Interstate Hotels & Resorts Reports Third-Quarter Results
WASHINGTON -- Interstate Hotels & Resorts
The company was formed July 31, 2002, following the merger of MeriStar Hotels & Resorts and Interstate Hotels Corporation. Both combined pro forma financial data (assuming the merger was completed on January 1, 2001) and historical financial data for the 2002 third quarter are included in the tables of this press release. Historical financial data represents results for Interstate Hotels Corporation through July 31, 2002 and results for Interstate Hotels & Resorts subsequent to July 31, 2002.
"The merger integration has proceeded smoothly. Our experienced management team stayed focused on operations throughout the transition and our financial results came in as forecasted," said Paul W. Whetsell, chairman and chief executive officer. "We remain on track to realize $8 million to $10 million of annualized savings due to corporate synergies. Our development team continues to source new growth opportunities, adding five new management contracts since the closing of the merger."
On a historical basis, net loss available to common shareholders was $(22.4) million, or $(1.30) per share, in the 2002 third quarter, compared to net loss of $(4.4) million, or $(0.72) per share, in the third quarter of 2001.
Recurring pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) increased 128.2 percent to $7.3 million. Third-quarter pro forma revenues for 2002 decreased 3.0 percent to $274.9 million. Excluding non-recurring items, pro forma net loss for the quarter was $(0.5) million, or $(0.03) per share on a diluted basis, compared to pro forma net loss of $(4.1) million, or $(0.20) per share, in the 2001 third quarter.
The pro forma statement of operations for the 2002 third quarter includes the following non-recurring charges:
- $12.8 million of restructuring costs related to the merger of MeriStar Hotels & Resorts and Interstate Hotels Corporation, including estimates of severance and vacant office space.
- $3.3 million of merger and integration costs, including professional fees, travel, and other transition costs.
The net loss for the 2002 third quarter on a historical basis includes the impact of a $3.1 million cumulative effect of a change in accounting principle recorded to reflect the change in the company's method of accounting for incentive management fees. The company changed its method from recording incentive management fees as earned based on current profitability of the hotel to recording incentive fees in the period it is certain they are earned, which, for annual incentive fee measurements, is typically in the last month of the annual contract period. The company also recorded $9.4 million of income tax expense as a valuation allowance on certain deferred tax assets that are not anticipated to be realized in future periods.
Same-store revenue per available room (RevPAR) for all full-service managed hotels in the 2002 third quarter declined 2.7 percent to $65.96. Average daily rate (ADR) dropped 3.6 percent to $98.94 while occupancy increased 0.9 percent to 66.7 percent.
Same-store RevPAR for all limited-service managed hotels in the 2002 third quarter fell 2.3 percent to $59.35. ADR was off 3.5 percent to $85.05, and occupancy increased 1.2 percent to 69.8 percent.
"We were one of the few companies in the industry to meet earnings guidance, due primarily to the stability of our base management fees, the improved performance of our domestic corporate housing operations, and our ability to realize immediate synergies following the merger. Nonetheless, it was a difficult quarter for the industry as the economic slowdown continued with a direct impact on business travel," said Whetsell. "Occupancy increased in the third quarter over last year for both our full-service and limited-service portfolios; average daily rate, however, continues to be impacted by the shift in customer mix to more group and leisure business.
"EBITDA within BridgeStreet Corporate Housing Worldwide's North American markets were up significantly over the third quarter of 2001. This was partially offset by a decline in EBITDA from Europe due to a reduction of units in London as a result of slowing demand and costs incurred in Paris to ramp up operations as part of our effort to expand our operations in Europe."
"Our capital structure is in excellent shape following the merger," said John Emery, president and chief operating officer. "Our total debt to EBITDA is 3.8 times, our interest coverage is 2.7 times, and our average cost of debt is 7.0 percent. With $50 million of cash and availability on our line of credit and a joint venture in place to acquire $300 million to $500 million of hotel assets, we are well positioned to take advantage of growth opportunities as they arise."
During the third quarter, Interstate's board of directors authorized the purchase of up to $5 million of common shares of stock on the open market. "To date, we have purchased a modest amount under this program and based on the current stock price, we expect to continue buying back shares," said Emery. "We believe our stock is attractively valued as we are trading at only 5.5 to 6.0 times 2003 EBITDA."
"The exact timing of the elusive rebound remains difficult to predict with any real confidence, although we continue to see steady and gradual improvement in operating performance at the property level on a comparative basis," Emery said. "The key to any meaningful recovery will be the return of the transient business traveler. In the meantime, we will continue to focus on driving occupancy and profit margins."
Interstate updated its guidance for the 2002 fourth quarter and full year 2003. For the 2002 fourth quarter, the company expects EBITDA of $10 million to $12 million and net income per share of $0.04 to $0.10. For the full year 2002, the company expects pro forma EBITDA of $30 million to $32 million and net loss per share of $(0.08) to $(0.02). For 2003, the company projects EBITDA of $36 million to $40 million and net income per share of $0.30 to $0.40.
