returns. Our core turnaround growth strategy involves purchasing, renovating and up-branding under-performing, full-service hotels. We believe that
under-performing hotels that are poorly managed, that suffer from significant deferred maintenance and capital improvement, and that are not properly positioned in their respective markets can be acquired at attractive priceswell below the
cost of new construction or performing hotels. By acquiring such properties, we believe we can create significant value and superior, risk-adjusted returns.
Investment Strategy.
We intend to focus our investment activities on the following types of opportunities that involve the acquisition, renovation and up-branding of under-performing or functionally obsolete
hotels with the goal of achieving a total investment that is substantially less than replacement cost of a hotel or the acquisition cost of a market performing hotel:
|
|
|
Deep Turn Opportunity: The acquisition of a hotel that is closed or functionally obsolete and requires a restructuring of both the business components of the
operations as well as the physical plant of the hotel, including extensive renovation of the building, furniture, fixtures and equipment.
|
|
|
|
Shallow Turn Opportunity: The acquisition of an under-performing but structurally sound hotel that requires moderate renovation to re-establish the hotel in its
market.
|
|
|
|
Up-branding Opportunity: The acquisition of properties that can be upgraded physically and enhanced operationally to qualify for what we view as higher quality
franchise brands including Hilton, Doubletree, Crowne Plaza, Holiday Inn, Westin, Sheraton and Intercontinental. We refer to this as our up-branding strategy. This up-branding strategy may also be a component of our deep and shallow turn
opportunities described above.
|
By pursuing deep and shallow turn opportunities and implementing our up-branding
strategy, we hope to improve revenue and cash flow and increase the long-term value of the hotels we acquire.
Acquisition Strategy.
The acquisition strategy for our portfolio focuses on the pursuit of opportunities that (i) are in identified geographic growth markets, (ii) represent full-service mid-scale to upper upscale hotel properties, and
(iii) have significant barriers to entry for new product delivery. Our acquisition strategy is further detailed below:
|
|
|
Geographic Growth Markets: We focus on the Southeastern United States and Mid-Atlantic regions. Our management team has a long history of operating in
these geographic markets and remains confident in the long-term growth potential associated with this part of the United States. These
|
5
|
markets are generally characterized by population growth, economic expansion, growth in new businesses, and growth in the resort, recreation, and leisure
segments. We will continue to focus on these markets and will investigate other markets for acquisition objectives if we believe new markets provide the same long-term growth prospects. We will also review other opportunities in selected markets in
close proximity to the Southeastern and Mid-Atlantic regions of the United States and may expand to markets outside these regions if a portfolio of properties is acquired and includes properties outside the Southeastern and Mid-Atlantic regions.
|
|
|
|
Full-Service Hotels: We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall under the mid-scale to upper up-scale
categories, as characterized by such brands as Hilton, Crowne Plaza and Holiday Inn. We do not own economy branded hotels. We believe that full-service hotels, with mid-scale to upper up-scale brands, that have successfully benefited from our
turnaround strategy, offer our investors the highest quality returns on invested capital.
|
|
|
|
Barriers to Entry: We focus on hotels in prime locations that carry barriers to entry to new hotels. Our acquisition strategy focuses on geographic brand
management. We hope to ensure that our acquisitions will benefit from the licensing of brands that provide us with certain exclusive rights which protect the value of our acquisition by prohibiting or limiting the licensing of the same brand and/or
other brands that use the same reservation systems.
|
Investment Vehicles.
In pursuit of our investment strategy we
will employ various traditional and non-traditional investment vehicles:
|
|
|
Direct Purchase Opportunity: Our traditional investment strategy is to acquire direct ownership interests in properties that meet our investment criteria, including
opportunities that involve full-service mid-scale to upper up-scale properties in identified geographic growth markets that have significant barriers to entry for new product delivery. Such properties may or may not be acquired subject
to a mortgage by the seller or third-party.
|
|
|
|
Condominium Investment Opportunity: We may also identify opportunities to acquire an interest in an operating or under-performing hotel or apartment asset that is
being converted to a condominium hotel. Such an investment may involve one or more developers who would renovate the property, complete a condominium conversion, and sell the condominium units, after which we, through an affiliate, would purchase
the commercial spaces and operate them as a hotel. Such an investment is an extension of our up-branding strategy whereby we would retain the services of MHI Hotels Services, our management company, to operate the hotel and manage the rental units,
and would seek a well-known national hotel franchise.
|
|
|
|
Distressed Debt Opportunities: In sourcing acquisitions for our core turnaround growth strategy, we may pursue investments in debt instruments that are
collateralized by under-performing hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return
to our stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may
be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures.
|
|
|
|
Joint Venture/Mezzanine Lending Opportunities: We may, from time to time, undertake a significant renovation and rehabilitation project that we characterize as a
Deep Turn Opportunity. In such cases, we may acquire a functionally obsolete hotel whose renovation may be very lengthy and require significant capital. In these projects, we may choose to structure such acquisitions in a joint venture,
or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income commonly referred to as the negative carry associated with such extensive renovation programs. We will not pursue joint venture or
mezzanine programs in which we would become a de facto lender to the real estate community.
|
6
Portfolio Management Strategy.
Our core strategy for our portfolio is intended to create value for
stockholders by renovating, rehabilitating, repositioning, and up-branding hotel properties. Once these assets have benefited from this turnaround strategy, they become part of our core portfolio. We believe we can optimize performance
within the portfolio by superior management practices and by timely and recurring capital expenditures to maintain and enhance the physical property.
In addition, we will seek to leverage our portfolio management expertise by investing in portfolios of hotel properties together with institutional investors with whom we would enter into a joint venture. We expect
that our investment into any such venture will not exceed 25% of the equity of such entity. Such portfolios may or may not include properties that fit with our acquisition strategy. However, we believe the portfolio management fee that such an
arrangement would generate together with returns from well-positioned and well-managed properties offers the prospect of additional value and superior, risk-adjusted returns for our stockholders.
In April 2007, we entered into a program agreement and related operating agreements with Carlyle that provide for the formation of entities to be jointly
owned by us and Carlyle, which will source, underwrite, acquire, develop and operate hotel assets and/or hotel portfolios. Under these agreements, we will offer the joint venture the first right to acquire potential investment opportunities
identified by us with total capitalization requirements in excess of $30.0 million. Carlyle has agreed to commit $100.0 million of equity capital to the joint venture through April 2010. Carlyle will fund up to 90% of the equity of an acquisition,
and we will provide between 10% and 25%.
We have engaged MHI Hotels Services, an eligible independent management company, to operate our
hotels. MHI Hotels Services and its predecessors have been in continuous operation since 1957. By using MHI Hotels Services as our manager, we intend to capitalize on their extensive experience to seek above-average operating results. MHI Hotels
Services operates in markets where we have had a presence for many years and its operations are driven by a focused sales, marketing and food and beverage strategy that is critical to the success of a full-service hotel.
Asset Disposition Strategy.
When a property no longer fits with our investment objectives, we will pursue traditional and non-traditional means of
disposal:
|
|
|
Direct Sale: Most commonly we will dispose of properties through a direct sale of the property for cash so that our investment capital can be redeployed according
to the investment strategies outlined above.
|
|
|
|
Performing Hotel Opportunity/Capital Recycling: In certain circumstances, we may sell an existing hotel asset and replace such assets with a performing hotel that
may not otherwise meet our traditional investment criteria. Under this asset disposition strategy, we will seek to purchase a performing hotel in connection with the requirements of a tax-free exchange. Such a strategy may be deployed in order to
mitigate the tax consequences to the Company that a direct sale might cause. We may target for acquisition a performing hotel that, traditionally, is a hotel operating at or above market fair share in order to execute a tax-free exchange. In the
event we elect to purchase a performing hotel, we would seek to maintain a positive contribution to our earnings.
|
Our Principal
Agreements
Strategic Alliance Agreement
MHI Hotels Services is currently the management company for each of our hotels and our leased condominium resort property.
On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services pursuant to which (i) MHI Hotels Services agrees to refer to us (on an exclusive basis) hotel
acquisition opportunities in the United States presented to MHI Hotel Services, and (ii) unless a majority of our independent
7
directors in good faith concludes for valid business reasons that another management company should manage a hotel owned by us, we agree to offer MHI Hotels
Services or its subsidiaries the right to manage hotel properties that we acquire in the United States.
In addition, during the term of
the agreement, MHI Hotels Services has the right to nominate one person for election to our board of directors at our annual meeting of stockholders, subject to the approval of such nominee by our Nominating, Corporate Governance and Compensation
Committee for so long as certain of our officers and directors, Andrew Sims, Kim Sims, and Christopher Sims, and their families and affiliates, hold, in the aggregate, not less than 1.5 million units or shares of our common stock.
Joint Venture Program Agreement
On April 26, 2007, we entered into a program agreement and related operating agreements with CRP/MHI Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P., and The Carlyle Group. The agreements provide for the formation of
entities to be jointly owned by Carlyle and us, which will source, underwrite, acquire, develop and operate hotel assets and/or hotel portfolios. Under the agreement, we will offer the joint venture the first right to acquire potential investment
opportunities identified by the Company with total capitalization requirements in excess of $30.0 million. Carlyle has agreed to commit $100.0 million of equity capital to the joint venture through April 2010. Carlyle will fund up to 90% of the
equity of an acquisition, and we will provide between 10% and 25%.
We will receive an asset management fee of 1.5% of the gross revenues
of the hotels owned by the venture. In addition, we will have a first right of offer with respect to any investment disposed by the joint venture. It is expected that hotels acquired by the joint venture will be managed by MHI Hotels Services.
Lease Agreements
In
order for us to qualify as a REIT, neither our company nor the operating partnership or its subsidiaries can operate our hotels directly. Our hotels are leased to our TRS Lessee, which has engaged MHI Hotels Services to manage the hotels. Each lease
for the hotels will have a non-cancelable term of five years, subject to earlier termination upon the occurrence of certain contingencies described in the lease.
During the term of each lease, the TRS Lessee will be obligated to pay a fixed annual base rent plus a percentage rent and certain other additional charges. Base rent will accrue and be paid monthly. Percentage rent
is calculated by multiplying fixed percentages by gross room revenues, in excess of certain threshold amounts and other revenues for each of the initial hotels and will be paid quarterly.
Management Agreement
Pursuant to the
terms of a management agreement, we, through our TRS Lessee, have engaged MHI Hotels Services as the property manager for our existing hotel portfolio. Except as described below, we intend to offer MHI Hotels Services the opportunity to manage any
future hotels that we lease to our TRS Lessee and have already engaged MHI Hotels Services as the property manager of the Sheraton Louisville Riverside which we anticipate will re-open April 2008. The joint venture entity which leases the Crowne
Plaza Hollywood Beach Resort has also entered into a management agreement with MHI Hotels Services on terms that vary from those described below. The following terms apply only to those hotels in our existing portfolio that are 100% owned by
subsidiaries of our operating partnership.
Term
The management agreement with MHI Hotels Services has an initial term of 10 years for each of the initial hotels and a term of 10 years for each
hotel we directly acquire subsequent to our initial public offering. The term of the management agreement with respect to each hotel may be renewed by MHI Hotels Services, upon the
8
mutual agreement of MHI Hotels Services and our TRS lessee, subject to the satisfaction of certain performance tests, for two successive periods of five
years each, provided that at the time the option to renew is exercised, MHI Hotels Services is not then in default under the management agreement. If at the time of the exercise of any renewal period MHI Hotels Services is in default, then the
exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then our TRS Lessee may terminate the management agreement. If MHI Hotels Services desires to exercise any option to renew,
it must give our TRS Lessee written notice of its election to renew the management agreement no less than 90 days before the expiration of the then current term of the management agreement.
Any amendment, supplement or modification of the management agreement must be in writing signed by all parties and approved by a majority of our
independent directors.
Amounts Payable under the Management Agreement
MHI Hotels Services receives a base management fee, and if the hotels exceed certain financial thresholds, an additional incentive management fee for the
management of our hotels.
The base management fee for each of our initial hotels and for any subsequent hotels we directly acquire will be
a percentage of the gross revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for each of our hotels is as follows:
Hotel Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
Holiday Inn Downtown Williamsburg
|
|
2.0
|
%
|
|
2.5
|
%
|
|
N/A
|
|
|
N/A
|
|
Hilton Savannah DeSoto
|
|
2.0
|
%
|
|
2.5
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Hilton Wilmington Riverside
|
|
2.0
|
%
|
|
2.5
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Hilton Philadelphia Airport
|
|
2.0
|
%
|
|
2.5
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Holiday Inn Laurel West
|
|
2.0
|
%
|
|
2.5
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Holiday Inn Brownstone
|
|
2.0
|
%
|
|
2.5
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Crowne Plaza Jacksonville
|
|
2.0
|
%
|
|
2.0
|
%
|
|
2.5
|
%
|
|
3.0
|
%
|
Sheraton Louisville Riverside
(1)
(substituted for the Holiday Inn Downtown Williamsburg)
|
|
N/A
|
|
|
2.5
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
(1)
|
The property is anticipated to re-open as the Sheraton Louisville Riverside in April 2008.
|
The base management fee for a future hotel first leased other than on the first day of the fiscal year will be 2.0% for the partial year such hotel is
first leased and for the first full fiscal year such hotel is managed. There is no fee cap on the base management fee.
Subsequently
Acquired Hotel Properties
|
|
|
|
First full calendar year and any partial calendar year
|
|
2.0
|
%
|
Second calendar year
|
|
2.5
|
%
|
Third calendar year and thereafter
|
|
3.0
|
%
|
The incentive management fee, if any, will be due annually in arrears within 90 days of the end of
the fiscal year and will be equal to 10% of the amount by which the gross operating profit of the hotels on an aggregate basis for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The
incentive fee may not exceed 0.25% of the aggregate gross revenue of all of the hotels included in the incentive fee calculation for the year in which the incentive fee is earned. The calculation of the incentive fee will not include results of
hotels for the fiscal year in which they are initially leased, or for the fiscal year in which they are sold, and newly acquired or leased hotels will be included in the calculation beginning in the second full
9
year such hotel is managed. In fiscal year 2007, only our Savannah, Philadelphia and Jacksonville properties qualified for inclusion in the incentive
management fee calculation. In fiscal year 2006, all of our properties qualified for inclusion in the incentive management fee calculation with the exception of the Holiday Inn Downtown Williamsburg and the Crowne Plaza Jacksonville. In fiscal year
2005, all of our properties qualified for inclusion in the incentive management fee calculation with the exception of the Holiday Inn Laurel West and the Crowne Plaza Jacksonville.
Early Termination
The
management agreement may be terminated with respect to one or more of the hotels earlier than the stated term, if certain events occur, including:
|
|
|
a sale of a hotel or the substitution of a newly acquired hotel for an existing hotel;
|
|
|
|
the failure of MHI Hotels Services to satisfy certain performance standards with respect to any of the future hotels or with respect to the six initial hotels after
the expiration of the initial 10-year term;
|
|
|
|
in the event of a casualty to, condemnation of, or force majeure involving a hotel;
|
|
|
|
or upon a default by MHI Hotels Services or us that is not cured prior to the expiration of any applicable cure periods.
|
Termination Fees
In certain
cases of early termination of the management agreement with respect to one or more of the hotels, we must pay MHI Hotels Services a termination fee, plus any amounts otherwise due to MHI Hotels Services pursuant to the terms of the management
agreement. We will be obligated to pay termination fees in such circumstances provided that MHI Hotels Services is not then in default, subject to certain cure and grace periods.
New Acquisitions; Strategic Alliance Agreement
Pursuant to the strategic alliance agreement with MHI Hotels Services, we have agreed to engage MHI Hotels Services for the management of any future hotels unless a majority of our independent directors in good faith
concludes, for valid business reasons, that another management company should manage these hotels. If the management agreement terminates as to all of the hotels covered in connection with a default under the management agreement, the strategic
alliance agreement will also terminate.
Franchise Agreements
Our hotels operate under franchise licenses from national hotel companies.
