UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2005
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-14045
LASALLE HOTEL PROPERTIES
(Exact name of registrant as specified in its charter)
Maryland |
36-4219376 |
|
(State or other jurisdiction of
incorporation or organization) |
(IRS Employer
Identification No.) |
|
3 Bethesda Metro Center, Suite 1200,
|
20814 |
|
(Address of principal executive offices) | (Zip Code) |
301/941-1500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
|
Common Shares of Beneficial Interest ($0.01 par value) |
New York Stock Exchange |
|
10 1 / 4 % Series A Cumulative Redeemable Preferred Shares ($0.01 par value) |
New York Stock Exchange |
|
8 3 / 8 % Series B Cumulative Redeemable Preferred Shares ($0.01 par value) |
New York Stock Exchange |
|
7 1 / 2 % Series D Cumulative Redeemable Preferred Shares ($0.01 par value) |
New York Stock Exchange |
|
8% Series E Cumulative Redeemable Preferred Shares ($0.01 par value) |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
The aggregate market value of the 29,744,530 common shares of beneficial interest held by non-affiliates of the Registrant was approximately $975.9 million based on the closing price on the New York Stock Exchange for such common shares of beneficial interest on of June 30, 2005.
Number of the registrants common shares of beneficial interest outstanding as of February 15, 2006: 39,409,606.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2006 Annual Meeting of Shareholders to be held on or about April 20, 2006 are incorporated by reference in Part III of this report.
LASALLE HOTEL PROPERTIES
INDEX
Item No. |
Form 10-K Report Page |
|||
PART I | ||||
1. |
2 | |||
1A. |
6 | |||
1B. |
12 | |||
2. |
13 | |||
3. |
17 | |||
4. |
19 | |||
PART II | ||||
5. |
19 | |||
6. |
20 | |||
7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
7A. |
46 | |||
8. |
47 | |||
9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
47 | ||
9A. |
47 | |||
PART III | ||||
10. |
48 | |||
11. |
48 | |||
12. |
Security Ownership of Certain Beneficial Owners and Management |
48 | ||
13. |
48 | |||
14. |
48 | |||
PART IV | ||||
15. |
49 |
Forward-Looking Statements
This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Companys future plans, strategies and expectations, are generally identifiable by use of the words believe, expect, intend, anticipate, estimate, project or similar expressions. Forward-looking statements in this report include, among others, statements about the Companys business strategy, including its acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets, expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital), and anticipated outcomes and consequences of pending litigation. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Companys control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
| the Companys dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly; |
| risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs, actual or threatened terrorist attacks and downturns in general and local economic conditions; |
| the availability and terms of financing and capital and the general volatility of securities markets; |
| risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act and similar laws; |
| interest rate increases; |
| the possible failure of the Company to qualify as a REIT and the risk of changes in laws affecting REITs; |
| the possibility of uninsured losses; and |
| the risk factors discussed under the heading Risk Factors on this Annual Report on Form 10-K. |
Accordingly, there is no assurance that the Companys expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Companys expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
The Company means LaSalle Hotel Properties, a Maryland real estate investment trust, and one or more of its subsidiaries (including LaSalle Hotel Operating Partnership, L.P. (the Operating Partnership) and LaSalle Hotel Lessee, Inc. (LHL)), or, as the context may require, LaSalle Hotel Properties only or the Operating Partnership only.
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Item 1. | Business |
General
The Company was organized as a Maryland real estate investment trust on January 15, 1998 to buy, own and lease primarily upscale and luxury full-service hotels located in convention, resort and major urban business markets. As of December 31, 2005, the Company owned interests in 26 hotels with approximately 8,300 rooms/suites located in eleven states and the District of Columbia. Independent hotel operators manage the hotels. The Company is a self-managed and self-administered real estate investment trust (REIT) as defined in the Internal Revenue Code of 1986, as amended (the Code). A REIT is a legal entity that holds real estate interests, and that may reduce its federal taxable income to the extent it distributes taxable dividends to its shareholders.
Substantially all of the Companys assets are held by, and all of its operations are conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Company owned approximately 99.6% of the common units of the Operating Partnership at December 31, 2005. The remaining 0.4% is held by limited partners who hold 143,090 limited partnership common units at December 31, 2005. Common units of the Operating Partnership are redeemable for cash or, at the option of the Company, for a like number of common shares of beneficial interest, par value $0.01 per share, of the Company. In addition, another limited partner owns 2,348,888 preferred units of limited interest in the Operating Partnership having an aggregate liquidation value of approximately $58.7 million and bearing an annual cumulative distribution of 7.25% on the liquidation preference. The hotels are leased under participating leases that provide for rental payments equal to the greater of (i) base rent or (ii) participating rent based on fixed percentages of gross hotel revenues.
The Companys principal offices are located at 3 Bethesda Metro Center, Suite 1200, Bethesda, MD 20814. The Companys website is www.lasallehotels.com. The Company makes available on its website free of charge its filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports.
Strategies and Objectives
The Companys primary objectives are to provide a stable stream of income to its shareholders through increases in distributable cash flow and to increase long-term total returns to shareholders through appreciation in the value of its common shares of beneficial interest. To achieve these objectives, the Company seeks to:
| enhance the return from, and the value of, the hotels in which it owns interests and any additional hotels the Company may acquire or develop; and |
| invest in or acquire additional hotel properties on favorable terms. |
The Company seeks to achieve revenue growth principally through:
| renovations, repositioning and/or expansions at selected hotels; |
| acquisitions of full-service hotels located in convention, resort and major urban markets in the U.S. and abroad, especially upscale and luxury full-service hotels in such markets where the Company perceives strong demand growth or significant barriers to entry; and |
| selective development of hotel properties, particularly upscale and luxury full-service hotels in high barrier to entry and high demand markets where development economics are favorable. |
The Company intends to acquire additional hotels in target markets, consistent with the growth strategies outlined above and which may:
| possess unique competitive advantages in the form of location, physical facilities or other attributes; |
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| be available at significant discounts to replacement cost, including when such discounts result from reduced competition for hotels with long-term management and/or franchise agreements; |
| benefit from brand or franchise conversion, new management, renovations or redevelopment or other active and aggressive asset management strategies; or |
| have expansion opportunities. |
The Company seeks to grow through strategic relationships with premier, internationally recognized hotel operating companies, including Westin Hotels and Resorts, Sheraton Hotels and Resorts Worldwide, Inc., Crestline Hotels & Resorts, Inc., Outrigger Lodging Services, Noble House Hotels and Resorts, Hyatt Hotels Corporations, Kimpton Hotel & Restaurant Group, L.L.C., Hilton Hotels Corporation, Benchmark Hospitality, White Lodging Services Corporation, Davidson Hotel Company and Sandcastle Resorts & Hotels. The Company believes that having multiple independent operators creates a network that will generate acquisition opportunities. In addition, the Company believes its acquisition capabilities are enhanced by its considerable experience, resources and relationships in the hotel industry specifically and the real estate industry generally.