As of September 30, 2002:
- Total debt of $137.2 million
- Cash balance of $12.9 million
- Total debt to annual EBITDA of 3.8x
- Senior debt to annual EBITDA of 2.1x
- Annual interest coverage ratio of 2.7x
- Average cost of debt of 7.0 percent
Interstate will hold a conference call to discuss its third-quarter results today, November 4, at 10 a.m. Eastern time. Interested parties may visit the company's Web site at
Interstate Hotels & Resorts operates more than 400 hospitality properties with approximately 86,000 rooms in 45 states, the District of Columbia, Canada and Russia, including 55 properties managed by Flagstone Hospitality Management, a subsidiary of Interstate Hotels & Resorts. BridgeStreet Corporate Housing Worldwide, an Interstate Hotels & Resorts subsidiary, is one of the world's largest corporate housing providers, offering upscale, fully furnished corporate housing throughout the United States, Canada, the United Kingdom, France and 39 additional countries through its network partners.
For more information about Interstate Hotels & Resorts, visit the company's Web site:
This press release contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, about Interstate Hotels & Resorts, including those statements regarding future operating results and the timing and composition of revenues, among others, and statements containing words such as "expects," "believes" or "will," which indicate that those statements are forward-looking. Except for historical information, the matters discussed in this press release are forward-looking statements that are subject to certain risks and uncertainties that could cause the actual results to differ materially, including the current slowdown of the national economy, economic conditions generally and the real estate market specifically, the impact of the events of September 11, 2001, governmental actions, legislative and regulatory changes, availability of debt and equity capital, interest rates, competition, supply and demand for lodging facilities in our current and proposed market areas, and the company's ability to manage integration and growth. Additional risks are discussed in Interstate Hotels & Resorts' filings with the Securities and Exchange Commission, including MeriStar Hotels & Resorts' and Interstate Hotels Corporation's annual reports on Form 10-K for the year ended December 31, 2001 and joint proxy statement and prospectus, filed on July 2, 2002.
Interstate Hotels & Resorts, Inc.
Historical Statements of Operations
(Unaudited, in thousands except per share amounts and operating
statistics)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenue
Rooms $832 $1,182 $2,287 $3,633
Other operating departments - 41 - 114
Corporate housing 19,779 - 19,779
Management and other fees 15,688 8,837 37,145 29,662
--------- -------- ---------
36,299 10,060 59,211 33,409
Other revenue from managed
properties 163,347 67,816 297,662 207,674
--------- -------- ---------
Total revenue 199,646 77,876 356,873 241,083
Operating expenses by
department:
Rooms 225 295 621 865
Other operating departments
expenses - 21 - 66
Corporate housing 14,198 - 14,198
Undistributed operating
expenses:
Administrative and general 14,803 7,261 30,010 23,827
Property operating costs 1,479 410 2,114 1,231
Participating lease expense - 192 - 474
Depreciation and amortization 4,024 2,685 9,133 8,085
Merger costs 3,430 - 5,653
Restructuring expenses 12,820 - 12,820
Tender offer costs - - 1,000
--------- -------- ---------
50,979 10,864 75,549 34,548
Other expenses from managed
properties 163,347 67,816 297,662 207,674
--------- -------- ---------
Total operating expenses 214,326 78,680 373,211 242,222
--------- -------- ---------
Net operating income (loss) (14,680) (804) (16,338) (1,139)
Interest expense, net 1,562 560 3,474 792
Equity in (income) loss of
affiliates 1,074 2,556 1,670 2,222
Loss on impairment of
investment in hotel real
estate - 3,026 - 3,026
--------- -------- ---------
Loss before minority interests
and income taxes (17,316) (6,946) (21,482) (7,179)
Minority interests 243 39 295 130
Income tax (benefit) expense 1,818 (2,794) 641 (2,924)
--------- -------- ---------
Net income (loss) before
cumulative effect
of accounting change (19,377) (4,191) (22,418) (4,385)
Cumulative effect of a change
in accounting principle 3,050 - 3,050
--------- -------- ---------
Net loss (22,427) (4,191) (25,468) (4,385)
Mandatorily redeemable
preferred stock:
Dividends - 158 307 476
Accretion - 16 356 46
Conversion incentive payments - - 9,250
--------- -------- ---------
Net loss available to common
shareholders $(22,427) $(4,365) $(35,381) $(4,907)
========= ======== ========= ========
Weighted average number of:
Basic and diluted shares of
common stock outstanding 17,270 6,060 11,277 6,358
========= ======== ========= ========
Net income (loss) per basic and
diluted common share $(1.30) $(0.72) $(3.14) $(0.77)
========= ======== ========= ========
Interstate Hotels & Resorts, Inc.