We anticipate that most of the additional hotels we acquire will be operated under franchise licenses. We believe that the publics perception of quality associated with a franchisor is an important feature in
the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality
standards and centralized reservation systems.
Our TRS Lessee holds the franchise licenses for our wholly-owned hotels. MHI Hotels
Services must operate each of our hotels it manages in accordance with and pursuant to the terms of the franchise agreement for the hotel.
The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses, the franchisee must
comply with the franchisors standards and requirements with respect to:
|
|
|
training of operational personnel;
|
10
|
|
|
maintaining specified insurance;
|
|
|
|
the types of services and products ancillary to guest room services that may be provided;
|
|
|
|
marketing techniques including print media, billboards, and promotions standards; and
|
|
|
|
the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.
|
Additionally, as the franchisee, our TRS Lessee will be required to pay the franchise fees described below.
The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties:
|
|
|
|
|
|
|
|
|
|
|
|
Franchise Fee
(1)
|
|
|
Marketing/Reservation
Fee
(1)
|
|
|
Expiration
Date
|
|
Hilton Philadelphia Airport
|
|
5.0
|
%
|
|
3.5
|
%
|
|
11/30/14
|
|
Holiday Inn Brownstone
|
|
5.0
|
%
|
|
2.5
|
%
|
|
03/10/11
|
|
Hilton Wilmington Riverside
|
|
5.0
|
%
|
|
3.5
|
%
|
|
03/31/18
|
|
Hilton Savannah DeSoto
|
|
5.0
|
%
|
|
3.5
|
%
|
|
07/31/17
|
|
Crowne Plaza Jacksonville
|
|
5.0
|
%
|
|
3.5
|
%
|
|
04/01/16
|
|
Holiday Inn Laurel West
|
|
5.0
|
%
|
|
2.5
|
%
|
|
10/05/16
|
|
Sheraton Louisville Riverside
(2)
|
|
5.0
|
%
|
|
3.5
|
%
|
|
(2
|
)
|
Crowne Plaza Tampa Westshore
(3)
|
|
5.0
|
%
|
|
3.5
|
%
|
|
(3
|
)
|
Crowne Plaza Hampton Marina
(4)
|
|
5.0
|
%
|
|
3.5
|
%
|
|
(4
|
)
|
(1)
|
Percentage of room revenues payable to the franchisor.
|
(2)
|
A 15-year Sheraton license agreement has been approved for the Sheraton Louisville Riverside. A capital improvement plan mandated by Sheraton is scheduled for completion in the
second quarter 2008 at which time the property will begin to operate as a Sheraton.
|
(3)
|
A 10-year Crowne Plaza license agreement has been approved for the Crowne Plaza Tampa Westshore. A capital improvement plan mandated by InterContinental Hotels Group is scheduled
for completion in the first quarter 2009 at which time the property will begin to operate as a Crowne Plaza.
|
(4)
|
A 10-year Crowne Plaza license agreement has been approved for the Crowne Plaza Hampton Marina which, on January 23, 2008, we entered into definitive agreement to purchase and
upon which we expect to close in the second quarter 2008, subject to customary closing conditions. We anticipate that InterContinental Hotels Group will mandate a capital improvement plan and that upon completion of certain improvements we will
begin to operate as a Crowne Plaza.
|
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. To maintain our qualification as a REIT, we must meet a number of organizational and operational requirements,
including a requirement that we currently distribute at least 90% of our taxable income (excluding net capital gains) to our stockholders. It is our current intention to adhere to these requirements and maintain our qualification for taxation as a
REIT. As a REIT, we generally will not be subject to federal corporate income tax on that portion of our net income that is distributed to stockholders. If we fail to qualify for taxation as a REIT in any taxable year, and no relief provision
applies, we will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and we would be disqualified from re-electing treatment as a REIT until the fifth calendar year after the year in which
we failed to qualify as a REIT. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. In addition,
taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
11
Environmental Matters
In connection with the ownership and operation of the hotels, we are subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or
previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the
owners ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such
property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of
such substances may adversely affect the owners ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the hotels, we may be potentially liable for such costs.
We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and
regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not received written notice from any governmental authority of any material
noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present hotel properties.
Employees
As of March 14, 2008, we employed ten persons, six of whom work at our corporate office in Williamsburg,
Virginia and four of whom work in our offices in Greenbelt, Maryland. All persons employed in the day-to-day operations of the hotels are employees of MHI Hotels Services, the management company engaged by our TRS Lessee to operate such hotels.
Available Information
We maintain an
Internet site, http://www.mhihospitality.com, which contains additional information concerning MHI Hospitality Corporation. We make available free of charge through our Internet site all our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and other reports filed with the Securities and Exchange Commission as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We
have also posted on this website our Code of Business Conduct and the charters of our Audit and Nominating, Corporate Governance and Compensation Committees of our board of directors. We intend to disclose on our website any changes to, or waivers
from, our Code of Business Conduct. Information on our Internet site is neither part of nor incorporated into this Form 10-K.
12
Item 1A.
Risk Factors
The risks discussed herein can adversely affect our business, liquidity, operating
results, and financial condition. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, and
financial condition.
Risks Related to Our Business and Properties
Failure of the lodging industry to exhibit improvement would adversely affect our business plan and cause a decline in the value of our common stock.
A substantial part of our business plan is based on our belief that the lodging markets in which we invest are experiencing and/or will experience stable
or improving economic fundamentals. However, there can be no assurance that lodging industry fundamentals will improve. In the event conditions in the industry or in the lodging markets in which we invest do not improve, our cash available for
distribution would be less than anticipated.
Conflicts of interest could result in our executive officers and certain of our directors acting in a
manner other than in our stockholders best interest.
Conflicts of interest relating to MHI Hotels Services, the entity
that manages the properties, and the terms of its management agreement may lead to management decisions that are not in the stockholders best interest.
Conflicts of interest relating to MHI Hotels Services may lead to management decisions that are not in the stockholders best interest. MHI Hotels Services is owned and controlled by members of the Sims family,
including Andrew Sims, our chairman, president and chief executive officer, Kim Sims and Christopher Sims, who serve on our board of directors, William Zaiser, our executive vice president and chief financial officer, and Steven Smith who is the
Executive Vice President of MHI Hotels Services. MHI Hotels Services manages our hotel properties. In addition, unless a majority of independent directors concludes otherwise, MHI Hotels Services has a right of first offer to manage hotels we
acquire in the future, subject to certain exceptions, and receives substantial management fees based on the revenues and operating profit of our hotels. Our management agreement with MHI Hotels Services, including the financial terms thereof, was
not negotiated on an arms-length basis and may be less favorable to us than we could have obtained from third parties.
Our
management agreement establishes the terms of MHI Hotels Services management of our hotels. Under certain circumstances, if we terminate our management agreement as to one of the hotels, we will be required to pay MHI Hotels Services a
termination fee. If we were to terminate the management agreement with respect to all our hotels in connection with a sale of those hotels, the aggregate termination fee would be approximately $13.0 million. As majority owners of MHI Hotels
Services, which would receive any management and management termination fees payable by us under the management agreement, Andrew Sims, William Zaiser, Kim Sims and Christopher Sims may influence our decisions to sell a hotel or acquire or develop a
hotel when it is not in the best interests of our stockholders to do so. In addition, Andrew Sims and William Zaiser will have conflicts of interest with respect to decisions to enforce provisions of the management agreement, including any
termination thereof.
There can be no assurance that provisions in our bylaws will always be successful in mitigating conflicts of
interest.
Under our bylaws, a committee consisting of only independent directors must approve any transaction between us and MHI Hotels
Services or its affiliates or any interested director. However, there can be no assurance that these policies always will be successful in mitigating such conflicts, and decisions could be made that might not fully reflect the interests of all of
our stockholders.
13
Certain of our officers and directors hold units in our operating partnership and may seek to avoid
adverse tax consequences, which could result from transactions that would otherwise benefit our stockholders.
Holders of units,
including members of our management team, may suffer adverse tax consequences upon our sale or refinancing of certain properties. Therefore, holders of units, including Andrew Sims, William Zaiser, Kim Sims, Christopher Sims, and Edward Stein may
have different objectives than holders of our common stock regarding the appropriate pricing and timing of a propertys sale, or the timing and amount of a propertys refinancing. These officers and directors may influence us not to sell
or refinance certain properties, even if such sale or refinancing might be financially advantageous to our stockholders, or they may influence us to enter into tax-deferred exchanges with the proceeds of such sales when such a reinvestment might not
otherwise be in our best interest. Our tax indemnification obligations, which were not the result of arms-length negotiations and which apply in the event that we sell certain properties, could subject us to liability, which, as of
December 31, 2007, were estimated to be $46.0 million, and limit our operating flexibility and reduce our returns on our investments.
Contractual obligations require us to nominate affiliates of the Sims family as two of our directors.
Pursuant to a
strategic alliance agreement we entered into in December 2004, MHI Hotels Services has a contractual right to nominate one person for election as a director, to our Companys Board of Directors, and, pursuant to his employment agreement with
us, Andrew Sims has the right to be nominated as a director. These provisions in effect provide the Sims family and their affiliates the right to nominate two of our directors. As discussed herein, such persons have conflicts of interest with our
company.
Our executive officers and certain of our directors may experience conflicts of interest in connection with their ownership interests in
our operating partnership.
Our executive officers and certain of our directors, which include Andrew Sims, Williams Zaiser, Kim
Sims, Christopher Sims and Ed Stein, may experience conflicts of interest relating to their ownership interests in our operating partnership. These individuals, together with their affiliates owned as of December 31, 2007, in the aggregate,
approximately 21.68% of the outstanding units in our operating partnership. Conflicts may arise as a result of these persons ownership interests as limited partners diverge from the interests of MHI Hospitality Corporation, particularly with
regard to transactions such as sales of assets or the repayment of indebtedness, that could be in the best interests of MHI Hospitality Corporation and its stockholders, but may have adverse tax consequences to the limited partners in our operating
partnership.
Our tax indemnification obligations, which were not the result of arms-length negotiations and which apply in the event that we
sell certain properties, could subject us to liability, which we currently estimate to be approximately $46.0 million, and limit our operating flexibility and reduce our returns on our investments.
If we dispose of certain of our initial hotels, we would be obligated to indemnify the original contributors (including their permitted transferees and
persons who are taxable on the income of a contributor or permitted transferee) against certain tax consequences of the sale pursuant to the tax indemnity agreements, the terms of which were not the result of arms-length negotiations. These
original contributors include Andrew Sims, our chairman, president and chief executive officer, William Zaiser, our executive vice president and chief financial officer, and Kim and Christopher Sims, two of our directors. We have agreed to pay a
certain amount of the contributors tax liability with respect to gain allocated to the contributor under Section 704(c) of the Internal Revenue Code if we dispose of a property contributed by the contributor in a taxable transaction
during a protected period, which continues until the earlier of:
|
|
|
10 years after the contribution of such property; or
|
|
|
|
the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of
property to our operating partnership.
|
14
This tax indemnity will be equal to a certain amount of the federal and state income tax liability the
contributor incurs with respect to the gain allocated to the contributor upon such sale based on a sliding scale percentage. Specifically, we will indemnify the contributors for 100% of their tax liability during the first five years after
contribution, 50% during the sixth year, 40% during the seventh year, 30% during the eighth year, 20% during the ninth year and 10% during the tenth year. The terms of the tax indemnity agreements also require us to gross up the tax indemnity
payment for the amount of income taxes due as a result of the tax indemnity payment. While the tax indemnities do not contractually limit our ability to conduct our business in the way we desire, we are less likely to sell any of the contributed
properties in a taxable transaction during the protected period because of the significant tax liability we would have to the contributors. Instead, we would either hold the property for the entire protected period, or at least the first five years,
or seek to transfer the property in a tax-deferred like-kind exchange.
As three years have elapsed since the properties were contributed,
if we were to sell during the next two years in a taxable transaction the five initial hotels that were contributed to us in our initial public offering in exchange for units immediately after the closing of our initial public offering, our
estimated total tax indemnification obligation to our indemnified contributors, including the gross-up payment, would be approximately $46.0 million.
Our agreements with MHI Hotels Services and its affiliates, including the contribution agreements, management agreement, strategic alliance agreement, subleases, partnership agreement of our operating partnership and employment
agreements, were not negotiated on an arms length basis and may be less favorable to us than we could have obtained from third parties.
In connection with our initial public offering, we entered into various agreements with MHI Hotels Services and its affiliates, including contribution agreements, a management agreement, a strategic alliance
agreement, subleases, the partnership agreement of our operating partnership and employment agreements. The terms of each of these agreements were determined by our management team who had conflicts of interest as described above and ownership
interests in MHI Hotels Services and its affiliates. The terms of each of these agreements may be less favorable to us than we could have obtained from third parties.
Unanticipated expenses and insufficient demand for hotels we acquire in new geographic markets could adversely affect our profitability and our ability to make distributions to our stockholders.
As part of our business plan, we may develop or acquire hotels in geographic areas in which our management may have little or no
operating experience and in which potential customers may not be familiar with our franchise brands. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially
greater than those incurred in other areas. These hotels may attract fewer customers than expected and we may choose to increase spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and
insufficient demand at a new hotel property, therefore, could adversely affect our profitability and our ability to make distributions to our stockholders.
We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our returns are dependent on the management of our hotels
by MHI Hotels Services.
Under the terms of our management agreement with MHI Hotels Services and the REIT qualification rules, our
ability to participate in operating decisions regarding the hotels is limited. We will depend on MHI Hotels Services to operate our hotels as provided in the management agreement. We do not have the authority to require any hotel to be operated in a
particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory
occupancy rates, revenue per available room, which we refer to as
15
RevPAR, and average daily rates, we may not be able to force MHI Hotels Services to change its method of operation of our hotels. Additionally, in the event
that we need to replace MHI Hotels Services or any other management companies in the future, we may be required by the terms of the management agreement to pay substantial termination fees and may experience significant disruptions at the affected
hotels.
Our ability to make distributions to our stockholders is subject to fluctuations in our financial performance, operating results and capital
improvements requirements.
As a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding net capital
gains, each year to our stockholders. In the event of future downturns in our operating results and financial performance or unanticipated capital improvements to our hotels, including capital improvements, which may be required by our franchisors,
we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our financial performance, debt service
obligations and debt covenants, and capital expenditure requirements. We cannot assure you that we will continue to generate sufficient cash to fund distributions.
Among the factors which could adversely affect the results of our operations and our distributions to stockholders are the failure of our TRS Lessee to make required rent payments because of reduced net operating
profits or operating losses, increased debt service requirements and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels. Among the factors which could reduce the net operating profits of our
TRS Lessee are decreases in hotel revenues and increases in hotel operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel rooms and decreased demand for hotel rooms. These
factors can reduce both occupancy and room rates at our hotels.
We lease all of our hotels to our TRS Lessee. The TRS Lessee is subject to
hotel operating risks, including risks of sustaining operating losses after payment of hotel operating expenses, including management fees. These risks can adversely affect the net operating profits of our TRS Lessee, our operating expenses, and our
ability to make distributions to our stockholders.
We agreed to provide to certain of the contributors of our initial properties opportunities to
guarantee liabilities of our operating partnership which may limit our ability to make similar opportunities available to owners of properties that we would like to purchase. This limitation may adversely affect our ability to acquire properties in
the future.
Under certain of the tax indemnification agreements, we agreed to use commercially reasonable efforts during the
protected period to make available to certain contributors opportunities to guarantee liabilities of our operating partnership. By guaranteeing liabilities of the operating partnership, the contributors will be entitled to defer recognition of gain
in connection with the contribution of certain hotels. As a consequence of the allocation of debt to them for tax purposes by virtue of guaranteeing the liabilities of the operating partnership, contributors will not be deemed to have received a
distribution under the applicable provisions of the Code. In the case of our tax indemnification obligation, the protected period continues until the earlier of:
|
|
|
10 years after the contribution of such property; or
|
|
|
|
the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of
property to our operating partnership.
|
The obligation to make guarantee opportunities available to the contributors could adversely
affect our ability to acquire additional properties in the future by reducing the amount of debt that could be guaranteed by other, future contributors.