Hotel Acquisitions
The Company has acquired the following hotel interests in 2005:
| the 282-room Hilton San Diego Gaslamp Quarter, a full-service upscale urban hotel located in downtown San Diego, California, for a purchase price of approximately $85.0 million, in January 2005; |
| the 108-room The Grafton on Sunset, an upscale full-service hotel located in West Hollywood, California, for a purchase price of approximately $25.5 million, in January 2005; |
| the 112-room Onyx Hotel, an upscale full-service hotel located in historic downtown Boston, Massachusetts, for a purchase price of approximately $28.6 million, in May 2005; |
| the 803-room Westin Copley Place, an urban upscale full-service hotel located in downtown Boston, Massachusetts, for an aggregate purchase price of approximately $324.0 million, in August 2005; |
| the 158-room University Tower Hotel, an urban upscale full-service hotel located in Seattle, Washington, for a purchase price of approximately $26.4 million, in December 2005; |
| the 357-room Hilton San Diego Resort, an upscale full-service resort located in San Diego, California, for a purchase price of approximately $90.3 million, in December 2005; and |
| the 212-room Washington Grande Hotel (formerly Holiday Inn Downtown) located in downtown Washington, DC, for a purchase price of approximately $44.6 million, in December 2005. |
Recent Developments
On January 6, 2006, the joint venture that owns the Chicago Marriott Downtown in which the Company holds a non-controlling 9.9% equity interest, signed a term sheet to refinance its mortgage and furniture, fixtures and equipment line of credit by obtaining a new $220.0 million mortgage with a variable interest rate of LIBOR plus 1.85%. Upon closing, the Companys pro rata share of the mortgage loan will be approximately $21.8 million.
On January 17, 2006, the Company signed an agreement to acquire a 100% interest in the House of Blues Hotel, a 367-room, full-service hotel, and related Marina City retail and parking facilities, all located in Chicago, Illinois, for $114.5 million subject to customary closing conditions and requirements. The closing is expected to occur during the first quarter of 2006.
On January 27, 2006, the Company acquired a 100% interest in the LeParc Suite Hotel, a 154-room, upscale full-service hotel located in West Hollywood, California, for $47.0 million. The source of the funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL and Outrigger Lodging Services was retained to manage the property.
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On January 27, 2006, 92,893 common units of limited partnership interest in the Operating Partnership were redeemed for an equal number of common shares in the Company.
On January 30, 2006, the Company signed an agreement to acquire a 100% interest in the Westin Michigan Avenue, a 751-room, upscale full-service hotel located in Chicago, Illinois, for $215.0 million, subject to customary closing conditions and requirements. The closing is expected to occur during the first quarter of 2006. The property will continue to be managed by Starwood Hotels & Resorts.
On February 7, 2006, the Company completed an underwritten public offering of 3,250,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $119.8 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and for general corporate purposes including acquisitions. The Company granted the underwriters an option to purchase up to 487,500 additional common shares to cover over-allotments. This option may be exercised any time before March 3, 2006. As of February 22, 2006 this option has not been exercised.
On February 8, 2006, the Company completed an underwritten public offering of 3,050,000 shares of 8.0% Series E Cumulative Redeemable Preferred Shares (the Series E Preferred Shares) par value $0.01 per share (liquidation preference $25.00 per share). After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $74.3 million. The net proceeds will be used to repay existing indebtedness under the Companys senior unsecured credit facility and for general corporate purposes including acquisitions. On February 16, 2006, the Company issued an additional 450,000 Series E Preferred Shares pursuant to an over-allotment option for approximately $11.0 million after deducting underwriters discounts and commissions.
On February 15, 2006, the tax-exempt special project revenue bond and the taxable special project revenue bond, both issued by the Massachusetts Port Authority, were remarketed with the supporting letters of credit being provided by Royal Bank of Scotland, replacing GE Commercial Credit. The cost of the supporting letters of credit was reduced from 2% to 1.35%. The bonds are secured by the letters of credit and the letters of credit are secured by the Harborside Hyatt Conference Center & Hotel.
On February 21, 2006, the Washington Grande Hotel (formerly the Holiday Inn Downtown) was closed for renovations. The Company plans to invest over $21 million in a renovation and repositioning similar to those performed on the Companys DC Urban Collection purchased in March 2001. After completion of the renovation and repositioning in early 2007, the hotel will be operated as a luxury high-style, independent hotel.
Hotel Dispositions
Effective May 9, 2005, the Company entered into an exclusive listing agreement for the sale of the Seaview Resort and Spa. The asset was classified as held for sale at that time because the property was being actively marketed and the sale was expected to occur within one year; accordingly, depreciation was suspended. Based on initial pricing expectations, the Company expected to recognize a gain on the sale; therefore, no impairment had been recognized. In September 2005, the Company changed its intent to sell the Seaview Resort and Spa. Though pricing was above the book value of the asset, it was below the Companys target. The Company evaluated the carrying value of the hotel and determined no impairment exists. The Company reclassified the Seaview Resort and Spa as held and used and adjusted for depreciation expense of $1.0 million in the third quarter that would have been recognized had the asset been continuously classified as held and used.
Hotel Renovations
The Company believes that its regular program of capital improvements at the hotels, including replacement and refurbishment of furniture, fixtures and equipment, helps maintain and enhance its competitiveness and
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maximizes revenue growth under the participating leases. As of December 31, 2005, purchase orders and letters of commitment totaling approximately $16.5 million had been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. Any unexpended amounts will remain the property of the Company upon termination of the participating leases.
Tax Status
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, the Company generally is not subject to corporate income tax on that portion of its net income that is currently distributed to shareholders. A REIT is subject to a number of highly technical and complex organizational and operational requirements, including requirements with respect to the nature of its gross income and assets and a requirement that it currently distribute at least 90% of its taxable income. The Company may, however, be subject to certain state and local taxes on its income and property.
Effective January 1, 2001, the Company elected to operate its wholly-owned subsidiary, LHL, as provided for under the REIT Modernization Act as a taxable-REIT subsidiary. Accordingly, LHL is required to pay corporate income taxes at the applicable rates.
Seasonality
The hotels operations historically have been seasonal. The hotels maintain higher occupancy rates during the second and third quarters. The Seaview Resort and Spa and Lansdowne Resort, which generate a portion of their revenues from golf-related business, and the Hotel Viking, have revenues that fluctuate according to the season and the weather. These seasonality patterns can be expected to cause fluctuations in the Companys quarterly lease revenue under the participating leases with third-party lessees and hotel operating revenue from LHL.
Competition
The hotel industry is highly competitive. Each of the hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy, average daily rate and room revenue per available room of the Companys current hotels or at hotels acquired in the future. The Company may be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a hotel operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell.