Pro Forma Statements of Operations (1) (2)
(Unaudited, in thousands except per share amounts and operating
statistics)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenue
Lodging revenues $832 $40,778 $70,262 $129,989
Net mangement fees 14,305 13,142 44,214 46,519
Corporate housing 29,971 28,255 81,641 79,192
Other fees 4,838 3,840 16,101 13,661
--------- --------- ---------
49,946 86,015 212,218 269,361
Other revenue from managed
properties 224,936 197,260 629,730 612,486
--------- --------- ---------
Total revenue 274,882 283,275 841,948 881,847
Operating expenses by
department:
Lodging expenses 225 11,723 18,989 36,471
Corporate housing 21,500 20,611 60,736 57,416
Property operating costs 2,041 9,305 16,893 42,889
Administrative and
general 18,893 25,589 67,710 80,998
Lease expense - 15,594 27,569 34,025
Depreciation and
amortization 4,765 5,064 14,524 15,721
Charges to investments in and
advances to affiliates,
accounts and notes receivable,
and other - 800 - 16,098
Gain on Winston lease
conversion - - (7,229)
Merger costs 3,295 (146) 4,296 4,239
Restructuring expenses 12,820 918 13,502 1,830
Tender offer costs - - 1,000
--------- --------- ---------
63,539 89,458 217,990 289,687
Other expenses from
managed properties 224,936 197,260 629,730 612,486
--------- --------- ---------
Total operating expenses 288,475 286,718 847,720 902,173
--------- --------- ---------
Net operating loss (13,593) (3,443) (5,772) (20,326)
Interest expense, net 2,306 2,629 7,704 7,591
Equity in (income) loss of
affiliates 1,019 2,182 1,731 1,424
Loss on impairment of
investment in hotel real
estate - 3,025 - 3,025
--------- --------- ---------
Loss before minority
interests
and income taxes (16,918) (11,279) (15,207) (32,366)
Minority interests (241) (187) (207) (172)
Income tax benefit (6,537) (4,212) (8,308) (12,203)
--------- --------- ---------
Net loss $(10,140) $(6,880) $(6,692) $(19,991)
========= ========= ========= =========
Weighted average number of:
Basic and diluted shares of
common stock outstanding(3) 20,228 20,198 20,208 20,198
========= ========= ========= =========
Net loss per basic and
diluted common share $(0.50) $(0.34) $(0.33) $(0.99)
========= ========= ========= =========
Net operating loss $(13,593) $(3,443) $(5,772) $(20,326)
Depreciation and
amortization 4,765 5,064 14,524 15,721
Gain on Winston lease
conversion - - (7,229)
Charges to investments in
and advances to affiliates,
accounts and notes receivable,
and other - 800 - 16,098
Merger costs 3,295 (146) 4,296 4,239
Restructuring Costs 12,820 918 13,502 1,830
Tender offer costs - - 1,000
--------- --------- ---------
Recurring EBITDA $7,287 $3,193 $20,321 $17,562
========= ========= ========= =========
Net loss $(10,140) $(6,880) $(6,692) $(19,991)
Adjustments to net loss, net
of income taxes:
Gain on Winston lease
conversion - - (7,229)
Charges to investments in and
advances to affiliates,
accounts and notes receivable,
and other - 496 - 9,981
Merger costs 2,010 (91) 2,741 2,628
Restructuring expenses 7,764 569 8,228 1,134
Tender offer costs - - 630
Minority interests (150) (31) (172) (257)
Loss on impairment of
investment in hotel real
estate - 1,876 - 1,876
--------- --------- ---------
Net loss, excluding non
recurring items $(516) $(4,061) $(2,494) $(4,629)
========= ========= ========= =========
Net loss per basic and diluted common
share, excluding
non-recurring items $(0.03) $(0.20) $(0.12) $(0.23)
========= ========= ========= =========
(1) Excludes the effect of EITF 98-9.
(2) Assumes merger transaction between Interstate Hotels
Corporation and MeriStar Hotels & Resorts, Inc. was completed
on January 1, 2001.
(3) On August 1, 2002 Interstate Hotels and Resorts effected a
one-for-five reverse stock split. The weighted average number
of basic and diluted common shares outstanding is presented
assuming the reverse stock split occurred on January 1, 2001
Pro forma hotel operating
statistics:
Full-service hotels:
Occupancy 66.7% 66.1% 67.0% 69.7%
ADR $98.94 $102.67 $104.61 $112.58
RevPAR $65.96 $67.82 $70.04 $78.51
Limited-service hotels:
Occupancy 69.8% 69.0% 67.5% 68.7%
ADR $85.05 $88.10 $85.21 $89.39
RevPAR $59.35 $60.77 $57.52 $61.43