16
Future debt service obligations could adversely affect our overall operating results, may require us to liquidate
our properties, may jeopardize our tax status as a REIT and limit our ability to make distributions to our stockholders.
While we
intend to maintain target debt levels of 45-55% of total assets, our board of directors may change this debt policy at any time without stockholder approval. In addition, we entered into a $60.0 million revolving credit facility, which has a term of
four years, and our borrowings under the credit facility are expected to bear interest at a floating interest rate of 30-day LIBOR plus 1.625% to 2.125%. The LIBOR rate on December 31, 2007 was 4.6%. The primary collateral for the credit
facility is a first mortgage on the Holiday Inn Brownstone, the Hilton Philadelphia Airport, the property under development in Jeffersonville, Indiana and the property under development in Tampa, Florida as well as a lien on all business assets
including, but not limited to, equipment, accounts receivable, inventory, furniture, fixtures and proceeds thereof. We must satisfy certain financial and non-financial covenants. As of December 31, 2007, we were in compliance with all the
required covenants. Failure to satisfy these covenants and conditions would create a default under this credit facility, and the lender could require us to immediately repay all outstanding indebtedness under the credit facility. The credit facility
has a balance of approximately $34.4 million as of December 31, 2007. The Company intends to expand the credit facility to $75.0 million and to use it to acquire, repair and renovate properties, and for working capital. We, and our
subsidiaries, may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:
|
|
|
our cash flow from operations will be insufficient to make required payments of principal and interest;
|
|
|
|
our debt may increase our vulnerability to adverse economic and industry conditions;
|
|
|
|
we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing cash available for distribution to
our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;
|
|
|
|
our debt service obligations on floating rate debt will increase as interest rates rise;
|
|
|
|
the terms of any refinancing will not be as favorable as the terms of the debt being refinanced; and
|
|
|
|
the use of leverage could adversely affect our ability to make distributions to our stockholders and the market price of our common stock.
|
If we violate covenants in the agreements governing future indebtedness, we could be required to repay all or a portion
of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all.
If we incur debt in the future and do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance this debt through additional debt financing, private or public offerings of debt securities, or additional
equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and, consequently, cash available for
distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities.
We may place mortgages on our hotel properties to secure our credit facility or other debt. To the extent we cannot meet our debt service obligations, we risk losing some or all of those properties to foreclosure. Also, covenants applicable to our
debt could impair our planned strategies and, if violated, result in a default of our debt obligations.
We are subject to risks of increased hotel
operating expenses and decreased hotel revenues.
Our leases with our TRS Lessee provide for the payment of rent based in part on
gross revenues from our hotels. Our TRS Lessee is subject to hotel operating risks including decreased hotel revenues and increased hotel operating expenses, including but not limited to the following:
|
|
|
wage and benefit costs;
|
17
|
|
|
repair and maintenance expenses;
|
|
|
|
other operating expenses.
|
Any
increases in these operating expenses can have a significant adverse impact on the TRS Lessees ability to pay rent and other operating expenses and, consequently, our earnings and cash flow.
Operating our hotels under franchise agreements could increase our operating costs and lower our net income.
Our hotels operate under franchise agreements, which subject us to risks in the event of negative publicity related to one of our franchisors.
The maintenance of the franchise licenses for our hotels is subject to our franchisors operating standards and other terms and conditions. Our
franchisors periodically inspect our hotels to ensure that we, our lessee and our management company follow their standards. Failure by us, our TRS Lessee or our management company to maintain these standards or other terms and conditions could
result in a franchise license being cancelled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies
by franchisor and by hotel. As a condition of continuing a franchise license, a franchisor could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in
an acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital expenditures.
If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise license, or to operate the hotel without a franchise license. The loss of a franchise license could
significantly decrease the revenues at the hotel and reduce the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise
license for one or more hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely affect our financial condition and results of operations and reduce our cash available for distribution to
stockholders.
Our executive officers have very limited experience operating a public company or a REIT, which could increase our general and
administrative costs and reduce our cash available for distributions.
Prior to the completion of our initial public offering in
December 2004, none of our senior executive officers had any experience operating a public company or a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions. As a result, we may
incur higher general and administrative expenses than our competitors that are managed by persons with greater experience operating a public company or a REIT, which would reduce our net income and cash available for distribution.
Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in stockholder
dilution.
Our business strategy may not ultimately be successful and may not provide positive returns on our investments.
Acquisitions may cause disruptions in our operations and divert managements attention away from day-to-day operations. The issuance of equity securities in connection with any acquisition could be substantially dilutive to our stockholders.
18
Our net income would be adversely affected if our leases for the resort property are terminated or if the
sub-lessees have insufficient net income to pay rent.
If the Shell Island resort property leases are terminated, our sublease
agreements for the resort property will also be terminated. The property leases may be terminated by the resort propertys homeowners association if MHI Hotels, LLC or MHI Hotels Two, Inc., two of our affiliates, breach certain provisions
under the leases. The leases may also be terminated by the homeowners association if MHI Hotels Services serves as central rental agent for less than 80 of the 160 rental units at the resort. Upon termination of these subleases, MHI Hotels,
LLC and MHI Hotels Two, Inc. would be unable to meet their payment obligations, and we would no longer receive the fixed annual amount of approximately $640,000, less our lease payments of approximately $168,000 to the resort propertys
homeowners association. In addition, the ability of MHI Hotels, LLC and MHI Hotels Two, Inc. to make rent payments is dependent upon generating revenues from the operation of the resort properties. Although MHI Hotels Services has agreed to
make capital contributions to MHI Hotels, LLC and MHI Hotels Two, Inc. in an amount sufficient to cure their defaults under the sublease agreements, MHI Hotels Services has nominal assets, and is dependent on management fee income. In such event,
our net income could be adversely affected, and we may be required to write off our investment in the Shell Island Resort property leases.
We may
realize reduced revenue because our management company may experience conflicts of interest in connection with the management of the resort property.
MHI Hotels Services may experience conflicts of interest in connection with the management of our resort property and one of our initial hotel properties, which are located less than one mile from each other, and its
continued management of an additional resort property not owned by us and located nearby in the same geographic market. The fees MHI Hotels Services earns for managing our properties are largely fixed under our management agreement with MHI Hotels
Services and may be less than the fees it earns for managing the resort property that we do not own or lease. Because MHI Hotels Services handles the reservations for all of these properties, MHI Hotels Services may have a greater financial
incentive to direct guests to the resort property that we do not own or lease.
Geographic concentration of our initial hotels will make our business
vulnerable to economic downturns in the Mid-Atlantic, Midwest and Southeastern United States.
Our hotels are located in the
Mid-Atlantic, Midwest and Southeastern United States. Economic conditions in the Mid-Atlantic, Midwest and Southeastern United States will significantly affect our revenues and the value of our hotels. Business layoffs or downsizing, industry
slowdowns, changing demographics and other similar factors may adversely affect the economic climate in these areas. Any resulting oversupply or reduced demand for hotels in the Mid-Atlantic, Midwest and Southeastern United States and our markets in
particular would therefore have a disproportionate negative impact on our revenues and limit our ability to make distributions to stockholders.
Our
borrowing costs are sensitive to fluctuations in interest rates.
Higher interest rates could increase debt service requirements on
our floating rate debt, including any borrowings under our proposed credit facility, which permits us to borrow up to $60.0 million. Any borrowings under our proposed credit facility will have floating interest rates of 30-day LIBOR plus 1.625 to
2.125%. We currently have an interest-rate swap agreement that fixes the amount of interest on $30 million of indebtedness. To the extent that the total amount borrowed on the credit facility is less than $30 million, we are exposed to falling
interest rates on the difference between the amount borrowed and $30 million. To the extent that the total amount borrowed on the credit facility is more than $30 million, we are exposed to rising interest rates on the difference between the amount
borrowed in excess of $30 million. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our hotel investments at times which may not permit us to receive an
attractive return on our investments in order to meet our debt service obligations. If we were to engage in any additional hedging transactions, they would have to be structured so as to not jeopardize our status as a REIT.
19
We are company with limited operating history, and we might not be able to operate our business or implement our
operating policies and strategies successfully, which could negatively impact our ability to make distributions and cause you to lose all or part of your investment.
We were incorporated in Maryland in August 2004 and have only operated our business since the close of our initial public offering on December 21,
2004. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our business objectives and that the value of your investment could decline substantially. The results
of our operations will depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the financial markets and economic conditions. Furthermore, if we cannot
successfully operate our business or implement our operating policies and strategies as described in this report, it could negatively impact our ability to make distributions and cause you to lose all or part of your investment.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a joint venture partners financial
condition and disputes between our joint venture partners and us.
In August 2007, we purchased a 25% indirect, non-controlling
interest in the Crowne Plaza Hollywood Beach through a joint venture with Carlyle. Carlyle owns a 75% controlling interest in the joint venture and is in a position to exercise sole decision-making authority regarding the property including, but not
limited to, the method and timing of disposition of the property.
We may co-invest in the future with Carlyle or other third parties
through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we would not be in a position
to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third
party not involved, including the possibility that partners or joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Partners or joint venture partners may have economic or other business
interests or goals, which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a
sale, because neither we, nor the partner or joint venture partner, would have full control over the partnership or joint venture. Disputes between us and partners or joint venture partners may result in litigation or arbitration that would increase
our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or joint venture partners might result in subjecting properties owned by the partnership
or joint venture to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners or joint venture partners. For example, we may be required to guarantee indebtedness incurred by a partnership, joint
venture or other entity for the purchase or renovation of a hotel property. Such a guarantee may be on a joint and several basis with our partner or joint venture partner in which case we may be liable in the event such party defaults on its
guaranty obligation.
Investments in condominium hotels may be adversely affected by state and local regulations as well as unit owner participation.
We may identify opportunities to acquire an interest in a hotel, apartment building or other real estate asset that is being
converted to or developed for use as a condominium hotel. The offer and sale of condominiums is subject to federal, state, and local regulations. Failure by the condominium developer to comply with these regulations may lead, among others, to
the unit owners right to rescind the purchase of the unit. Such a rescission could adversely impact the operation of the condominium hotel. State and local jurisdictions have complex and varying condominium laws and related regulations that
govern their use and re-sale. These laws and regulations may contain limitations and restrictions that could impact the economic benefits derived from investing in a condominium hotel. In addition, economic benefits, of an investment in a
condominium hotel, which are already affected by the state of the local lodging industry, will vary depending upon the number of condominium units that are included in the operations of the hotel.
20
Risks Related to the Hotel Industry
Our ability to make distributions to our stockholders may be affected by factors in the lodging industry.
Operating Risks
Our hotel properties are subject to various operating risks common to the lodging
industry, many of which are beyond our control, including the following:
|
|
|
competition from other hotel properties in our markets;
|
|
|
|
over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels;
|
|
|
|
dependence on business and commercial travelers and tourism;
|
|
|
|
increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and
tourists;
|
|
|
|
increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
|
|
|
|
changes in interest rates and in the availability, cost and terms of debt financing;
|
|
|
|
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies
and ordinances;
|
|
|
|
adverse effects of international, national, regional and local economic and market conditions;
|
|
|
|
adverse effects of a downturn in the lodging industry; and
|
|
|
|
risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.
|
These factors could reduce the net income of our TRS Lessee, which in turn could adversely affect our ability to make distributions to our stockholders.
Competition for Acquisitions
We compete for investment opportunities with entities that have substantially greater financial resources than we do. These entities generally may be able to accept more risk than we can prudently manage. This competition may generally
limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and
poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make distributions to our stockholders.
Investment Concentration in Particular Segments of Single Industry
Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the segments in which we operate, in particular, will have a material adverse effect on amounts available for
distribution to our stockholders.
Capital Expenditures
Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture,
fixtures and equipment. The franchisors of our hotels also require
21
us to make periodic capital improvements as a condition of keeping the franchise licenses. In addition, our lenders will likely require that we set aside
annual amounts for capital improvements to our hotel properties. We expect the average lenders capital improvements reserve requirement for all of our hotels will be approximately 4% of gross sales. Based upon our hotels gross revenue in
fiscal year 2007, the average lenders capital improvements reserve requirement for all of our hotels would have been approximately $2,759,000 based on an average 4% capital improvement reserves. For the year ended December 31, 2007, we
spent approximately $19.4 million on capital improvements to our hotels. These capital improvements may give rise to the following risks:
|
|
|
possible environmental problems;
|
|
|
|
construction cost overruns and delays;
|
|
|
|
a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to
us on affordable terms; and
|
|
|
|
uncertainties as to market demand or a loss of market demand after capital improvements have begun.
|
The costs of all these capital improvements could adversely affect our financial condition and amounts available for distribution to our stockholders.
Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to make
distributions to stockholders.
We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into
consideration general economic conditions and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involve a number of risks, including risks associated with:
|
|
|
construction delays or cost overruns that may increase project costs;
|
|
|
|
receipt of zoning, occupancy and other required governmental permits and authorizations;
|
|
|
|
development costs incurred for projects that are not pursued to completion;
|
|
|
|
acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;
|
|
|
|
governmental restrictions on the nature or size of a project.
|
We cannot assure you that any re-development project will be completed on time or within budget. Our inability to complete a project on time or within budget would increase our operating costs and reduce our net
income.
The hotel business is capital intensive, and our inability to obtain financing could limit our growth.
Our hotel properties will require periodic capital expenditures and renovation to remain competitive. Acquisitions or development of additional hotel
properties will require significant capital expenditures. The lenders under some of the mortgage debt that we assumed in our initial public offering require us to set aside varying amounts each year for capital improvements at our hotels. We may not
be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we must distribute at least 90% of our REIT taxable income, excluding net capital gains, each year to maintain our REIT tax status.
Consequently, we rely upon the availability of debt or equity capital to fund hotel acquisitions and improvements. As a result, our ability to fund capital expenditures, acquisitions or hotel development through retained earnings is very limited.
Our ability to grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity financing which will depend on market conditions. Neither our charter nor our bylaws limits the amount of debt that we
can incur. However, we cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.
22
The events of September 11, 2001, recent economic trends, the military action in Afghanistan and Iraq and
prospects for future terrorist acts and military action have adversely affected the hotel industry generally, and these adverse effects may continue.
Before September 11, 2001, hotel owners and operators had begun experiencing declining RevPAR, as a result of the slowing U.S. economy. The terrorist attacks of September 11, 2001 and the after-effects
(including the prospects for more terror attacks in the United States and abroad), combined with economic trends and the U.S.-led military action in Afghanistan and Iraq, substantially reduced business and leisure travel and lodging industry RevPAR
generally. We cannot predict the extent to which these factors will directly or indirectly impact the value of our common stock, the lodging industry or our operating results in the future. Declining RevPAR at hotels that we acquire would reduce our
net income and restrict our ability to fund capital improvements at our hotels and our ability to make distributions to stockholders necessary to maintain our status as a REIT. Additional terrorist attacks, acts of war or similar events could have
further material adverse effects on the markets on which shares of our common stock will trade, the lodging industry at large and our operations in particular.
Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.
We intend to maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There
are no assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, such as Hurricane Katrina in New Orleans in August 2005, losses from foreign terrorist
activities such as those on September 11, 2001 or losses from domestic terrorist activities such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Initially, we do not expect to
obtain terrorism insurance on our hotel properties because it is costly. Lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and
the value of the properties securing the affected loan in relation to the balance of the loan, a default could reduce our net income and limit our ability to obtain future financing.
In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost
investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might
nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance
proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
Noncompliance with governmental regulations could adversely affect our operating results.
Environmental Matters
Our hotels may
be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:
|
|
|
our knowledge of the contamination;
|
|
|
|
the timing of the contamination;
|
|
|
|
the cause of the contamination; or
|
|
|
|
the party responsible for the contamination of the property.
|
23
There may be unknown environmental problems associated with our properties. If environmental
contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.