Environmental Matters
In connection with the ownership of hotels, the Company is 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
5
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 of hotels the Company may be potentially liable for such costs.
The Company believes that its 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 could have a material adverse effect on the Company. The Company has 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 its present properties.
Employees
The Company had 27 employees as of February 15, 2006. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the lessees to operate such hotels.
Additional Information
The Company has made available copies of the charters of the committees of the board of trustees, its code of ethics and conduct, its corporate governance guidelines and its whistleblower policy on its website at www.lasallehotels.com . Copies of these documents are available in print to any shareholder who requests them. Requests should be sent to LaSalle Hotel Properties, 3 Bethesda Metro Center, Suite 1200, Bethesda, Maryland, 20814. Attn: Hans S. Weger, Corporate Secretary.
Compliance with NYSE Corporate Governance Standards
Each year, the chief executive officer of each company listed on the New York Stock Exchange must certify to the NYSE that he or she is not aware of any violation by the company of NYSE corporate governance listing standards as of the date of certification, qualifying the certification to the extent necessary. Last year, the Companys chief executive officer timely submitted the required certification to the NYSE. The Companys chief executive officer subsequently provided an updated certificate disclosing that while the Companys non-management trustees regularly met in executive session, the Company had not disclosed in its proxy statement that the non-management trustees met in such sessions or that a single trustee presided over the sessions or the procedure by which a presiding trustee was selected. The Company also subsequently issued a press release disclosing that the non-management trustees regularly met in executive session, as required by NYSE, and that the Board of Trustees had determined that the chairman of the Nominating and Corporate Governance Committee of the Board of Trustees would preside over future executive sessions.
In addition, the NYSE requires each listed company to disclose that the Company filed with the SEC, as an exhibit to the companys most recently filed Annual Report on Form 10-K, the certification regarding the quality of the companys public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002. Attached as an exhibit to this Annual Report on Form 10-K is such certificate, and this Form 10-K and the certificate have been filed with the SEC.
Item 1A. | Risk Factors |
Additional Factors that May Affect Future Results
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that it may currently deem immaterial also may impair its business operations. If any of the following risks occur, the Companys business, financial condition, operating results and cash flows could be materially adversely affected.
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The Companys return on its hotels depends upon the ability of the lessees and the hotel operators to operate and manage the hotels.
To maintain its status as a REIT, the Company is not permitted to operate any of its hotels. As a result, the Company is unable to directly implement strategic business decisions with respect to the operation and marketing of its hotels, such as decisions with respect to the setting of room rates, repositioning of a hotel, food and beverage prices and certain similar matters. Although the Company consults with the lessees and hotel operators with respect to strategic business plans, the lessees and hotel operators are under no obligation to implement any of the Companys recommendations with respect to such matters. Thus, even if the Company believes its hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room, average daily rates or operating profits, the Company may not have sufficient rights under its hotel operating agreements to enable it to force the hotel operator to change its method of operation. The Company generally can only seek redress if a hotel operator violates the terms of the applicable operating agreement, and then only to the extent of the remedies provided for under the terms of the agreement. Some of the Companys operating agreements have lengthy terms and may not be terminable by the Company before the agreements expiration. In the event that the Company is able to and does replace any of its hotel operators, the Company may experience significant disruptions at the affected hotels, which may adversely affect its ability to make distributions to its shareholders.
The Companys performance and its ability to make distributions on its shares are subject to risks associated with the hotel industry.
Competition for guests, increases in operating costs, dependence on travel and economic conditions could adversely affect the Companys cash flow . The Companys hotels are subject to all operating risks common to the hotel industry. These risks include:
| competition for guests and meetings from other hotels including competition and pricing pressure from internet wholesalers and distributors; |
| increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increased room rates; |
| labor strikes, disruptions or lockouts that may impact operating performance; |
| dependence on demand from business and leisure travelers, which may fluctuate and be seasonal; |
| increases in energy costs, airline fares and other expenses related to travel, which may negatively affect traveling; |
| terrorism, terrorism alerts and warnings, military actions such as the engagement in Iraq, and SARs, pandemics or other medical events which may cause decreases in business and leisure travel; and |
| adverse effects of weak general and local economic conditions. |
These factors could adversely affect the ability of the lessees (including the Companys taxable-REIT subsidiary lessees) to generate revenues and to make rental payments to the Company.
Unexpected capital expenditures could adversely affect the Companys cash flow . Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of furniture, fixtures and equipment. Under the terms of its leases, the Company is obligated to pay the cost of certain capital expenditures at the hotels, including new brand standards, and to pay for periodic replacement or refurbishment of furniture, fixtures and equipment. If capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures.
In addition, the Company has acquired hotels that are undergoing or will undergo significant renovation and may acquire additional hotels in the future that require significant renovation. Renovations of hotels involve numerous risks, including the possibility of environmental problems, construction cost overruns and delays, the effect on current demand, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels.
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The Companys obligation to comply with financial covenants in its senior unsecured credit facility and mortgages on some of its hotel properties could restrict its range of operating activities.
The Company has a senior unsecured credit facility with a syndicate of banks, which provides for a maximum borrowing of up to $300.0 million. The senior unsecured facility matures on June 9, 2008 and has a one-year extension option.
The Companys credit facility contains financial covenants that could restrict its ability to incur additional indebtedness or make distributions on its shares. The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness; it also contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions that, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) 90% of the funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure that the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar-year basis. Availability under the credit facility may be reduced by hotel financing that the Company obtains outside the credit facility. The credit facility financial covenants could adversely affect the Companys financial condition.
LHL has a senior unsecured credit facility with U.S. Bank National Association, which provides for a maximum borrowing of up to $25.0 million. The senior unsecured credit facility matures on June 9, 2008. The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, minimum tangible net worth and total funded indebtedness.
The Sheraton Bloomington Hotel Minneapolis South, Westin City Center Dallas, Le Montrose Suite Hotel, San Diego Paradise Point Resort, Indianapolis Marriott Downtown, Hilton Alexandria Old Town, Hilton San Diego Gaslamp Quarter, Westin Copley Place and the University Tower Hotel are each mortgaged to secure payment of indebtedness aggregating approximately $489.7 million as of December 31, 2005. The Harborside Hyatt Conference Center & Hotel is mortgaged to secure payment of principal and interest on bonds with an aggregate par value of approximately $42.5 million. In addition, the joint venture that owns the Chicago Marriott Downtown in which the Company holds a non-controlling 9.9% equity interest is mortgaged to secure payment of indebtedness of $140.0 million. The Companys pro rata share of the loan is approximately $13.9 million. If the Company is unable to meet mortgage payments, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company. From time to time, the Company may mortgage additional hotels to secure payment of additional indebtedness.
The Companys performance is subject to real estate industry conditions and the terms of its leases.