The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our
properties could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to stockholders.
Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations
Under the
Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADAs requirements could require removal of access
barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in
governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.
General Risks Related to the Real Estate Industry
Illiquidity of real estate investments could significantly
impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
Because
real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties or mortgage loans in our portfolio in response to changing economic, financial and investment conditions is limited.
The real estate market is affected by many factors that are beyond our control, including:
|
|
|
adverse changes in international, national, regional and local economic and market conditions;
|
|
|
|
changes in interest rates and in the availability, cost and terms of debt financing;
|
|
|
|
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies
and ordinances;
|
|
|
|
the ongoing need for capital improvements, particularly in older structures;
|
|
|
|
changes in operating expenses; and
|
|
|
|
civil unrest, acts of God, including earthquakes, floods and other natural disasters such as Hurricane Katrina in New Orleans in August 2005, which may result in
uninsured losses, and acts of war or terrorism, including the consequences of the terrorist acts, such as those that occurred on September 11, 2001.
|
We may decide to sell our hotels in the future. We cannot predict whether we will be able to sell any hotel property or loan for the price or on the
terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property or loan.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you
that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other
restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a
material adverse effect on our operating results and financial condition, as well as our ability to pay distributions to stockholders.
24
Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs
of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur,
particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a
variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold
from the affected property, which would reduce our cash available for distribution. In addition, the presence of significant mold could expose us to liability from our guests, employees or our management company and others if property damage or
health concerns arise.
Risks Related to Our Organization and Structure
Our failure to qualify as a REIT under the federal tax laws will result in substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.
The federal income tax laws governing REITs are complex.
We intend to operate in a manner that will maintain our qualification as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal
income tax laws governing qualification as a REIT are limited. We have not applied for or obtained a ruling from the Internal Revenue Service that we will qualify as a REIT. Accordingly, we cannot be certain that we will be successful in operating
so we can qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT.
Failure to make distributions could subject us to tax.
In order to maintain our qualification as a REIT, each year we must pay out to our stockholders in distributions at least 90% of our REIT taxable income, excluding net capital gain. To the extent that we satisfy this
distribution minimum, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount
that we pay out to our stockholders in a calendar year is less than the minimum amount specified under federal tax laws. Our only source of funds to make these distributions comes from rent and dividends we receive from our TRS Lessee, which in turn
receives revenues from hotel operations. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid
corporate income tax and the 4% nondeductible excise tax in a particular year.
Failure to qualify as a REIT would subject us to federal
income tax.
If we fail to remain qualified as a REIT in any taxable year (including, but not limited to, a failure resulting from not
making the minimum required distribution), and if the relief provisions were not to apply, we will be subject to federal income tax on our taxable income. If we fail to qualify as a REIT, we would not be required to make any distributions. In
addition, any distributions that we do make will not be deductible by us. This would substantially reduce our earnings, our cash available to pay distributions, and the value of our common stock.
The resulting tax liability might cause us to borrow funds, liquidate some of our investments, or take other steps that could negatively affect our
operating results in order to pay any such tax. Moreover, if our REIT status is terminated because of our failure to meet a technical REIT requirement and the relief provisions did not excuse our failure to qualify as a REIT, or if we voluntarily
revoke our election, we generally would be disqualified from re-electing treatment as a REIT until the fifth calendar year after the year in which we failed to qualify as a REIT.
25
Failure to qualify as a REIT may cause us to reduce or eliminate distributions to our shareholders,
and we may face increased difficulty in raising capital or obtaining financing.
If we fail to remain qualified as a REIT, we may have
to reduce or eliminate any distributions to our stockholders in order to satisfy our income tax liabilities. Any distributions that we do make to our stockholders would be treated as taxable dividends to the extent of our current and accumulated
earnings and profits. This may result in negative investor and market perception regarding the market value of our common stock, and the value of your shares of our common stock may be reduced. In addition, we may face increased difficulty in
raising capital or obtaining financing if we fail to qualify or remain qualified as a REIT because of the resulting tax liability and potential reduction of our market valuation.
MHI Holding and our TRS Lessee increase our overall tax liability.
MHI Holding and our TRS Lessee are subject to federal and state income tax on their taxable income, which will consist of the revenues from the hotels leased by our TRS Lessee, net of the operating expenses for such
hotels and rent payments to us. Accordingly, although our ownership of our TRS Lessee will allow us to participate in the operating income from our hotels in addition to receiving rent, that operating income will be fully subject to income tax. The
after-tax net income of our TRS Lessee is available for distribution to us.
We will incur a 100% excise tax on transactions with MHI
Holding and our TRS Lessee that are not conducted on an arms-length basis. For example, to the extent that the rent paid by our TRS Lessee to us exceeds an arms-length rental amount, such amount potentially will be subject to this excise
tax. We intend that all transactions between us and MHI Holding and our TRS Lessee will be conducted on an arms-length basis and, therefore, that the rent paid by our TRS Lessee to us will not be subject to this excise tax.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets. For example:
|
|
|
We will be required to pay tax on undistributed REIT taxable income.
|
|
|
|
We may be required to pay alternative minimum tax on our items of tax preference.
|
|
|
|
If we have net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying
income from foreclosure property, we must pay tax on that income at the highest corporate rate.
|
|
|
|
If we sell a property in a prohibited transaction, our gain from the sale would be subject to a 100% penalty tax. A prohibited transaction
would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business.
|
|
|
|
MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its income, which will consist of the revenues from the hotels leased
from our operating partnership, net of the operating expenses for such hotels and rent payments to us.
|
Our ability to effect a
merger or other business combination transaction may be restricted by our operating partnership agreement.
Conflicts of interest
relating to a merger or other business combination transactions involving our change of control may occur between us and Andrew Sims, our chairman, president and chief executive officer, William Zaiser, our executive vice president and chief
financial officer and Kim Sims, Christopher Sims, and Edward Stein, three of our directors. Our operating partnerships agreement of limited partnership provides that the holders of 66.7% of the outstanding limited partnership interests in our
operating partnership (including our limited partnership interest in our operating partnership) must approve such a merger or other business
26
combination transaction, unless the holders of 50% or more of the outstanding limited partnership interests (other than our limited partnership interest)
approves such a merger or other business combination transaction. As of December 31, 2007, Andrew Sims, William Zaiser, Kim Sims, Christopher Sims and Ed Stein beneficially own approximately 21.68% of our outstanding limited partnership
interests, and we own approximately 64.84%. Although our stockholders must approve a merger or other business combination transaction under applicable Maryland law, under our operating partnership agreement, limited partners, including certain of
our officers and directors, must approve certain other business combination transactions involving us. These approval rights of limited partners may lead to conflicts of interest, which could result in decisions that do not fully reflect our best
interests or the best interests of our stockholders.
In addition, in the event of a change of control of our company, the limited partners
will have the right, for a period of 30 days following the change of control event, to cause the operating partnership to redeem all of the units held by the limited partners for a cash amount equal to the cash redemption amount otherwise payable
upon redemption pursuant to the partnership agreement. This cash redemption right may make it more unlikely or difficult for a third party to propose or consummate a change of control transaction, even if such transaction were in the best interests
of our shareholders.
Complying with REIT requirements may cause us to forego attractive opportunities that could otherwise generate strong
risk-adjusted returns and instead pursue less attractive opportunities, or none at all.
To qualify as a REIT for federal income tax
purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. Thus, compliance with
the REIT requirements may hinder our ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for our stockholders.
Complying with REIT requirements may force us to liquidate otherwise attractive investments, which could result in an overall loss on our investments.
To maintain qualification as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of
cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified
real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at
the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. After January 1, 2008, if we fail to comply with these
requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, we may be able to preserve our REIT status if the failure was due to reasonable cause and not to willful neglect. In this case, we will be required to
dispose of the assets causing the failure within six months after the last day of the quarter in which the failure occurred, and we will be required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate
multiplied by the net income generated on those assets. As a result, we may be required to liquidate otherwise attractive investments.
Taxation of
dividend income could make our common stock less attractive to investors and reduce the market price of our common stock.
At any
time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or could adversely affect you
as a stockholder. On May 28, 2003, the President signed the Jobs and
27
Growth Tax Relief Reconciliation Act of 2003, which we refer to as the Jobs and Growth Tax Act. Effective for taxable years beginning after December 31,
2002, and before January 1, 2009, the Jobs and Growth Tax Act generally reduced the maximum rate of tax applicable to individuals, trusts and estates on dividend income from regular C corporations to 15.0%. This reduced substantially the
so-called double taxation (that is, taxation at both the corporate and stockholder levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs do not qualify for the dividend tax
reduction because, as a result of the dividends paid deduction to which REITs are entitled, REITs generally do not pay corporate level tax on income that they distribute to stockholders. As a result of the Jobs and Growth Tax Act, individual, trust,
and estate investors could view stocks of non REIT corporations as more attractive relative to shares of REITs than was the case previously because the dividends paid by non REIT corporations are subject to lower tax rates for such investors.
Provisions of our charter may limit the ability of a third party to acquire control of our company.
Aggregate Share and Common Share Ownership Limits
Our charter provides that no person may directly or indirectly own more than 9.9% of the value of our outstanding shares of stock or more than 9.9% of the number of our outstanding shares of common stock. These
ownership limitations may prevent an acquisition of control of our company by a third party without our board of directors approval, even if our stockholders believe the change of control is in their interest. Our board of directors has
discretion to waive that ownership limit if the board receives evidence that ownership in excess of the limit will not jeopardize our REIT status.
Authority to Issue Stock
Our amended and restated Charter authorizes our board of directors to issue up to 49,000,000
shares of common stock and up to 1,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares.
Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our stock, even if stockholders believe that a change of control
is in their interest. We will be able to issue additional shares of stock or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on
which our securities may be listed or traded.
Provisions of Maryland law may limit the ability of a third party to acquire control of our company.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such
shares, including:
|
|
|
business combination provisions that, subject to limitations, prohibit certain business combinations between us and an interested
stockholder (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and
thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and
|
|
|
|
control share provisions that provide that control shares of our company (defined as shares which, when aggregated with other shares
controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a control share acquisition (defined as the direct or indirect acquisition of ownership
or control of control shares) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
|
28
We have opted out of these provisions of the MGCL, in the case of the business combination provisions of
the MGCL by resolution of our board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to opt in to the business combination
provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Additionally, Title 8, Subtitle 3 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which (for example, a
classified board) we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under the
circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then current market price.
Provisions in our executive officers employment agreements and the strategic alliance agreement may make a change of control of our company more costly or difficult.
Our employment agreements with Mr. Andrew Sims, our chief executive officer, and Mr. William Zaiser, our chief financial officer, contain
provisions providing for substantial payments to these officers in the event of a change of control of our company. Specifically, if we terminate these executives employment without cause or the executive resigns with good reason, which
includes a failure to nominate Mr. Sims to our board of directors or his involuntary removal from our board of directors, unless for cause or by vote of the stockholders, or if there is a change of control, each of these executives is entitled
to the following:
|
|
|
any accrued but unpaid salary and bonuses;
|
|
|
|
vesting of any previously issued stock options and restricted stock;
|
|
|
|
payment of the executives life, health and disability insurance coverage for a period of five years following termination;
|
|
|
|
any unreimbursed expenses; and
|
|
|
|
a severance payment equal to five times the executives combined salary base and actual bonus compensation for the preceding fiscal year.
|
In the event that the employment of Mr. David Folsom, our chief operating officer, is terminated without cause or
he resigns for good reason, Mr. Folsom is entitled to received the sum of the following amounts:
|
|
|
any accrued but unpaid salary and bonuses;
|
|
|
|
issuance and vesting of any previously granted stock options or restricted stock (including unissued shares conditioned upon and in consideration of
Mr. Folsoms employment through dates set forth in the employment agreement);
|
|
|
|
payment of life, health and disability insurance coverage for a period of three years following termination;
|
|
|
|
any unreimbursed expenses; and
|
|
|
|
and a severance payment equal to three times of the executives combined salary and actual bonus compensation for the preceding fiscal year.
|
In addition, these executives will receive additional payments to compensate them for the additional taxes, if any,
imposed on them under Section 4999 of the Internal Revenue Code by reason of receipt of excess parachute payments.
These provisions
may make a change of control of our company, even if it is in the best interests of our stockholders, more costly and difficult and may reduce the amounts our stockholders would receive in a change of control transaction.
29
Our ownership limitations may restrict or prevent you from engaging in certain transfers of our common stock.
In order to maintain our REIT qualification, no more than 50% in value of our outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the federal income tax laws to include various kinds of entities) during the last half of any taxable year (other than the first year for which a REIT election is made). To preserve our REIT
qualification, our charter contains a 9.9% aggregate share ownership limit and a 9.9% common share ownership limit. Generally, any shares of our stock owned by affiliated persons will be added together for purposes of the aggregate share ownership
limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.
If anyone transfers shares in a way that would violate the aggregate share ownership limit or the common share ownership limit, or prevent us from continuing to qualify as a REIT under the federal income tax laws, those shares instead will
be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If
this transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then we will consider the initial intended transfer to be null and void from the outset. The intended transferee of those shares will be deemed
never to have owned the shares. Anyone who acquires shares in violation of the aggregate share ownership limit, the common share ownership limit or the other restrictions on transfer in our charter bears the risk of suffering a financial loss when
the shares are redeemed or sold if the market price of our stock falls between the date of purchase and the date of redemption or sale.
The board of
directors revocation of our REIT status without stockholder approval may decrease our stockholders total return.
Our
charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to
be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.
The ability of our board of directors to change our major corporate policies may not be in your interest.
Our board of directors determines our major corporate policies, including our acquisition, financing, growth, operations and distribution policies. Our
board may amend or revise these and other policies from time to time without the vote or consent of our stockholders.
Our success depends on key
personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our chairman, president and chief
executive officer, Andrew Sims; our executive vice president and chief operating officer, David Folsom; and our executive vice president and chief financial officer, William Zaiser, to manage our day-to-day operations and strategic business
direction. The loss of any of their services could have an adverse effect on our operations.
Item 1B.
Unresolved Staff Comments
Not applicable.
30
Item 2.
Properties
As of March 14, 2008, we owned the following eight hotel properties:
|
|
|
|
|
Property
|
|
Number of
Rooms
|
|
Location
|
Operating Properties
|
|
|
|
|
Hilton Philadelphia Airport
|
|
331
|
|
Philadelphia, Pennsylvania
|
Hilton Savannah DeSoto
|
|
246
|
|
Savannah, Georgia
|
Holiday Inn Brownstone
|
|
187
|
|
Raleigh, North Carolina
|
Hilton Wilmington Riverside
|
|
272
|
|
Wilmington, North Carolina
|
Holiday Inn Laurel West
|
|
207
|
|
Laurel, Maryland
|
Crowne Plaza Jacksonville
|
|
292
|
|
Jacksonville, Florida
|
|
|
|
|
|
Subtotal
|
|
1,535
|
|
|
Properties Under Development
|
|
|
|
|
Sheraton Louisville Riverside
(1)
|
|
186
|
|
Jeffersonville, Indiana
|
Crowne Plaza Tampa Westshore
(2)
|
|
250
|
|
Tampa, Florida
|
|
|
|
|
|
Total number of rooms
|
|
1,971
|
|
|
|
|
|
|
|
(1)
|
The property previously operated as the Louisville Ramada Riverfront Inn is currently undergoing extensive renovations and is expected to re-open in April 2008 as the Sheraton
Louisville Riverside.
|
(2)
|
The property formerly operated as the Tampa Clarion Hotel in Tampa, Florida is undergoing extensive renovations and is expected to re-open in the first quarter 2009 as the Crowne
Plaza Tampa Westshore.
|
The Company owns a 25% indirect non-controlling interest in the 311-room Crowne Plaza Hollywood Beach
Resort in Hollywood, Florida through a joint venture with Carlyle.
The Company also owns leasehold interests in two commercial units at
the Shell Island Resort, a condominium resort property located in Wrightsville Beach, North Carolina. One lease relates to the restaurant, kitchens, meeting rooms, ballroom, laundry, maintenance shop, offices and certain maid closets. The second
lease relates to the resorts common areas and includes the lobby, swimming pools, outdoor café, front desk, back office, gift shop, certain storage areas, and ingress and egress throughout the building, including parking areas.
Item 3.
Legal Proceedings
We are not involved in any legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are not material to our financial condition and results of operations.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our
stockholders during the fourth quarter of the fiscal year ended December 31, 2007.
31
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
MHI
Hospitality Corporation (the Company) is a self-advised real estate investment trust (REIT) that was incorporated in Maryland on August 20, 2004 to own full-service upscale and mid-scale hotels located in primary and
secondary markets in the Mid-Atlantic and Southeastern regions of the United States. The hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza and Holiday Inn. The Company commenced operations on December 21, 2004
when it completed its initial public offering (IPO) and thereafter consummated the acquisition of six hotel properties (initial properties). The Company utilized part of its net proceeds to repay approximately $25.0 million
of mortgage indebtedness secured by the initial properties and paid an additional $16.9 million in cash related to the acquisition of the properties. The Company had approximately $12.9 million available in cash immediately following its formation.
The IPO consisted of the sale of 6,000,000 shares of common stock at a price of $10 per share, resulting in gross proceeds of $60 million
and net proceeds (after deducting underwriting discounts and offering expenses) of approximately $54.8 million. On December 21, 2004 the Company issued 4,000 shares of restricted common stock to its independent directors. On January 19,
2005, the Company sold an additional 700,000 shares of common stock at a price of $9.30 per share, net of the underwriting discount, as a result of the exercise of the underwriters over-allotment option, resulting in additional net proceeds of
approximately $6.5 million. The total net proceeds from the IPO and the exercise of the underwriters over-allotment option was approximately $61.3 million.
In December 2004 and January 2005, the Company contributed all of the net proceeds from the IPO and the exercise of the underwriters over-allotment option to MHI Hospitality, L.P., a Delaware limited partnership
(the Operating Partnership), in exchange for general and limited partnership interests in the Operating Partnership which approximated 63.7% as of January 19, 2005. The Operating Partnership used approximately $42.1 million of the
net proceeds from the Company, along with 3,817,036 units of limited partnership interest, to acquire all of the equity interests in the entities that own or lease the initial properties.
On July 22, 2005, the Company acquired the Crowne Plaza Jacksonville (formerly, the Hilton Jacksonville Riverfront Hotel) in Jacksonville, Florida
from BIT Holdings Seventeen, Inc., an affiliate of the AFL-CIO Building Investment Trust (the Trust), for an aggregate price of $22 million. The Trust, for which Mercantile Safe Deposit and Trust Company (Mercantile) acts as
trustee, financed a portion of the purchase price by extending an $18 million mortgage loan (the Loan) to the purchaser. Pursuant to the terms of a Purchase Sale and Contribution Agreement dated May 20, 2005, MHI Hotels, LLC
(MHI Hotels), an affiliate of MHI Hotels Services, LLC (MHI Hotels Services), contributed furniture, fixtures and equipment used in the operation of the Hotel and assigned all other rights relating to the property to the
purchaser in exchange for 90,570 units in the Operating Partnership valued at approximately $913,000.
On May 9, 2006, the Company
closed on a senior secured revolving credit facility for up to $60 million, which was syndicated by Branch Banking & Trust Company (BB&T). The facility replaced an existing $23 million facility with BB&T and will be used
to fund acquisitions and working capital.
On August 10, 2006, the Company sold the Holiday Inn Downtown, in Williamsburg, VA for
$4.75 million. The Company agreed to take back three promissory notes that totaled $4.33 million from the purchaser and received the remainder of the purchase price in cash. Promissory notes in the amount of $2.63 million, $1.4 million and $0.4
million were obtained from the purchaser with interest-only payments due monthly bearing rates of 8.0%, 8.5% and 8.0%, respectively. On February 6, 2007, the first of the three promissory notes was satisfied with a payment of $2.63 million. On
March 14, 2007, the second of the three promissory notes was satisfied with a payment of $1.4 million. The third promissory note requires interest-only payments due monthly for the first four years and payments under a 20-year amortization
schedule until it matures in August 2026. The promissory notes are secured by a security interest in the hotel and by personal guarantees of affiliates of the purchaser.
F-7
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On September 20, 2006, the Company purchased the 186-room Louisville Ramada Riverfront Inn,
located in Jeffersonville, Indiana for approximately $7.7 million including transfer costs. The hotel is located directly on the Ohio River, with unimpeded views of the Louisville skyline, and access to the center of downtown Louisville. The Company
has closed the hotel to begin extensive renovations and plans to re-open the hotel as a Sheraton in April 2008. The purchase was structured to meet the requirements of an Internal Revenue Code Sec. 1031 like-kind exchange, enabling the Company to
defer tax on all capital gains on the sale in August 2006 of its Williamsburg property. To facilitate the closing of the acquisition, MHI accessed approximately $7.6 million from its line of credit, and approximately $0.1 million in cash proceeds
from the sale of its Williamsburg property.
On March 29, 2007, the Company closed a $23.0 million refinancing of the mortgage on the
Hilton Wilmington Riverside. Approximately $13.8 million of the proceeds were used to satisfy the existing indebtedness. The remainder of the proceeds, approximately $9.2 million, is being used to fund renovations to the property. The new mortgage
matures March 29, 2017 and bears interest at a rate of 6.21%, with payments of interest-only due for the first 24 months. Thereafter, payments of interest and principal are required under a 25-year amortization schedule.
On April 26, 2007, the Company entered into a program agreement and related operating agreements with CRP/MHI Holdings, LLC, an affiliate of Carlyle
Realty Partners V, L.P. and The Carlyle Group (Carlyle). The agreements provide for the formation of entities to be jointly owned by the Company and Carlyle, which will source, underwrite, acquire, develop and operate hotel assets and/or
hotel portfolios. Under the agreement, the Company will offer the joint venture the first right to acquire potential investment opportunities identified by the Company with total capitalization requirements in excess of $30.0 million. Carlyle has
agreed to commit $100.0 million of equity capital to the joint venture through April 2010. Carlyle will fund up to 90% of the equity of an acquisition, and the Company will provide between 10% and 25%. The Company will receive an asset management
fee of 1.5% of the gross revenues of the hotels owned by the venture. In addition, the Company will have a first right of offer with respect to any investment disposed by the joint venture. It is expected that hotels acquired by the joint venture
will be managed by MHI Hotels Services, LLC (MHI Hotels Services).
On July 16, 2007, the Company entered into a
definitive agreement to purchase a 250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel for the aggregate purchase price of $13.5 million. The hotel is located in Tampas Westshore corridor and is within two miles of the
Tampa International Airport. The Company intends to make extensive renovations and re-brand the hotel, as is consistent with the Companys repositioning strategy.
On August 1, 2007, the Company entered into an amendment to its credit agreement with BB&T, as administrative agent and lender, dated May 8, 2006. The amended credit agreement with BB&T and certain
other lenders reduced the rate of interest on the Companys revolving credit facility by 0.375%, so that it bears a rate equal to LIBOR plus additional interest ranging from 1.625% to 2.125%. The amendment also reduced the capitalization rate
to 8.5% from 10.0% for purposes of determining the asset value of the collateral for the credit facility. Finally, the amendment extended the maturity date of the Companys revolving credit facility from May 8, 2010 to May 8, 2011.
On August 2, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Savannah DeSoto. Approximately $9.6
million of the proceeds were used to satisfy the existing indebtedness and pay closing costs. At closing, approximately $2.4 million of the proceeds were issued to the Company. The remainder of the proceeds will be used to fund renovations to the
property. The new mortgage matures August 1, 2017 and bears interest at a rate of 6.06%, with payments of interest-only due for the first 36 months. Thereafter, payments of interest and principal are required under a 25-year amortization
schedule.
F-8
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On August 8, 2007, through its joint venture program with Carlyle, the Company completed the
acquisition of the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida for $74.0 million, with Carlyle retaining a 75% equity position. A portion of the $74.0 million purchase price was financed with a
two-year $57.6 million non-recourse loan from Société Générale. The loan has three one-year extensions and is interest-only bearing a rate of LIBOR plus 1.94%. The hotel will be managed by MHI Hotels Services. The Company
will receive an asset management fee of 1.5% of gross revenues of the hotel in addition to its share of the operating profits and proceeds of sale pursuant to the joint venture agreement.
On October 29, 2007, the Company completed the purchase of a 250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, for the
approximately $13.8 million, including transfer costs. The Company financed the acquisition with funds drawn on its credit facility. The Company intends to make extensive renovations and re-brand the hotel, as is consistent with the Companys
repositioning strategy.
Substantially all of the Companys assets are held by, and all of its operations are conducted through, the
Operating Partnership. For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which is owned 64.85% by the Company as of December 31, 2007, leases its hotels to a subsidiary of MHI Hospitality TRS
Holding Inc., MHI Hospitality TRS, LLC, (collectively, MHI TRS), a wholly owned subsidiary of the Operating Partnership. MHI TRS then engages a hotel management company to operate the hotels under a management contract. MHI TRS is
treated as a taxable REIT subsidiary for federal income tax purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company presented herein include all of the accounts of MHI Hospitality
Corporation, the Operating Partnership, MHI TRS and subsidiaries. All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash includes real estate tax escrows and reserves for replacements of furniture, fixtures and equipment pursuant
to certain requirements in the Companys mortgage agreement with The Mutual of New York Life Insurance Company (MONY). MONY holds mortgages on the Hilton Wilmington Riverside and the Hilton Savannah DeSoto. Also included is a
reserve for replacement of furniture, fixtures and equipment pursuant to the Companys mortgage agreement with the AFL-CIO Building Investment Trust which holds the mortgage on the Crowne Plaza Jacksonville.
Investment in Hotel Properties
Investments in hotel properties include investments in operating properties which are recorded at acquisition
cost and allocated to land, property and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations
. Replacements and improvements are capitalized, while
repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Companys accounts and any resulting gain or loss is included in the statements
of operations. Expenditures under a renovation project which constitute additions or improvements which extend the life of the property are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and
equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
F-9
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company reviews its investments in hotel properties for impairment whenever events or changes in
circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to
declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from
operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to
the related hotel propertys estimated fair market value is recorded and an impairment loss recognized.
Properties Under
Development
Investments in hotel properties that have been taken out of service for an extensive renovation in anticipation of re-opening under a new brand are included in properties under development. Currently, there are two properties
under development; one, in Jeffersonville, Indiana which is expected to open in April 2008 as the Sheraton Louisville Riverside North, and one in Tampa, Florida which is expected to open in the first quarter 2009 as the Crowne Plaza Tampa Westshore.
For properties under development, interest and real estate taxes incurred during the renovation period are capitalized and depreciated
over the lives of the renovated assets. Capitalized interest for the years ended December 31, 2007, 2006 and 2005 was $1,018,949, $183,634, and $0, respectively.
Derivative Instruments
The Company accounts for derivative instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended and interpreted (SFAS 133). Under SFAS 133, all derivative instruments are required to be reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative
instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge
exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in
accumulated other comprehensive income in stockholders equity to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the
change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings. The
Company does not enter into derivative instruments for speculative trading purposes.
The Company is party to an interest-rate swap
agreement on a notional amount of $30.0 million as required under its credit facility agreement for the purpose of hedging interest rate risk. The Company has not designated the interest-rate swap as a cash flow hedge and does not apply hedge
accounting. Changes in the value of the interest-rate swap agreement are reported in the Companys earnings. At December 31, 2007 and 2006, the interest-rate swap agreement had an estimated fair value of $(1,180,494) and $(408,702),
respectively, and is included in accounts payable and other accrued liabilities.
Inventories
Inventories, consisting primarily
of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.
Franchise License Fees
Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of December 31, 2007 and 2006 were $347,862 and $184,812,
respectively. Amortization expense for the years ended December 31, 2007, 2006 and 2005 was $25,950, $29,891 and $25,087, respectively.
F-10
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Minority Interest in Operating Partnership
Certain hotel properties have been acquired,
in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The minority interest in the Operating Partnership is: (i) increased or decreased by the limited partners pro-rata share
of the Operating Partnerships net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Companys common stock and (iv) adjusted to equal the net
equity of the Operating Partnership multiplied by the limited partners ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Companys common stock through an adjustment to additional
paid-in capital. Net income or net loss is allocated to the minority interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.
Revenue Recognition
Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales,
food and beverage sales, and other hotel department revenues, such as telephone, rooftop leases and gift shop sales and rentals.
Occupancy and Other Taxes
Revenue is reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.
Deferred Financing Costs
Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method
that approximates the effective interest method over the term of the related debt and is included in interest expense in the statements of operations.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Company generally will not be subject to federal income tax on that
portion of its net income (loss) that does not relate to MHI TRS the Companys wholly owned taxable REIT subsidiary. MHI TRS, which leases the Companys hotels from subsidiaries of the Operating Partnership, is subject to federal and state
income taxes.
The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards
No. 109,
Accounting for Income Taxes
(SFAS 109). Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Stock-based Compensation
The Companys 2004 Long Term Incentive Plan (Plan) permits the grant of stock options, restricted (non-vested) stock and performance share compensation awards to
its employees for up to 350,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders.
Under the Plan, the Company has made restricted stock and deferred stock awards totaling 87,000 shares including 69,000 shares granted under deferred stock awards to its executives, 4,000 restricted shares issued to
certain employees, and 14,000 restricted shares issued to its directors. Of the 69,000 shares granted under deferred stock awards, 60,000 shares vest over five years and 9,000 shares vested at the end of 2006. Regarding the restricted shares awarded
to the Companys directors and certain employees, the shares vest immediately and represent compensation for the previous year of service. All such shares are charged to compensation expense on a straight-line basis over the vesting or service
period based on the Companys stock price on the date of grant or issuance. The total value of non-vested awards which is expected to be recognized over the next three years is $342,000.
F-11
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Under the Plan, the Company may issue a variety of performance-based stock awards, including
nonqualified stock options. As of December 31, 2007, no performance-based stock awards have been issued. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method.
Total compensation cost recognized under the Plan for the years ended December 31, 2007, 2006 and 2005 was $276,904, $150,800 and
$123,500, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss), as defined, includes all changes in equity
(net assets) during a period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).
Segment Information
Statement of Financial Accounting Standards No 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), requires public entities to report
certain information about operating segments. Based on the guidance provided in SFAS 131, the Company has determined that its business is conducted in one reportable segment, hotel ownership.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain
reclassifications have been made to the predecessor financial statements to conform to the Companys presentation as well as the Companys prior period balances to conform to the current period presentation.
New Accounting
PronouncementsIn December 2007, the FASB Statement 141R, Business Combinations (SFAS 141R) was
issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also
requires transaction costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The effective date for the Company will be January 1, 2009. The Company has not yet determined the impact of SFAS 141R related to future acquisitions, if any, on our consolidated financial
statements. However, it is anticipated that the balance sheet presentation of the minority interest in the Operating Partnership will be reflected in the equity section upon implementation of SFAS141R.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
159). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and liabilities at fair value. The effective date for the Company is January 1, 2008. The Company is evaluating the impact
of the provisions of SFAS 159 on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value, establishes a framework for measuring fair value and expands disclosures required for fair value measurements. SFAS
No. 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS 157 is effective for the Company on a prospective basis for the reporting period beginning
January 1, 2008. The Company does not believe adoption will have a material impact on the Companys results of operations or financial position.
F-12
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in
Income TaxesAn Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by creating a framework for how companies should recognize, measure, present, and disclose
in their financial statements uncertain tax positions that they have taken or expect to take in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was required to be adopted by the Company beginning
January 1, 2007. The adoption did not have a material impact on the Companys results of operations or financial position.