Because real estate investments are illiquid, the Company may not be able to sell hotels when desired . Real estate investments generally cannot be sold quickly. The Company may not be able to vary its portfolio promptly in response to economic or other conditions. In addition, provisions of the Code limit a REITs ability to sell properties in some situations when it may be economically advantageous to do so.
Liability for environmental matters could adversely affect the Companys financial condition . As an owner of real property, the Company is subject to various federal, state and local laws and regulations relating to the protection of the environment that may require a current or previous owner of real estate to investigate and clean-up hazardous or toxic substances at a property. These laws often impose such liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability is not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner. Persons who arrange for the disposal or treatment of hazardous or toxic substances at a facility, whether or not such facility is owned or operated by the person, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. Even if more than one person were responsible for the contamination, each person covered by the environmental laws may be held responsible for the entire amount of clean-up costs incurred.
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Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials. These laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with ownership (direct or indirect) of its hotels, the Company may be considered an owner or operator of properties with asbestos-containing materials. Having arranged for the disposal or treatment of contaminants, the Company may be potentially liable for removal, remediation and other costs, including governmental fines and injuries to persons and property.
The costs of compliance with the Americans with Disabilities Act and other government regulations could adversely affect the Companys cash flow . Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that the Company is not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. If the Company is required to make substantial modifications to its hotels, whether to comply with ADA or other government regulation such as building codes or fire safety regulations, its financial condition, results of operations and ability to make shareholder distributions could be adversely affected.
Certain leases and management agreements may constrain the Company from acting in the best interests of shareholders or require it to make certain payments . The Harborside Hyatt Conference Center & Hotel, the San Diego Paradise Point Resort, Indianapolis Marriott Downtown, Hilton San Diego Resort and one of two golf courses, the Pines, at Seaview Resort and Spa are each subject to a ground lease with a third-party lessor. The Westin Copley Place is subject to a long term air rights lease with a third party lessor and requires no payments through maturity. The ground leases for the Indianapolis Marriott Downtown and the Pines golf course at Seaview Resort and Spa are each for one dollar per year. In order for the Company to sell any of these hotels or to assign its leasehold interest in any of these ground leases, it must first obtain the consent of the relevant third-party lessor. A parking lot at the Sheraton Bloomington Hotel Minneapolis South is also subject to a ground lease with a third-party lessor; third-party lessor consent is required to assign the leasehold interest unless the assignment is in conjunction with the sale of the hotel. Accordingly, if the Company determines that the sale of any of these hotels or the assignment of its leasehold interest in any of these ground leases is in the best interest of its shareholders, the Company may be prevented from completing such a transaction if it is unable to obtain the required consent from the relevant lessor.
In some instances, the Company may be required to obtain the consent of the hotel operator or franchisor prior to selling the hotel. Typically, such consent is only required in connection with certain proposed sales, such as if the proposed purchaser is engaged in the operation of a competing hotel or does not meet certain minimum financial requirements. Hotels where operator approval of certain sales may be required include the Chicago Marriott Downtown and Harborside Hyatt Conference Center & Hotel.
The Westin City Center Dallas is a unit of a commercial condominium complex and is subject to a right of first refusal in favor of the owner of the remaining condominium units. The Hilton San Diego Gaslamp Quarter is a unit of a commercial condominium complex and is not subject to a right of first refusal by the owner of the remaining condominium units. In addition, the Company is subject to certain rights of first refusal or similar rights with respect to the following hotels: LaGuardia Airport Marriott and Seaview Resort and Spa. The Company is subject to a franchisors right of first offer with respect to the Hilton Alexandria Old Town, Hilton San Diego Gaslamp Quarter, and Hilton San Diego Resort.
If the Company determines to terminate a lease with a third-party lessee (other than in connection with a default by such lessee), it may be required to pay a termination fee calculated based upon the value of the lease.
Increases in interest rates may increase the Companys interest expense.
As of December 31, 2005, approximately $87.5 million of aggregate indebtedness (15.2% of total indebtedness) was subject to variable interest rates. The aggregate indebtedness balance includes the Companys
9
$14.3 million pro rata portion of indebtedness relating to the Companys joint venture investment in the Chicago Marriott Downtown hotel. An increase in interest rates could increase the Companys interest expense and reduce its cash flow and may affect its ability to make distributions to shareholders and to service its indebtedness.
Failure to qualify as a REIT would be costly.
The Company has operated (and intends to so operate in the future) so as to qualify as a REIT under the Code beginning with its taxable year ended December 31, 1998. Although management believes that the Company is organized and operated in a manner to so qualify, no assurance can be given that the Company will qualify or remain qualified as a REIT.
If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, the Company also will be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would cause the Company to incur additional tax liabilities and would significantly impair the Companys ability to service indebtedness, and reduce the amount of cash available to make new investments or to make distributions on its common shares of beneficial interest and preferred shares.
New legislation, enacted October 22, 2004, contained several provisions applicable to REITs, including provisions that could provide relief in the event the Company violates certain provisions of the Internal Revenue Code that otherwise would result in its failure to qualify as a REIT. The Company cannot assure that these relief provisions would apply if the Company failed to comply with the REIT qualification laws. Even if the relief provisions do apply, the Company would be subject to a penalty tax of at least $50,000 for each disqualifying event in most cases.
Property ownership through partnerships and joint ventures could limit the Companys control of those investments.
Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that its co-investors might become bankrupt, might at any time have different interests or goals from those of the Company, and may take action contrary to the Companys instructions, requests, policies or objectives, including its policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investments include an impasse on decisions, such as a sale, because neither the Companys co-investors nor the Company would have full control over the partnership or joint venture. There is no limitation under the Companys organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.
Tax consequences upon a sale or refinancing of properties may result in conflicts of interest, and a hotel sale or refinancing may trigger tax indemnification obligations.
Holders of units of limited partnership interest in the Operating Partnership or co-investors in properties not owned entirely by the Company may suffer different and more adverse tax consequences than the Company upon the sale or refinancing of properties. The Company may have different objectives from these co-investors and unitholders regarding the appropriate pricing and timing of any sale or refinancing of these properties. While the Company, as the sole general partner of the Operating Partnership, has the exclusive authority as to whether and on what terms to sell or refinance each property owned solely by the Operating Partnership, one of its trustees who has interests in units of limited partnership interest may seek to influence the Company not to sell or refinance the properties, even though such a sale might otherwise be financially advantageous to it, or may seek to influence the Company to refinance a property with a higher level of debt.
In addition, [in one case] the Company has agreed to indemnify the sellers of a hotel acquired by the Company against certain tax consequences if the Company sells the hotel before a specific date. The Company could agree to additional similar tax indemnification obligations in connection with future acquisitions. These obligations may make it costly for the Company to sell the affected hotel during the indemnification period.
10
The Company may not have enough insurance.