In
November 2005, FASB issued FSP FAS 115-1 and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
(FSP FAS 115-1), which provides guidance on
determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP FAS 115-1 also includes accounting considerations
subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 became effective for reporting periods
beginning after December 15, 2005. We adopted FSP FAS 115-1 in the second quarter of fiscal 2006. The adoptions of FSP FAS 115-1 did not have a material impact on the Companys consolidated results or financial condition.
In November 2005, the FASB issued FSP FAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards
(FSP FAS 123(R)-3). FSP FAS 123(R)-3 provides an elective alternative method that establishes a computational component to arrive at the beginning balance of the accumulated paid-in capital pool related
to employee compensation and a simplified method to determine the subsequent impact on the accumulated paid-in capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS No. 123(R). The adoption of FSP FAS
123(R)3 did not have a material impact on the Companys consolidated results or financial condition.
In May 2005, FASB issued
Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154). SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 became effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on the
Companys results of operations or financial condition.
In February 2005, the FASB issued Emerging Issues Task Force Issue
No. 03-13,
Applying the Conditions of Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations
(EITF 03-13). EITF 03-13 gives guidance on how to evaluate whether the
operations and cash flows of a disposed component have been or will be eliminated from ongoing operations and the types of continuing involvement that constitute significant continuing involvement in the operations of the disposed component. The
adoption of EITF 03-13 did not have a material impact on the Companys results of operations, financial position or cash flows.
In
December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004),
Shared-Based Payment
(SFAS 123R). SFAS 123R is a revision of SFAS No. 123,
Accounting for
Stock-Based Compensation,
and supersedes Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees
and its related implementation guidance. SFAS 123R focuses primarily on accounting for
F-13
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
transactions in which an entity obtains employee services through share-based payment transactions. SFAS 123R requires a public entity to measure the cost of
employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange
for the award. SFAS 123R became effective as of the beginning of the first interim or annual reporting period that begins after January 1, 2006. The Company adopted the provisions of SFAS 123R effective January 1, 2006.
3. Acquisition of Hotel Properties
Tampa
Acquisition.
On October 29, 2007, the Company purchased the former Tampa Clarion Hotel in Tampa, Florida for approximately $13.8 million including transfer costs. The allocation of the purchase price to the acquired assets based on their
fair values was as follows (in thousands):
|
|
|
|
|
|
Tampa Clarion Hotel
|
Land and land improvements
|
|
$
|
4,153
|
Buildings and improvements
|
|
|
9,670
|
|
|
|
|
|
|
$
|
13,823
|
|
|
|
|
Louisville Acquisition.
On September 20, 2006, the Company purchased the Louisville
Ramada Riverfront Inn, located in Jeffersonville, Indiana for approximately $7.7 million including transfer costs. The allocation of the purchase price to the acquired assets based on their fair values was as follows (in thousands):
|
|
|
|
|
|
Louisville Ramada
Riverfront Inn
|
Land and land improvements
|
|
$
|
782
|
Buildings and improvements
|
|
|
6,891
|
Furniture, fixtures and equipment
|
|
|
63
|
|
|
|
|
|
|
$
|
7,736
|
|
|
|
|
Jacksonville Acquisition.
On July 22, 2005, the Company acquired the Crowne Plaza
Jacksonville, formerly known as the Hilton Jacksonville Riverfront, in Jacksonville, Florida from BIT Holdings Seventeen, Inc., an affiliate of the AFL-CIO Building Investment Trust, for an aggregate price of $22 million. The Trust, for which
Mercantile Safe Deposit and Trust Company acts as trustee, financed a portion of the purchase price by extending an $18 million mortgage loan (the Loan) to the purchaser.
The allocation of the purchase price to the acquired assets based on their fair values was as follows (in thousands):
|
|
|
|
|
|
Crowne Plaza
Jacksonville
|
Land and land improvements
|
|
$
|
6,892
|
Buildings and improvements
|
|
|
14,195
|
Furniture, fixtures and equipment
|
|
|
913
|
|
|
|
|
|
|
$
|
22,000
|
|
|
|
|
The results of operations are included in the Companys consolidated statements of operations
from the date of acquisition of this hotel.
F-14
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2007 and December 31, 2006 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
Land and land improvements
|
|
$
|
12,586
|
|
|
$
|
12,581
|
|
Buildings and improvements
|
|
|
101,205
|
|
|
|
91,239
|
|
Furniture, fixtures and equipment
|
|
|
19,470
|
|
|
|
20,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,261
|
|
|
|
123,898
|
|
Less: accumulated depreciation
|
|
|
(23,830
|
)
|
|
|
(20,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,431
|
|
|
$
|
103,070
|
|
|
|
|
|
|
|
|
|
|
5. Credit Facility
As of December 31, 2007, the Company had a secured, revolving credit facility with a financial institution that enabled the Company to borrow up to $60.0 million, subject to borrowing base and loan-to-value
limitations, with a syndicated bank group comprising of Branch Banking & Trust Company (BB&T), Key Bank National Association, Regions Bank and Manufacturers and Traders Trust Company. The credit facility was established during second
quarter of 2006 and replaced a $23.0 million secured, revolving credit facility with BB&T. The Company had borrowings under the credit facility of $34,387,858 and $15,228,232 at December 31, 2007 and December 31, 2006, respectively.
The credit facility matures during May 2011 and bears interest at a floating rate of LIBOR plus additional interest ranging from 1.625% to
2.125%. On December 31, 2007, LIBOR was 4.60%. In some circumstances, the revolving line of credit facility may bear interest at BB&Ts prime rate. Any amounts drawn under the revolving line of credit facility mature at the expiration
of the facility. The revolving line of credit facility includes an uncommitted accordion facility, pursuant to which the Company may be able to increase the total commitment under the revolving line of credit facility up to $75.0 million. The
Company is required to pay a fee of 0.25% on the unused portion of the credit facility. Under the terms of the agreement, the Company was required to purchase an interest rate swap in order to hedge against interest rate risk.
The credit facility is secured by the Holiday Inn Brownstone, Hilton Philadelphia Airport, the property in Jeffersonville, Indiana and the property in
Tampa, Florida as well as a lien on all business assets of those properties including, but not limited to, equipment, accounts receivable, inventory, furniture, fixtures and proceeds thereof. At December 31, 2007, the four properties had a net
carrying value of approximately $65.2 million. Under the terms of the BB&T line of credit, the Company must satisfy certain financial and non-financial covenants. As of December 31, 2007 and December 31, 2006, the Company was in
compliance with all of the required covenants.
6. Mortgage Debt
Upon its formation, the Company assumed existing mortgage debt with MONY that was in place on two of the initial properties.
On August 2, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Savannah DeSoto. Approximately $9.6 million of the proceeds were used to satisfy the existing indebtedness and pay
closing costs. At closing, approximately $2.4 million of the proceeds was issued to the Company. In
F-15
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
November 2007, the Company drew an additional $2.0 million to initiate a product improvement plan for the hotel in connection with the Hilton relicensing.
The remaining $9.0 million of the proceeds will fund the remainder of the product improvement plan. The new mortgage matures August 1, 2017 and bears interest at a rate of 6.06% with payments of interest-only due for the first 36 months.
Thereafter, payments of interest and principal are required under a 25-year amortization schedule. The outstanding balance due on the loan as of December 31, 2007 and December 31, 2006 was $14,000,000 and $9,685,090, respectively.
On March 29, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Wilmington Riverside. Approximately
$13.8 million of the proceeds were used to satisfy the existing indebtedness. The remainder of the proceeds, approximately $9.2 million, is being used to fund renovations to the property. The new mortgage matures March 29, 2017 and bears
interest at a rate of $6.21% with payments of interest-only due for the first 24 months. Thereafter, payments of interest and principal are required under a 25-year amortization schedule. The outstanding balance due on the loan as of
December 31, 2007 and December 31, 2006 was $23,000,000 and $13,922,010, respectively.
On July 22, 2005, the Company
purchased the Crowne Plaza Jacksonville in Jacksonville, Florida from BIT Holdings Seventeen, Inc., an affiliate of the AFL-CIO Building Investment Trust (the Trust), for an aggregate price of $22.0 million. The Trust, for which
Mercantile Safe Deposit and Trust Company (Mercantile) acts as trustee, financed a portion of the purchase price by extending an $18.0 million mortgage loan (the Loan) to the purchaser. The loan, which is secured by a lien
against all the assets, rents and profits of the hotel as well as the real property, bears interest at the rate of 8.0% payable monthly during the term and matures in July 2010. Pre-payment penalties apply toward any principal of the loan repaid
before the fifth year of the term.
Total debt maturities as of December 31, 2007 were as follows ($000s):
|
|
|
|
|
December 31, 2008
|
|
$
|
|
|
December 31, 2009
|
|
|
262
|
|
December 31, 2010
|
|
|
18,580
|
|
December 31, 2011
|
|
|
856
|
|
December 31, 2012
|
|
|
910
|
|
Thereafter
|
|
|
43,392
|
|
|
|
|
|
|
Total future maturities
|
|
$
|
64,000
|
|
Less: Funds remaining to be drawn on the Hilton Savannah DeSoto mortgage
|
|
|
(9,000
|
)
|
|
|
|
|
|
Mortgage loan balance, December 31, 2007
|
|
$
|
55,000
|
|
|
|
|
|
|
7. Commitments and Contingencies
Ground, Building and Submerged Land Leases
The Company leases 2,086 square feet of commercial space next to the Savannah hotel property for
use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. The space is leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the first of
three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease for the years ended December 31, 2007, 2006 and 2005 was $43,180,
$43,180 and $38,487, respectively.
The Company leases, as landlord, the entire fourteenth floor of the Savannah hotel property to The
Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized
under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.
F-16
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company leases a parking lot adjacent to the Holiday Inn Brownstone in Raleigh, North Carolina.
The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to
three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of
the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. For the years ended December 31, 2007, 2006 and 2005, rent expense was $95,482, $82,564 and $76,104, respectively.
In conjunction with the sublease arrangement for the property at Shell Island, the Company incurs an annual lease expense for a leasehold interest other
than the purchased leasehold interest. Lease expense for the year ended December 31, 2007, 2006 and 2005 was $168,138, $168,603 and $155,603, respectively.
The Company leases approximately 1,700 square feet of office space in Williamsburg, Virginia under a two-year lease that expires August 31, 2008. There is a renewal option for one additional year. For the years
ended December 31, 2007 and 2006, rent expense was $41,996 and $13,860, respectively.
The Company has agreed to lease a parking lot
in close proximity to the property under renovation in Jeffersonville, Indiana. The land is leased under an agreement dated August 17, 2007 with the City of Jeffersonville, which in turn leases the property from the State of Indiana. The lease
term for the parking lot coincides with that of the lease with the State of Indiana which expires December 31, 2011. The Company has the right to renew or extend the lease with the City of Jeffersonville pursuant to the conditions of the
original lease provided that the City of Jeffersonville is able to renew or extend the underlying lease with the State of Indiana. Minimum annual rents of $33,600 will commence no later than March 31, 2008.
The Company leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville from the Board of Trustees of the Internal
Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expired September 18, 2007. A new operating lease has been executed requiring annual payments of $4,961 and expires
September 18, 2012. Rent expense for the years ended December 31, 2007, 2006 and 2005 was $4,720, $4,638 and $2,100, respectively.
A schedule of minimum future lease payments is as follows:
|
|
|
|
2008
|
|
$
|
377,513
|
2009
|
|
|
357,361
|
2010
|
|
|
358,681
|
2011
|
|
|
354,765
|
2012
|
|
|
263,620
|
2013 and thereafter
|
|
|
350,101
|
|
|
|
|
Total
|
|
$
|
2,062,041
|
|
|
|
|
Purchase Commitment
On January 23, 2008, the Company entered into a definitive
agreement to purchase the 176-room Hampton Marina Hotel in Hampton, Virginia for the aggregate purchase price of $7.85 million. The Company expects to complete the purchase, subject to customary closing conditions including satisfactory completion
of a diligence review of the property, during the second quarter 2008 and fund the acquisition with borrowings on its credit facility.
F-17
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Management Agreement
Each of the operating hotels that the Company owned at
December 31, 2007 operate under a ten-year master management agreement with MHI Hotels Services which expires between December 2014 and July 2015 (see Note 9).
Franchise Agreements
As of December 31, 2007, the Companys hotels, except for those under development, operated under franchise licenses from national hotel companies. Franchise licenses have
been obtained for both the Sheraton Louisville Riverside North, expected to open in April 2008, and the Crowne Plaza Tampa Westshore, expected to open in the first quarter 2009. A franchise license has also been obtained for a Crowne Plaza license
for the Companys anticipated purchase of the Hampton Marina Hotel in Hampton, Virginia subject to certain terms and conditions. Under the franchise agreements, the Company is required to pay a franchise fee generally between 2.5% and 5.0% of
room revenues, plus additional fees that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between March 2011 and January 2024.
Restricted Cash Reserves
The Company is required to escrow with its lender on the Wilmington Riverside Hilton and the Savannah DeSoto Hilton
an amount equal to 1/12 of the annual real estate taxes due for the properties. The Company is also required to establish a property improvement fund for each of these two hotels to cover the cost of replacing capital assets at the properties.
Contributions to the property improvement fund are based on a percentage of gross revenues or receipts at each hotel equating to 4%.
Pursuant to the terms of the mortgage on the Crowne Plaza Jacksonville, the Company is required to contribute 4% of room revenues to a property improvement fund that commenced with the completion of the renovations at the property.
Litigation
The Company is not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. The Company believes that these routine legal proceedings, in the aggregate, are not material to our financial condition and results of operations.
8. Capital Stock
Common Shares
The Company is authorized to issue up to 49,000,000
shares of common stock, $.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Companys common stock are entitled to receive
distributions when authorized by the Companys board of directors out of assets legally available for the payment of distributions.
On December 21, 2004, the Company completed its IPO and sold 6,000,000 shares of common stock at a price of $10 per share, resulting in gross proceeds of $60 million and net proceeds (after deducting underwriting discounts and offering
expenses) of approximately $54.8 million. On December 31, 2004 the Company issued 4,000 shares of common stock to its independent directors. On January 19, 2005, the Company sold an additional 700,000 shares of common stock at a price of
$9.30 per share, net of the underwriting discount, as a result of the exercise of the underwriters over-allotment option, resulting in additional net proceeds of approximately $6.5 million. The total net proceeds generated from the IPO and the
underwriters over-allotment was approximately $61.3 million.
In June 2006, the Company issued 8,000 shares of restricted common
stock to its independent directors and non-executive employees. In January 2007, the Company issued 13,500 shares of restricted stock to certain of its principal executives and independent directors. In March 2007, two holders of units in the
Operating Partnership redeemed 120,000 units for an equivalent number of shares of the Companys common stock. In April 2007, the Company issued 1,500 shares of restricted stock to a new independent director. In August 2007, one holder of units
in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Companys common stock. As of December 31, 2007, the Company had 6,897,000 shares of common stock outstanding.
F-18
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Warrants
The Company has granted no warrants representing the right to purchase common
stock.
Preferred Shares
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par value per share. As
of December 31, 2006, there were no shares of preferred stock outstanding.
Operating Partnership Units
Holders of
Operating Partnership units have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Companys common stock on a one-for-one basis or, at the option of the Company,
cash per unit equal to the market price of the Companys common stock at the time of redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations
or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company. As of December 31, 2007, the total number of Operating Partnership
units outstanding was 3,737,607.
9. Related Party Transactions
As of December 31, 2007, the members of MHI Hotels Services (a company that is majority-owned and controlled by our chief executive officer, our chief financial officer and two members of the board of directors)
owned 0.1% of the Companys outstanding common stock and 2,218,670 Operating Partnership units. The following is a summary of the transactions between the Company and MHI Hotels Services:
Accounts Receivable
At December 31, 2007 and December 31, 2006, the Company was due $11,814 and $195,859, respectively, from MHI
Hotels Services.
Note Payable Related Party
On May 11, 2005, the Company repaid its indebtedness of $2,000,000 to
MHI Hotels Services.
Shell Island Sublease
The Company has a sublease arrangement with MHI Hotels Services on its
leasehold interests in the property at Shell Island. For the years ended December 31, 2007, 2006 and 2005, the Company earned $640,000 per year in leasehold revenue.
Sublease of Office Space
The Company subleases office space in Greenbelt, MD from MHI Hotels Services. For the years ended December 31,2007, 2006 and 2005, rent expense related to the sublease totaled
$38,040, $38,010 and $31,050, respectively.
Strategic Alliance Agreement
On December 21, 2004, the Company entered into a
ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.
Management Agreements
Each of the operating hotels that the Company owned at December 31, 2007 are operated by MHI Hotels Services under
a master management agreement that expires between December 2014 and July 2015. MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee
for the initial portfolio of six hotels is 2.0% in 2005, rising to 2.5% in 2006 and 3.0% thereafter of total gross revenues from the hotels. The base management fee for the Crowne Plaza Jacksonville is 2.0% through 2006, rising to 2.5% in 2007 and
3.0% thereafter. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company upon its formation, MHI Hotels Services has agreed that the property in Jeffersonville, Indiana shall
be substituted for the Williamsburg property under the master management
F-19
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
agreement. The incentive management fee, if any, is due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10% of the
amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of
gross revenues of all of the hotels included in the incentive fee calculation.
For the years ended December 31, 2007, 2006 and 2005,
the Company paid MHI Hotels Services $2,186,166, $1,768,912 and $1,263,994 in management fees, respectively.
Acquisition of Hotel
Furniture and Equipment
Upon acquisition of the Crowne Plaza Jacksonville on July 22, 2005, an affiliate of MHI Hotels Services contributed furniture, fixtures and equipment used in the operation of the Hotel and assigned all other
rights relating to the property to the purchase in exchange for 90,570 units in the Operating Partnership, valued at approximately $913,000.
Employee Medical Benefits
The Company purchases employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services. For the years ended December 31, 2007, 2006 and 2005, the
Company paid $1,610,386, $1,680,066 and $1,480,198, respectively, for benefits.
Construction Management Services
The Company
has engaged MHI Hotels Services to manage the renovations of the Hilton Philadelphia Airport, the Crowne Plaza Jacksonville, the Hilton Wilmington Riverside, and the newly acquired property in Jeffersonville, Indiana. For the years ended
December 31, 2007, 2006 and 2005, the Company paid $500,000, $312,000 and $70,000, respectively, in construction management fees.
Charter Vessel Rental
The Company leases the Jacksonville Princess, a charter vessel docked adjacent to the Crowne Plaza Jacksonville from MHI Hotels, Inc., an affiliate of MHI Hotels Services on an event-by-event
basis for guests of the hotel. Charter rentals for the years ended December 31, 2007, 2006 and 2005 were $66,145, $137,119 and $68,008, respectively. Beginning June 1, 2007, the Company no longer chartered the Jacksonville
Princess from MHI Hotels, Inc., but sold catering services to MHI Hotels, Inc. for events on the charter vessel. For the year ended December 31, 2007, total sales of catering services to MHI Hotels, Inc. was $46,846.
10. Retirements Plans
The Company began a 401(k)
plan for qualified employees on April 1, 2006. The plan is subject to safe harbor provisions which require that the Company match 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. All
Company matching funds vest immediately in accordance with the safe harbor provisions. Company contributions to the plan for the years ended December 31, 2007 and 2006 were $37,951 and $32,623.
F-20
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Unconsolidated Joint Venture
The Company owns a 25% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel
under a management contract. Carlyle owns a 75% controlling interest in both the entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this
investment, which is accounted for under the equity method, is as follows:
|
|
|
|
|
|
December 31, 2007
|
ASSETS
|
|
|
|
Investment in hotel properties, net
|
|
$
|
76,275,909
|
Cash and cash equivalents
|
|
|
1,981,885
|
Restricted cash
|
|
|
1,001,196
|
Accounts receivable
|
|
|
107,381
|
Prepaid expenses, inventory and other assets
|
|
|
1,541,164
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
80,907,535
|
|
|
|
|
LIABILITIES
|
|
|
|
Mortgage loans
|
|
|
57,600,000
|
Accounts payable and other accrued liabilities
|
|
|
794,716
|
Advance deposits
|
|
|
180,096
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
58,574,812
|
TOTAL MEMBERS EQUITY
|
|
|
22,332,723
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS EQUITY
|
|
$
|
80,907,535
|
|
|
|
|
|
|
|
|
|
|
|
Period from
May 25, 2007 through
December 31, 2007
|
|
Revenue
|
|
|
|
|
Rooms department
|
|
$
|
1,521,182
|
|
Food and beverage department
|
|
|
330,993
|
|
Other operating departments
|
|
|
115,409
|
|
|
|
|
|
|
Total revenue
|
|
|
1,967,584
|
|
Expenses
|
|
|
|
|
Hotel operating expenses
|
|
|
|
|
Rooms department
|
|
|
459,465
|
|
Food and beverage department
|
|
|
397,789
|
|
Other operating departments
|
|
|
81,608
|
|
Indirect
|
|
|
1,303,286
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
2,242,149
|
|
Depreciation and amortization
|
|
|
543,078
|
|
Start-up expenses
|
|
|
(1,555,618
|
)
|
General and administrative
|
|
|
9,033
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,349,878
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,382,294
|
)
|
Interest expense
|
|
|
(1,727,996
|
)
|
Interest income
|
|
|
17,955
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,092,335
|
)
|
|
|
|
|
|
F-21
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. Income Taxes
The components of the provision for (benefit from) income taxes for the years ended December 31, 2007, 2006 and, 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
Total
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
Total
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
108
|
|
|
|
108
|
|
|
|
|
|
|
441
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
108
|
|
|
|
|
|
|
441
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(263
|
)
|
|
|
(263
|
)
|
|
|
|
|
|
(266
|
)
|
|
|
(149
|
)
|
|
|
(117
|
)
|
|
|
(393
|
)
|
|
|
(199
|
)
|
|
|
(194
|
)
|
State and local
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
(69
|
)
|
|
|
(38
|
)
|
|
|
(31
|
)
|
|
|
(115
|
)
|
|
|
(58
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(296
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
(335
|
)
|
|
|
(187
|
)
|
|
|
(148
|
)
|
|
|
(508
|
)
|
|
|
(257
|
)
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(188
|
)
|
|
$
|
(188
|
)
|
|
$
|
|
|
$
|
106
|
|
|
$
|
254
|
|
|
$
|
(148
|
)
|
|
$
|
(508
|
)
|
|
$
|
(257
|
)
|
|
$
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax expense to the Companys provision for
(benefit from) income tax is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2007
|
|
|
Year Ended
December 31,
2006
|
|
|
Year Ended
December 31,
2005
|
|
Statutory federal income tax expense
|
|
$
|
1,239
|
|
|
$
|
1,748
|
|
|
$
|
1,159
|
|
Effect of non-taxable REIT income
|
|
|
(1,502
|
)
|
|
|
(2,014
|
)
|
|
|
(1,552
|
)
|
State income tax provision
|
|
|
75
|
|
|
|
372
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(188
|
)
|
|
$
|
106
|
|
|
$
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and December 31, 2006, the Company had a net deferred tax asset
of approximately $1.34 million and $1.04 million, respectively, of which, approximately $1.06 million and $0.90 million, respectively are due to past years net operating losses. These loss carryforwards will begin to expire in 2024 if not
utilized. As of December 31, 2007 and December 31, 2006, approximately $0.16 million and $0.00 million, respectively, of the deferred tax asset is attributable to the Companys share of start-up expenses related to the Crowne Plaza
Hollywood Beach Resort that are not currently deductible, but will be amortized over 15 years. The remainder of the deferred tax asset is attributable to year-to-year timing differences for accrued, but not deductible, vacation and sick pay. The
Company believes that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.
13.
Discontinued Operations
The provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, require that hotels sold or held for sale be treated as discontinued operations.
F-22
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On June 20, 2006, the Company announced it had entered into a definitive agreement to sell the
Holiday Inn Downtown, in Williamsburg, VA. The transaction closed on August 10, 2006. The results of operations of the property for the years ended December 31, 2006 and 2005 have been classified or reclassified as discontinued operations.
After transaction costs, a gain of approximately $108,800 was recognized on the sale of the property.
The results of operations for the
property for the years ended December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2006
|
|
|
Year ended
December 31,
2005
|
|
Revenue
|
|
|
|
|
|
|
|
|
Rooms department
|
|
$
|
1,304,020
|
|
|
$
|
1,918,146
|
|
Food and beverage department
|
|
|
456,148
|
|
|
|
712,831
|
|
Other operating departments
|
|
|
36,092
|
|
|
|
51,029
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,796,260
|
|
|
|
2,682,006
|
|
Expenses
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
|
|
|
|
|
|
|
Rooms department
|
|
|
513,729
|
|
|
|
660,012
|
|
Food and beverage department
|
|
|
471,662
|
|
|
|
709,644
|
|
Other operating departments
|
|
|
25,296
|
|
|
|
55,921
|
|
Indirect
|
|
|
895,874
|
|
|
|
1,348,058
|
|
|
|
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
1,906,561
|
|
|
|
2,773,635
|
|
Depreciation and amortization
|
|
|
136,869
|
|
|
|
237,801
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,043,430
|
|
|
|
3,011,436
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(247,170
|
)
|
|
|
(329,430
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
Minority interest in operating partnership
|
|
|
36,500
|
|
|
|
(28,795
|
)
|
Income tax (provision) benefit
|
|
|
148,007
|
|
|
|
250,877
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
$
|
(62,663
|
)
|
|
$
|
(107,348
|
)
|
|
|
|
|
|
|
|
|
|
14. Earnings per Share
The limited partners outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units
for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners share of income would also be added back to net income. The computation of
basic and diluted earnings per share is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
2007
|
|
Year ended
December 31,
2006
|
|
Year ended
December 31,
2005
|
Net income
|
|
$
|
2,461,017
|
|
$
|
3,181,012
|
|
$
|
2,481,451
|
Basic:
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
6,843,736
|
|
|
6,708,526
|
|
|
6,667,562
|
Net income per sharebasic
|
|
$
|
0.36
|
|
$
|
0.47
|
|
$
|
0.37
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Dilutive awards
|
|
|
60,000
|
|
|
69,000
|
|
|
|
Diluted weighted average number common shares outstanding
|
|
|
6,903,736
|
|
|
6,775,775
|
|
|
6,667,562
|
Net income per sharediluted
|
|
$
|
0.36
|
|
$
|
0.47
|
|
$
|
0.37
|
F-23
MHI HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Diluted net income per share takes into consideration the pro forma dilution of certain unvested
stock awards.
15. Quarterly Operating Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2007
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Total revenue
|
|
$
|
16,918,926
|
|
$
|
19,374,181
|
|
$
|
16,726,771
|
|
$
|
16,794,501
|
Total operating expenses
|
|
|
14,944,598
|
|
|
16,006,926
|
|
|
14,428,518
|
|
|
14,684,632
|
Net operating income
|
|
|
1,974,328
|
|
|
3,367,255
|
|
|
2,298,253
|
|
|
2,109,869
|
Net income (loss)
|
|
|
602,503
|
|
|
1,442,806
|
|
|
409,118
|
|
|
6,589
|
Earnings per share (basic and diluted):
|
|
|
0.09
|
|
|
0.21
|
|
|
0.06
|
|
|
0.00
|
|
|
|
|
Quarters Ended 2006
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Total revenue
|
|
$
|
15,527,572
|
|
$
|
18,601,088
|
|
$
|
16,117,736
|
|
$
|
16,995,401
|
Total operating expenses
|
|
|
14,233,033
|
|
|
15,506,265
|
|
|
13,853,528
|
|
|
14,126,599
|
Net operating income
|
|
|
1,294,539
|
|
|
3,094,823
|
|
|
2,264,208
|
|
|
2,868,802
|
Net income (loss)
|
|
|
143,549
|
|
|
1,127,793
|
|
|
799,343
|
|
|
1,110,327
|
Earnings per share (basic and diluted):
|
|
|
0.02
|
|
|
0.17
|
|
|
0.12
|
|
|
0.17
|
16. Subsequent Events
On January 11, 2008, the Company paid the dividend (distribution) for the fourth quarter of 2007 to those stockholders (and unit holders of MHI Hospitality, L.P.) of record on December 14, 2007. The dividend
(distribution) was $0.17 per share (unit).
On January 14, 2008, the Company authorized the payment of a quarterly dividend
(distribution) of $0.17 per share (unit) to the stockholders (and unit holders of MHI Hospitality, L.P.) of record as of March 14, 2008. The dividend (distribution) is to be paid April 11, 2008.
On February 6, 2008, the Company issued 6,000 shares of restricted stock to its independent directors and 12,613 shares of restricted stock to its
senior executives under the Companys 2004 Long-Term Incentive Plan.
On January 23, 2008, the Company entered into a definitive
agreement to purchase the Hampton Marina Hotel in Hampton, Virginia for the aggregate purchase price of $7.85 million. The 176-room hotel is located on the waterfront and includes a 297-space parking garage and 21,000sf of retail space. The Company
intends to make renovations and re-brand the hotel, as is consistent with the Companys repositioning strategy. To facilitate the closing of the acquisition, which is expected in the second quarter 2008, subject to customary closing conditions,
including satisfactory completion of a diligence review of the property, the Company anticipates accessing funds from its credit facility.
F-24
MHI HOSPITALITY CORPORATION
SCHEDULE IIIREAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2007
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Costs
|
|
Costs Capitalized
Subsequent to Acquisition
|
|
Gross Amount At End of Year
|
|
Accumulated
Depreciation
|
|
Description
|
|
Land
|
|
Building &
Improvements
|
|
Land
|
|
Building &
Improvements
|
|
Land
|
|
Building &
Improvements
|
|
Total
|
|
Philadelphia Airport Hilton Philadelphia, Pennsylvania
|
|
$
|
2,100
|
|
$
|
22,031
|
|
$
|
44
|
|
$
|
2,202
|
|
$
|
2,144
|
|
$
|
24,233
|
|
$
|
26,377
|
|
$
|
(1,994
|
)
|
Hilton Wilmington Riverside Wilmington, North Carolina
|
|
|
785
|
|
|
16,829
|
|
|
|
|
|
7,010
|
|
|
785
|
|
|
23,839
|
|
|
24,624
|
|
|
(4,332
|
)
|
Holiday Inn Brownstone Raleigh, North Carolina
|
|
|
815
|
|
|
7,416
|
|
|
|
|
|
989
|
|
|
815
|
|
|
8,405
|
|
|
9,220
|
|
|
(1,607
|
)
|
Hilton Savannah DeSoto Savannah, Georgia
|
|
|
600
|
|
|
13,562
|
|
|
|
|
|
3,238
|
|
|
600
|
|
|
16,800
|
|
|
17,400
|
|
|
(2,688
|
)
|
Holiday Inn Laurel West Laurel, Maryland
|
|
|
900
|
|
|
9,443
|
|
|
205
|
|
|
1,833
|
|
|
1,105
|
|
|
11,276
|
|
|
12,381
|
|
|
(1,073
|
)
|
Crowne Plaza Jacksonville Jacksonville, Florida
|
|
|
7,090
|
|
|
14,604
|
|
|
47
|
|
|
2,049
|
|
|
7,137
|
|
|
16,653
|
|
|
23,790
|
|
|
(1,024
|
)
|
Sheraton Louisville Riverside Jeffersonville, Indiana
|
|
|
782
|
|
|
6,891
|
|
|
|
|
|
8,758
|
|
|
782
|
|
|
15,649
|
|
|
16,431
|
|
|
(29
|
)
|
Crowne Plaza Tampa Westshore Tampa, Florida
|
|
|
4,153
|
|
|
9,670
|
|
|
|
|
|
999
|
|
|
4,153
|
|
|
10,669
|
|
|
14,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,225
|
|
$
|
100,446
|
|
$
|
296
|
|
$
|
27,078
|
|
$
|
17,521
|
|
$
|
127,524
|
|
$
|
145,045
|
|
$
|
(12,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
MHI HOSPITALITY CORPORATION
SCHEDULE IVMORTGAGE LOANS AND INTEREST EARNED ON REAL ESTATE
AS OF DECEMBER 31, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Prior Liens
|
|
Balance at
December 31,
2007
|
|
Delinquent
Principal at
December 31,
2007
|
|
Being
Foreclosed at
December 31,
2007
|
|
Accrued
Interest at
December 31,
2007
|
|
Interest
Income
During Year
Ended
December 31,
2007
|
Holiday Inn Williamsburg Downtown Williamsburg, Virginia
|
|
$
|
4,030
|
|
$
|
400
|
|
$
|
|
|
$
|
|
|
$
|
11
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,030
|
|
$
|
400
|
|
$
|
|
|
$
|
|
|
$
|
11
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
MHI/Carlyle Sian Owner I, LLC
MHI/Carlyle Sian Lessee I, LLC
Williamsburg, Virginia
We have audited the accompanying combined balance sheet of MHI/Carlyle Sian Owner I, LLC and MHI/Carlyle Sian Lessee I, LLC (the Company) as of
December 31, 2007, the related combined statements of operations, members equity, and cash flows for the period from inception (May 25, 2007) to December 31, 2007. These combined financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these combined financial statements based on our audit.