The Company carries comprehensive liability, fire, flood, earthquake, extended coverage and business interruption policies that insure it against losses with policy specifications and insurance limits that the Company believes are reasonable. There are certain types of losses, such as losses from environmental problems or terrorism, that management may not be able to insure against or may decide not to insure against since the cost of insuring is not economical. The Company may suffer losses that exceed its insurance coverage. Further, market conditions, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.
The Companys organizational documents and agreements with its executives and applicable Maryland law contain provisions that may delay, defer or prevent change of control transactions and may prevent shareholders from realizing a premium for their shares.
The Companys trustees serve staggered three-year terms, the trustees may only be removed for cause and remaining trustees may fill board vacancies. The Companys Board of Trustees is divided into three classes of trustees, each serving staggered three-year terms. In addition, a trustee may only be removed for cause by the affirmative vote of the holders of a majority of the Companys outstanding common shares. The Companys declaration of trust and bylaws also provide that a majority of the remaining trustees may fill any vacancy on the Board of Trustees and further effectively provide that only the Board of Trustees may increase or decrease the number of persons serving on the Board of Trustees. These provisions preclude shareholders from removing incumbent trustees, except for cause after a majority affirmative vote, and filling the vacancies created by such removal with their own nominees.
The Companys Board of Trustees may approve the issuance of shares with terms that may discourage a third party from acquiring the Company. The Board of Trustees has the power under the declaration of trust to classify any of the Companys unissued preferred shares, and to reclassify any of the Companys previously classified but unissued preferred shares of any series from time to time, in one or more series of preferred shares, without shareholder approval. The issuance of preferred shares could adversely affect the voting power, dividend and other rights of holders of common shares and the value of the common shares.
The Companys declaration of trust prohibits ownership of more than 9.8% of the common shares or 9.8% of any series of preferred shares. To qualify as a REIT under the Internal Revenue Code, no more than 50% of the value of the Companys outstanding shares may be owned, directly or under applicable attribution rules, by five or fewer individuals (as defined to include certain entities) during the last half of each taxable year. The Companys declaration of trust generally prohibits direct or indirect ownership by any person of (i) more than 9.8% of the number or value (whichever is more restrictive) of the outstanding common shares or (ii) more than 9.8% of the number or value (whichever is more restrictive) of the outstanding shares of any class or series of preferred shares. Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limitation. Any transfer of shares that would violate the ownership limitation will result in the shares that would otherwise be held in violation of the ownership limit being designated as shares-in-trust and transferred automatically to a charitable trust effective on the day before the purported transfer or other event giving rise to such excess ownership. The intended transferee will acquire no rights in such shares.
The Maryland Business Combination Statute applies to the Company. A Maryland business combination statute contains provisions that, subject to limitations, prohibit certain business combinations between the Company and an interested stockholder (defined generally as any person who beneficially owns 10% or more of the voting power of the Companys shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested stockholder, and thereafter impose special shareholder voting requirements on these combinations.
The Board of Trustees may choose to subject the Company to the Maryland Control Share Act. A Maryland law known as the Maryland Control Share Act provides that control shares of a company (defined
11
as shares which, when aggregated with other shares controlled by the acquiring shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) 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 the companys shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. The Companys bylaws currently provide that the Company is not subject to these provisions. However, the Board of Trustees, without shareholder approval, may repeal this bylaw and cause the Company to become subject to the Maryland Control Share Act.
Other provisions of the Companys organization documents may delay or prevent a change of control of the Company. Among other provisions, the Companys organizational documents provide that the number of trustees constituting the full Board of Trustees may be fixed only by the trustees and that a special meeting of shareholders may not be called by holders of common shares holding less than a majority of the outstanding common shares entitled to vote at such meeting.
The Companys executive officers have agreements that provide them with benefits in the event of a change in control of the Company. The Company entered into agreements with its executive officers that provide them with severance benefits if their employment ends under certain circumstances within one year following a change in control of the Company (as defined in the agreements) or if the executive officer resigns for good reason (as defined in the agreements). These benefits could increase the cost to a potential acquiror of the Company and thereby prevent or deter a change in control of the Company that might involve a premium price for the common shares or otherwise be in the interests of the Companys shareholders.
Item 1B. | Unresolved Staff Comments |
None.
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Item 2. | Properties |
Hotel Properties
At December 31, 2005, the Company owned interests in the following 26 hotel properties:
Property |
Number of
Rooms/Suites |
Location |
||
1. Sheraton Bloomington Hotel Minneapolis South* |
564 | Bloomington, MN | ||
2. Westin City Center Dallas * |
407 | Dallas, TX | ||
3. Seaview Resort and Spa |
297 | Galloway, NJ (Atlantic City) | ||
4. Le Montrose Suite Hotel * |
133 | West Hollywood, CA | ||
5. LaGuardia Airport Marriott |
438 | New York, NY | ||
6. San Diego Paradise Point Resort * |
462 | San Diego, CA | ||
7. Harborside Hyatt Conference Center & Hotel * |
270 | Boston, MA | ||
8. Hotel Viking |
222 | Newport, RI | ||
9. Chicago Marriott Downtown * |
1,192 | Chicago, IL | ||
10. Topaz Hotel |
99 | Washington, D.C. | ||
11. Hotel Rouge |
137 | Washington, D.C. | ||
12. Hotel Madera |
82 | Washington, D.C. | ||
13. Hotel Helix |
178 | Washington, D.C. | ||
14. Hotel George |
139 | Washington, D.C. | ||
15. Holiday Inn on the Hill |
343 | Washington, D.C. | ||
16. Lansdowne Resort |
296 | Lansdowne, VA | ||
17. Indianapolis Marriott Downtown * |
615 | Indianapolis, IN | ||
18. Hilton Alexandria Old Town * |
241 | Alexandria, VA | ||
19. Chaminade Resort and Conference Center |
153 | Santa Cruz, CA | ||
20. Hilton San Diego Gaslamp Quarter* |
282 | San Diego, CA | ||
21. The Grafton on Sunset |
108 | West Hollywood, CA | ||
22. Onyx Hotel |
112 | Boston, MA | ||
23. Westin Copley Place* |
803 | Boston, MA | ||
24. University Tower Hotel* |
158 | Seattle, WA | ||
25. Hilton San Diego Resort |
357 | San Diego, CA | ||
26. Washington Grande Hotel |
212 | Washington, D.C. | ||
|
||||
Total number of rooms/suites |
8,300 | |||
|
* | Properties subject to a mortgage/debt. |
Sheraton Bloomington Hotel Minneapolis South. Sheraton Bloomington Hotel Minneapolis South is an upscale full-service convention hotel located at the intersection of Interstate 494 and Highway 100, approximately 15 minutes from the Minneapolis/St. Paul International Airport and five miles from the Mall of America. The hotel is currently leased to LHL and operated by Starwood Hotels & Resorts Worldwide, Inc.