We conducted our audit
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but nor for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements described
above present fairly, in all material respects, the financial position of MHI/Carlyle Sian I, LLC and MHI/Carlyle Sian Lessee I, LLC as of December 31, 2007, and the results of their operations and their cash flows for the initial period then
ended in conformity with accounting principles generally accepted in the United States of America.
/s/ PKF Witt Mares,
PLC
Williamsburg, Virginia
February 16, 2008
F-27
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
COMBINED BALANCE SHEET
|
|
|
|
|
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,981,885
|
|
Restricted cash
|
|
|
1,001,196
|
|
Accounts receivable
|
|
|
107,381
|
|
Prepaid expenses, inventory and other assets
|
|
|
619,869
|
|
|
|
|
|
|
Total current assets
|
|
|
3,710,331
|
|
|
|
|
|
|
Property and Equipment (at cost)
|
|
|
|
|
Land and improvements
|
|
|
13,884,230
|
|
Building and improvements
|
|
|
58,685,853
|
|
Furniture, fixtures and equipment
|
|
|
4,247,602
|
|
|
|
|
|
|
Total property and equipment
|
|
|
76,817,685
|
|
Less: accumulated depreciation
|
|
|
(541,776
|
)
|
|
|
|
|
|
Property and equipment, net
|
|
|
76,275,909
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
Deferred loan costs, net
|
|
|
685,632
|
|
Other assets
|
|
|
235,663
|
|
|
|
|
|
|
Total other assets
|
|
|
921,295
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
80,907,535
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
794,716
|
|
Advance deposits
|
|
|
180,096
|
|
|
|
|
|
|
Total current liabilities
|
|
|
974,812
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
Mortgage loan
|
|
|
57,600,000
|
|
|
|
|
|
|
Total long term liabilities
|
|
|
57,600,000
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
58,574,812
|
|
|
|
|
|
|
Commitments and contingencies (see Note 5)
|
|
|
|
|
MEMBERS EQUITY
|
|
|
|
|
Members equity accounts
|
|
|
22,332,723
|
|
|
|
|
|
|
TOTAL MEMBERS EQUITY
|
|
|
22,332,723
|
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS EQUITY
|
|
$
|
80,907,535
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-28
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
COMBINED STATEMENT OF OPERATIONS AND MEMBERS EQUITY
|
|
|
|
|
|
|
Period From
Inception
(May 25, 2007)
to
December 31, 2007
|
|
REVENUE
|
|
|
|
|
Rooms department
|
|
$
|
1,521,182
|
|
Food and beverage department
|
|
|
330,993
|
|
Other operating departments
|
|
|
115,409
|
|
|
|
|
|
|
Total revenue
|
|
|
1,967,584
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
Hotel operating expenses
|
|
|
|
|
Rooms department
|
|
|
459,465
|
|
Food and beverage department
|
|
|
397,789
|
|
Other operating departments
|
|
|
81,608
|
|
Indirect
|
|
|
1,303,287
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
2,242,149
|
|
Depreciation and amortization
|
|
|
543,078
|
|
Startup costs
|
|
|
1,555,618
|
|
Corporate general and administrative
|
|
|
9,033
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,349,878
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(2,382,294
|
)
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
Interest expense
|
|
|
(1,727,996
|
)
|
Interest income
|
|
|
17,955
|
|
|
|
|
|
|
NET LOSS
|
|
|
(4,092,335
|
)
|
MEMBERS EQUITY, BEGINNING OF PERIOD
|
|
|
|
|
Members equity contributions
|
|
|
26,425,058
|
|
Members equity distributions
|
|
|
|
|
|
|
|
|
|
MEMBERS EQUITY, END OF PERIOD
|
|
$
|
22,332,723
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-29
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
COMBINED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
Period From
Inception
(May 25, 2007) to
December 31, 2007
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net Loss
|
|
$
|
(4,092,335
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
543,078
|
|
Amortization of deferred financing costs
|
|
|
75,948
|
|
Changes in assets and liabilities:
|
|
|
|
|
Restricted cash
|
|
|
(17,955
|
)
|
Accounts receivable
|
|
|
(107,381
|
)
|
Inventory, prepaid expenses and other assets
|
|
|
(430,703
|
)
|
Other assets
|
|
|
(160,663
|
)
|
Accounts payable and accrued liabilities
|
|
|
604,248
|
|
Advance deposits
|
|
|
180,096
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,405,667
|
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Acquisition of hotel property
|
|
|
(18,175,628
|
)
|
Improvements and additions to hotel property
|
|
|
(1,117,057
|
)
|
Contribution to restricted cash reserve
|
|
|
(1,985,000
|
)
|
Proceeds of restricted cash reserve
|
|
|
1,001,759
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(20,275,926
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Members capital contributed
|
|
|
26,425,058
|
|
Payment of deferred financing costs
|
|
|
(761,580
|
)
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
25,663,478
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,981,885
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
1,981,885
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,835,039
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Mortgage note on purchase of hotel property
|
|
$
|
57,600,000
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-30
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
1.
Organization and Description of Business
MHI/Carlyle Sian Owner I, LLC (Sian Owner) and MHI/Carlyle Sian Lessee I, LLC
(Sian Lessee and together, the Company) were formed on May 25, 2007 pursuant to a program agreement between MHI Hospitality Corporation (MHI) and the Carlyle Group (Carlyle) for the purpose of
acquiring a recently renovated property in Hollywood Beach, Florida, formerly known as the Ambassador Hotel, and re-opening as the Crowne Plaza Hollywood Beach. Sian Owner acquired the property on August 8, 2007 subject to a mortgage in the
amount of $57.6 million with Société Générale that matures on August 1, 2009 and bears a rate of 1-month LIBOR plus 1.94%. Sian Lessee is a co-obligor of the loan, which can be extended for a maximum of two 12-month
periods. The Crowne Plaza Hollywood Beach commenced operations on September 18, 2007.
Substantially all of the Companys assets
are held by, and all of its operations are conducted through, Sian Owner. Sian Owner leases the hotel to Sian Lessee, which in turn has engaged a hotel management company to operate the hotel under a management contract.
2. Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements presented herein include all of the accounts of Sian Owner and Sian Lessee and together represent assets and operations of the Crowne Plaza Hollywood Beach.
Principles of Combination
The combined financial statements of the Company include the accounts of the Sian Owner and Sian Lessee. All
inter-company accounts and transactions have been eliminated.
Cash and Cash Equivalents
All highly liquid investments with an
original maturity of three months or less are cash equivalents.
Restricted Cash
Restricted cash represents a debt service
escrow of approximately three months interest payments under the mortgage loan agreement with Société Générale. Under the terms of the agreement, the escrow account must remain until the mortgagee exceeds a debt
service coverage ratio for a one-year period.
Property and Equipments
Property and equipment are stated at cost and are
depreciated on a straight-line basis over their estimated useful lives as follows: land improvements ten to twenty years, building and improvements thirty-nine years, furniture and equipment five to ten years. Depreciation
expense for the period from May 25, 2007 through December 31, 2007 was $541,775.
Expenditures for items that have a useful life
of more than one year or that materially increase the value or extend the life of existing assets are capitalized, while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are charged against
earnings as incurred. Upon sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed and any resulting gain or loss in included in the statement of operations.
The management of Sian Owner reviews the hotel property for impairment whenever events or changes in circumstances indicate that the carrying value of
the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or
new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition
of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel propertys estimated fair market
value is recorded and an impairment loss recognized.
F-31
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS(Continued)
Derivative Instruments
Derivative instruments are accounted for in accordance with the
provisions of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
, as amended and interpreted (SFAS 133). Under SFAS 133, all derivative instruments are required
to be reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk,
such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative
instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders equity to the extent the hedge is effective. For a derivative instrument designated as a
fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is
not designated as a hedge, the change in fair value each period is reported in earnings. Derivative instruments are not purchased for speculative trading purposes.
Pursuant to the terms of the mortgage loan agreement with Société Générale, an interest rate cap agreement was purchased for $37,690 limiting exposure to 1-Month LIBOR to no more than 6.25%
and will expire August 15, 2009. The interest rate cap had an estimated fair value of $30,214 at December 31, 2007 and is included in other assets.
Inventories
Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis. Generally,
supplies of bed linens, towels, china, glass and silverware are not capitalized. Purchases of replacement supplies are expensed when put into service. However, with the opening of the hotel, initial supplies of linen, china, glass and silver were
capitalized at cost and are being amortized over their expected useful life of between 9 and 24 months.
Franchise License
Fees
Fees expended to obtain the franchise license are amortized over the life of the license. The unamortized franchise fees as of December 31, 2007 were $50,698. Amortization expense for the period May 25, 2007 through
December 31, 2007 was $1,302.
Revenue Recognition
Revenues from operation of the hotel are recognized when the services
are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, rooftop leases and gift shop sales and rentals.
Deferred Financing Costs
Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in obtaining debt
financing. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the statement of operations.
Income Taxes
Sian Owner and Sian Lessee are limited liability companies which file tax returns for which the members are taxed on their
respective shares of the entitys income, and accordingly, no provision for income taxes is included in the financial statements.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
F-32
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS(Continued)
Occupancy and Other Taxes
Revenue is reported net of occupancy and other taxes collected
from customers and remitted to governmental authorities.
New Accounting Pronouncements
In December 2007, the FASB
Statement 141R, Business Combinations (SFAS 141R) was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transactions costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date for the Company will be January 1, 2009. The management of Sian Owner and Sian Lessee have not yet
determined the impact of SFAS 141R related to future acquisitions, if any, on our combined financial statements.
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets
and liabilities at fair value. The effective date for the Company is January 1, 2008. The management of Sian Owner and Sian Lessee is evaluating the impact of the provisions of SFAS 159 on its combined financial statements.
In September 2006, FASB Statement 157, Fair Value Measurements (SFAS 157) was issued. SFAS 157 establishes a framework for
measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS 157, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that
require or permit fair value measurements. The effective date for the Company is January 1, 2008. The management of Sian Owner and Sian Lessee is evaluating the impact of adopting SFAS 157 on its Consolidated Financial Statements. However, the
FASB has proposed FASB Staff Position No. FAS 157-b,
Effective Date of FASB Statement No. 157
(the proposed FSP). The proposed FSP would delay the effective date of Statement 157 for all nonfinanical assets and
nonfinancial liabilities until fiscal years beginning after November 15, 2008.
In June 2006, the FASB issued FASB Interpretation No.
(FIN 48),
Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109
. FIN 48 clarifies the accounting for uncertainty in income taxes by creating a framework for how companies should recognize,
measure, present, and disclose in their financial statements uncertain tax positions that they have taken or expect to take in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted
beginning January 1, 2007. As the companys members are subject to tax on the companys earnings, the management of Sian Owner and Sian Lessee do not believe adoption will have a material impact on the combined results of operations
or financial position.
3. Acquisition of Hotel Property
On August 8, 2007, Sian Owner I, LLC purchased recently renovated property in Hollywood Beach, Florida, formerly known as the Ambassador Hotel, for approximately $75.8 million including transfer costs. The
allocation of the purchase price to the acquired assets based on their fair values was as follows (in thousands):
|
|
|
|
Land and improvements
|
|
$
|
13,870
|
Building and improvements
|
|
|
58,506
|
Furniture and equipment
|
|
|
3,324
|
Other assets
|
|
|
75
|
|
|
|
|
|
|
$
|
75,775
|
|
|
|
|
F-33
MHI/CARLYLE SIAN OWNER I, LLC and
MHI/CARLYLE SIAN LESSEE I, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS(Continued)
4. Mortgage Debt
Co-incident with the purchase of the hotel property in Hollywood Beach, Florida, Sian Owner and Sian Lessee became obligors of a $57.6 million mortgage with Société Générale. Under the
loan, monthly payments of interest-only are due at 1-month LIBOR plus 1.94% through August 1, 2009, the loans maturity date. Provided certain conditions are met, the loan can be extended for up to two (2) 12-month periods. The loan
is secured by the Crowne Plaza Hollywood Beach hotel.
Total debt maturities as of December 31, 2007 were as follows ($000s):
|
|
|
|
December 31, 2008
|
|
$
|
|
December 31, 2009
|
|
|
57,600
|
|
|
|
|
Total
|
|
$
|
57,600
|
|
|
|
|
5. Commitments and Contingencies
Management Agreement
Sian Lessee, which leases the property from Sian Owner, has contracted with MHI Hotels Services, LLC (MHI Hotels
Services) to manage the property under a ten-year management agreement which expires August 2017. (See Note 6.)
Asset Management
Agreement
Sian Owner has engaged MHI Hospitality TRS II, LLC, an indirect subsidiary of MHI to provide advisory and consultation services with respect to ownership, management, operation, financing and disposition of the Crowne Plaza
Hollywood Beach. (See Note 6.)
Franchise Agreements
As of December 31, 2007, the Crowne Plaza Hollywood Beach operated
under a franchise license from InterContinental Hotel Group. Under the franchise agreement, the hotel is required to pay a franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees that amount to between 2.5% and 6.0% of
room revenues from the hotels.
Litigation
The Company is not involved in any material litigation nor, to its knowledge, is any
material litigation threatened against the Company.
6. Related Party Transactions
Management Agreement
Sian Lessee, which leases the property from Sian Owner, has contracted with MHI Hotels Services (a company majority-owned
and controlled by the CEO, the CFO and two directors of MHI) for management of the hotel. MHI Hotels Services receives a base management fee of 2.0% in 2007 and 2008, rising to 2.5% in 2009 and 3.0% thereafter of total gross revenue. Management fees
for the period from inception, May 25, 2007 through December 31, 2007 were $39,352.
Asset Management
Agreement
Sian Owner has engaged MHI Hospitality TRS II, LLC, an indirect subsidiary of MHI, to provide advisory and consultation services previously described. A fee of 1.50% of total revenue is due on a quarterly basis for services
rendered. Asset management fees for the period from inception, May 25, 2007, to December 31, 2007 were $29,514. Unpaid asset management fees included in accounts payable and accrued liabilities at December 31, 2007 totaled $29,514.
F-34
Mhi Hospitality Corp. (MM) (NASDAQ:MDH)
Historical Stock Chart
From Aug 2024 to Sep 2024
Mhi Hospitality Corp. (MM) (NASDAQ:MDH)
Historical Stock Chart
From Sep 2023 to Sep 2024