Westin City Center Dallas. Westin City Center Dallas is an upscale full-service urban hotel located in downtown Dallas, approximately 25 minutes from the Dallas/Fort Worth International Airport, in the heart of the citys arts and financial districts. The hotel is conveniently located near the Dallas Convention Center, four stops away on the Dallas light rail system, with a DART station adjacent to the hotel. The hotel is leased to LHL and operated by Starwood Hotels & Resorts Worldwide, Inc.
Seaview Resort and Spa. Seaview Resort and Spa, a Marriott resort, is a luxury golf resort and conference center located on Reeds Bay, approximately nine miles north of Atlantic City, New Jersey. The hotel is leased to LHL and operated by Marriott International, Inc.
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Le Montrose Suite Hotel. Le Montrose Suite Hotel is a five-story, luxury full-service hotel located in West Hollywood, California, two blocks east of Beverly Hills and one block south of the Sunset Strip. The hotel is within walking distance of many of the areas finest restaurants, retail shops and nightclubs. The hotel attracts short and long-term guests and small groups primarily from the recording, film and design industries. The hotel is leased to and operated by Outrigger Lodging Services.
LaGuardia Airport Marriott. LaGuardia Airport Marriott is an upscale full-service hotel located directly across from New Yorks LaGuardia Airport. The hotel is five minutes from Shea Stadium and the USTA National Tennis Center and 20 minutes from Manhattan. The hotel is leased to LHL and operated by Marriott International, Inc.
San Diego Paradise Point Resort. San Diego Paradise Point Resort is a luxury resort that lies on 44 acres and has nearly one mile of beachfront. The hotel is located in the heart of Mission Bay on Vacation Island, a 4,600-acre aquatic park in southwest San Diego County. The resort is 15 minutes away from the San Diego International Airport and convenient to many major San Diego tourist attractions, including Sea World, Old Town, downtown San Diego, the San Diego Convention Center, Qualcomm Stadium, Petco Park and the San Diego Zoo. The hotel is subject to a 50-year ground lease with the city of San Diego, which expires in June 2049. The hotel is leased to and operated by WestGroup San Diego Associates, Ltd., an affiliate of Noble House Hotels and Resorts.
Harborside Hyatt Conference Center & Hotel. Harborside Hyatt Conference Center & Hotel is a full-service luxury conference center and airport hotel located adjacent to Bostons Logan International Airport along the Boston waterfront. The property features 19,000 square feet of meeting space and is directly across Boston Harbor from Bostons central business district. The hotel is located next to the Ted Williams Tunnel, providing convenient access to downtown Boston and the new Boston Convention Center. The property is subject to a long-term ground lease with the Massachusetts Port Authority, Logan International Airports owner and operating authority, which expires March 1, 2026 and can be renewed through April 30, 2077. The hotel is leased to LHL and operated by Hyatt Corporation pursuant to a long-term incentive-based management agreement.
Hotel Viking. Hotel Viking is a full-service upscale resort located on Bellevue Avenue in Newport, Rhode Island. The hotel offers 29,000 square feet of meeting space, a restaurant, lounge, a rooftop bar and a full-service spa. The property also includes the Trinity Parish House and the fully restored Kay Chapel, both adjacent to the hotel. The hotel is leased to LHL and operated by Noble House Hotels and Resorts.
Chicago Marriott Downtown. Chicago Marriott Downtown is a full-service, upscale convention hotel located at the intersection of North Michigan Avenue and Ohio Street on downtown Chicagos Magnificent Mile. The property has over 60,000 square feet of meeting space, five food and beverage outlets, a health club and sports center, a business center and a gift shop. The Chicago Marriott Downtown allows guests convenient access to a variety of attractions. The Magnificent Mile is home to such retailers as Neiman Marcus, Saks Fifth Avenue, Nordstrom, Marshall Fields and Niketown. The Company, through the Operating Partnership, owns a non-controlling 9.9% equity interest in the Chicago Marriott Downtown. The hotel is leased to Chicago 540 Lessee, Inc., in which the Company also owns a non-controlling 9.9% equity interest. The hotel is operated by Marriott International, Inc.
D.C. Collection. The D.C. Collection comprises five full-service hotels located in Washington, DC, with a total of 635 guestrooms. Each hotel features large guestrooms or suites. The Company renovated and repositioned four of the hotels as full-service, upscale, high-style, independent hotels: the Topaz Hotel, the Hotel Rouge, the Hotel Madera and the Hotel Helix. The Company leases each of these hotels to wholly-owned subsidiaries of LHL. All five hotels are operated by Kimpton Hotel & Restaurant Group, LLC.
Topaz Hotel . The Topaz Hotel is an upscale full-service hotel with an exotic East-meets-West theme. The hotel is conveniently located on Embassy Row in downtown Washington, DC. It is within walking distance of the central business district, minutes from the monuments and museums, and less than two blocks from Dupont Circle and the Metro. The hotel features a bar/restaurant.
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Hotel Rouge . Hotel Rouge is an upscale full-service hotel with a playful, interactive, glamorous theme. Located on Scott Circle in Washington, DC, the hotel is five blocks from the White House and minutes from the business district. The hotel features a bar/restaurant.
Hotel Madera . Hotel Madera is a luxury full-service hotel with a cosmopolitan comfort theme. The Hotel Madera is located on the Westside of downtown Washington, DC, and near many of the areas attractions. The hotel features Firefly, a modern American bistro.
Hotel Helix . Hotel Helix is an upscale full-service hotel with a pop-art theme. The Hotel Helix is located just a few blocks from the new 2.3 million square-foot Washington Convention Center. The hotel is located four blocks from Dupont Circle in close proximity to most of the major downtown tourist attractions. The hotel features a bar/restaurant.
Hotel George . The Hotel George, a luxury urban hotel, is within three blocks of the U.S. Capitol Building and numerous leisure and corporate demand generators such as Union Station, The White House, the Mall and the Smithsonian. The hotel is minutes away from the new 2.3 million square-foot Washington Convention Center and the revitalized Capitol Hill and Chinatown neighborhoods. The hotel features the award-winning restaurant Bistro Bis.
Holiday Inn on the Hill. Holiday Inn on the Hill is an upscale full-service hotel located on Capitol Hill in Washington, DC. The property is the closest hotel to the U.S. Capitol Building. The hotel features 10,000 square feet of newly renovated meeting space, a full-service restaurant and bar and a roof-top swimming pool. The hotel is minutes away from the 2.3 million square-foot Washington Convention Center. The hotel is leased to a wholly-owned subsidiary of LHL and operated by Crestline Hotels & Resorts, Inc.
Lansdowne Resort. Lansdowne Resort is a AAA Four Diamond luxury full-service golf resort and conference center located in Lansdowne, Virginia. The 296-room resort is located on 476 acres along the Potomac River. The hotel offers two championship golf courses, The Robert Trent Jones, Jr. course and the Greg Norman designed course, a new clubhouse and resort pool. A nine-hole executive course designed by Greg Norman and a new spa are currently under construction. The resort is leased to a wholly-owned subsidiary of LHL and operated by Benchmark Hospitality.
Indianapolis Marriott Downtown. Indianapolis Marriott Downtown is a AAA Four Diamond, full-service convention hotel centrally located in the heart of Indianapolis business and leisure district. The property is physically connected, via a temperature-controlled skywalk, to the 1.9 million square foot Indiana Convention Center/RCA Dome. The property has over 38,000 square feet of meeting space, including a 21,000 square foot ballroom, two restaurants, an upscale fitness center and an indoor swimming pool. The hotel is subject to a ground lease with the city of Indianapolis that expires on June 23, 2099 with a 50 year extension option. The hotel is leased to LHL and operated by White Lodging Services Corporation.
Hilton Alexandria Old Town. Hilton Alexandria Old Town is an upscale full-service hotel located in the heart of historic downtown Alexandria. The property was built in 2000 and includes approximately 8,000 square feet of meeting space, including a 3,800 square-foot ballroom, an upscale restaurant, a fitness center, an indoor swimming pool and an on-site parking facility. The property is in the center of the City of Alexandria, on Old Towns main street and directly adjacent to the King Street Metro Station. The hotel is leased to LHL and operated by Sandcastle Resorts & Hotels.
Chaminade Resort and Conference Center. The Chaminade Resort and Conference Center is a AAA Four Diamond resort and executive conference center located on a 288-acre bluff overlooking the northern end of Monterey Bay, approximately 30 miles south of San Jose and 75 miles south of San Francisco. The property opened in 1985 and features 12 meeting rooms encompassing approximately 12,000 square feet of meeting space, state-of-the-art audio-visual and teleconferencing facilities, three upscale restaurants, a spa, a fitness center and other resort amenities. The hotel is leased to LHL and operated by Benchmark Hospitality.
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Hilton San Diego Gaslamp Quarter. The Hilton San Diego Gaslamp Quarter is an upscale full-service hotel located in the historic Gaslamp Quarter in downtown San Diego. The hotel amenities include two award-winning restaurants, a day spa, parking facilities, an outdoor swimming pool, a whirlpool, a fitness center and a sun deck. The hotel contains 7,800 square feet of meeting and function space, housed in eight state-of the-art meeting rooms. The hotel is also part of a mixed-used complex that includes restaurants, retail shops, parking facilities and two separate outdoor meeting areas totaling 31,800 square feet. The hotel is within walking distance to PETCO Park, the new home of the San Diego Padres baseball team, San Diego Zoo, numerous museums and over 70 miles of sandy coastline. The hotel is leased to LHL and operated by Davidson Hotel Company.
The Grafton on Sunset. The Grafton on Sunset is an upscale full-service, high-style hotel located in the heart of West Hollywood, adjacent to Beverly Hills and a short distance from Melrose Avenue, Century City, Santa Monica, Marina Del Rey and downtown Los Angeles. The hotel is near several well-known West Hollywood nightspots, including The Roxy, The Viper Room, House of Blues and Sky Bar. The hotel is leased to LHL and operated by Outrigger Lodging Services.
Onyx Hotel. The Onyx Hotel is an urban, luxury AAA Four Diamond full-service hotel that opened in May 2004 and is located in historic downtown Boston, one block from the highly anticipated Rose Kennedy Greenway. The hotel is also one block from the Fleet Center and within a short walk of historical landmarks such as Faneuil Hall and Bunker Hill. The hotel is leased to LHL and operated by Kimpton Hotel & Restaurant Group, LLC.
Westin Copley Place. The Westin Copley Place is a AAA Four Diamond urban full-service hotel located in downtown Bostons Back Bay neighborhood within two blocks of the Hynes Convention Center and less than five miles from Logan International Airport. The hotel features over 47,000 square feet of meeting and function space, including two major ballrooms. The hotel is connected via skywalks to the Hynes Convention Center, Copley Place and the Prudential Center, with over 100 retail shops and restaurants. The hotel is subject to a long-term air rights lease with the Massachusetts Turnpike Authority which expires on Decmber 14, 2077. The hotel is leased to LHL and operated by Starwood Hotels and Resorts.
University Tower Hotel. The University Tower Hotel, an upscale full-service hotel, is located in Seattles University District, two blocks from the University of Washington and within minutes of downtown Seattle. The hotel offers high-speed Internet access in all rooms, complimentary breakfast, a fitness center and complimentary shuttle to the University of Washington campus and the University of Washington Medical Center. The hotel features 6,700 square feet of meeting space and a full-service restaurant. The hotel is leased to LHL and operated by Noble House Hotels & Resorts.
Hilton San Diego Resort. The Hilton San Diego Resort is a AAA Four Diamond resort located directly on the waterfront of Mission Bay Park, the largest aquatic preserve in the United States, and offers a 4,000 square foot outdoor pool area, five tennis courts, a spa and fitness center, a gift shop, a restaurant and a poolside grill. The Mediterranean-style hotel offers over 16,000 square feet of interior meeting and function space and 9,600 square feet of outdoor meeting space. The hotel is subject to a ground lease with the city of San Diego which expires on December 31, 2045. The hotel is leased to LHL and operated by Noble House Hotels & Resorts.
Washington Grande Hotel. The Washington Grande Hotel (formerly Holiday Inn Downtown) is located in downtown Washington, D.C., within a short walk of the White House, Washington Convention Center and the Smithsonian Museums. The Company anticipates investing over $21 million in a renovation and repositioning. The hotel closed on February 21, 2006 and upon the anticipated completion of the renovation and repositioning in 2007, the hotel will be operated as a luxury high-style, independent hotel. The hotel is leased to LHL.
Taxable-REIT Subsidiary Leases and Third-Party Leases
Of the 25 hotels in which the Operating Partnership has a 100% ownership interest, 23 are leased to LHL or a subsidiary of LHL and two (Le Montrose Suite Hotel and San Diego Paradise Point Resort) are leased to third-party lessees pursuant to a participating lease.
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For each of the hotels leased by LHL or a subsidiary of LHL, the Company, through LHL, is subject to a hotel management agreement, earns all hotel revenues (subject to corporate income taxes applicable to LHL), and is responsible for all hotel expenses, including base management fees and incentive management fees, if any, pursuant to the terms of the respective management agreement. The leases with LHL expire between 2008 and 2011.
For each of the two hotels leased to a third-party lessee, the Company earns the greater of (i) base rent or (ii) participating rent based on fixed percentages of gross hotel revenues pursuant to the respective participating lease. In addition, the Company is responsible for the payment of real estate taxes, ground rent, if any, certain insurance, maintaining a reserve for future capital expenditures and payment of agreed upon capital expenditures. The third-party participating leases expire between 2008 and 2009.
Item 3. | Legal Proceedings |
The nature of the operations of the hotels exposes the hotels to the risk of claims and litigation in the normal course of their business. Although the outcome of these matters cannot be determined, management does not expect the ultimate resolution of these matters to have a material adverse effect on the financial position, operations or liquidity of the hotels.
The Company has engaged Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its Dallas hotel under the Westin brand affiliation. Meridien Hotels, Inc. (Meridien) affiliates had been operating the Dallas property as a wrongful holdover tenant, until the Westin brand conversion occurred on July 14, 2003 under court order.
On December 20, 2002, affiliates of Meridien abandoned the Companys New Orleans hotel. The Company entered into a lease with a wholly-owned subsidiary of LHL and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property thereafter was sold on April 21, 2003 for $92.5 million.
In connection with the termination of the Meridien affiliates at these hotels, the Company is currently in litigation with Meridien and related affiliates. The Company believes its sole potential obligation in connection with the termination of the leases is to pay fair market value of the leases, if any. With respect to the Dallas hotel, the Company has obtained a judgment from the court that Meridien defaulted and that Meridien is not entitled to the payment of fair market value. The Companys damage claims against Meridien went to trial in March 2005, and a final judgment was entered for the Company in the amount of $3.9 million, plus post-judgment interest. Meridien has indicated that it plans to appeal. With respect to the New Orleans hotel, arbitration of the fair market value of the New Orleans lease commenced in October 2002. On December 19, 2002, the arbitration panel determined that Meridien was entitled to an award of approximately $5.7 million, subject to adjustment (reduction) by the courts to account for Meridiens holdover. In order to dispute the arbitration decision, the Company was required to post a $7.8 million surety bond, which was secured by $5.9 million of restricted cash. The Company successfully challenged the award on appeal, and the dispute was remanded to the trial court. Meridiens request for rehearing was denied on March 31, 2004, and Meridien did not petition to the Louisiana Supreme Court. In June 2004, the $7.8 million surety bond was released and the $5.9 million restricted cash securing it was returned to the Company. The issue of default by the lessee and the Companys wrongful holdover claim, as well as Meridiens damage claims arising from the termination of its leasehold, among other claims, went to trial in February 2005. On June 9, 2005, the trial court issued its judgment denying the Companys default claim as well as Meridiens fraud claim, and re-determined fair market value to be $8.6 million, plus interest. The Company has noticed an appeal from the trial courts judgment. On July 18, 2005, the Company posted a $8.6 million surety bond, which was secured by $8.8 million of restricted cash.
On April 22, 2005, the Company filed suit against Meridien in Delaware state court alleging certain defaults, including non-payment of rent and other breaches in connection with the transition at the New Orleans hotel. Preliminary motions are set to be heard in February 2006. That matter has not yet been set for trial.
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In 2002, the Company recognized a net $2.5 million contingent lease termination expense and reversed previously deferred assets and liabilities related to the termination of both the New Orleans property and Dallas property leases and recorded a corresponding contingent liability included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. The Company believes, however, it is owed holdover rent per the lease terms due to Meridiens failure to vacate the properties as required under the leases. The contingent lease termination expense was, therefore, net of the holdover rent the Company believes it is entitled to for both properties. In 2003, the Company adjusted this liability by additional holdover rent of $0.8 million that it believes it is entitled to for the Dallas property. These amounts were recorded as other income in the Companys December 31, 2003 consolidated financial statements. The contingent lease termination expense recognized cumulatively since 2002 is comprised of (dollars in thousands):
Expense
Recognized Quarter Ended December 31, 2002 |
Expense
Recognized Year Ended December 31, 2004 |
Expense
Recognized Year Ended December 31, 2005 |
Cumulative
Expense
|
||||||||||||
Estimated arbitration award |
$ | 5,749 | $ | | $ | | $ | 5,749 | |||||||
Legal fees related to litigation |
2,610 | 1,350 | 1,000 | 4,960 | |||||||||||
Holdover rent |
(4,844 | ) | | | (4,844 | ) | |||||||||
Expected reimbursement of legal fees |
(995 | ) | (500 | ) | | (1,495 | ) | ||||||||
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Net contingent lease termination expense |
$ | 2,520 | $ | 850 | $ | 1,000 | $ | 4,370 | |||||||
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|
In September 2004, after evaluating the ongoing Meridien litigation, the Company accrued additional net legal fees of $0.9 million due to litigation timeline changes in order to conclude this matter. In June 2005, after further evaluation of the ongoing Meridien litigation, the Company accrued an additional $1.0 million in legal fees. As a result, the net contingent lease termination liability has a balance of approximately $1.7 million as of December 31, 2005, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. Based on the claims the Company has against Meridien, the Company is and will continue to challenge Meridiens claim that it is entitled to the payment of fair market value, and will continue to seek reimbursement of legal fees and damages. These amounts may exceed or otherwise may be used to offset any amounts potentially owed to Meridien, and therefore, ultimately may offset or otherwise reduce any contingent lease termination expense. Additionally, the Company cannot provide any assurances that the holdover rents or any damages will be collectible from Meridien or that the amounts due will not be greater than the recorded contingent lease termination expense.
The Company maintained a lien on Meridiens security deposit on both disputed properties with an aggregate value of approximately $3.3 million, in accordance with the lease agreements. The security deposits were liquidated in May 2003 with the proceeds used to partially satisfy Meridiens outstanding obligations. The judgment entered by the Dallas Court already incorporates a set-off in the amount of $1.0 million attributable to the security deposit for the Dallas property.
Meridien also has sued the Company and one of the Companys officers alleging that certain actions taken in anticipation of re-branding the Dallas and New Orleans hotels under the Westin brand affiliation constituted unfair trade practices, false advertising, trademark infringement, trademark dilution and tortious interference. The parties have reached an agreement to settle this matter through dismissal of all claims with prejudice, with no consideration to be paid from either party to the other, although settlement documents have not yet been fully executed.
The Company does not believe that the amount of any fees or damages it may be required to pay on any of the litigation related to Meridien will have a material adverse effect on the Companys financial condition or results of operations, taken as a whole. The Companys management has discussed this contingency and the related accounting treatment with the audit committee of its Board of Trustees.
18
The Company initiated a lawsuit against Marriott Hotel Services, Inc. in the Supreme Court of the State of New York, County of New York, in connection with Marriotts implementation of certain expenditures without the Companys approval at the LaGuardia Airport Marriott. The Company alleged breach of contract and breach of fiduciary duty by Marriott Hotel Services, Inc., among other claims. The trial court dismissed the Companys claims before receiving any evidence, and the Company has appealed from the courts decision. The appeal was argued in January 2006, and a decision has not yet been issued by the appeals court.
The Company is not presently subject to any other material litigation nor, to the Companys knowledge, is any other litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.
Item 4. | Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of the Companys shareholders during the fourth quarter of the year covered by this Annual Report on Form 10-K.
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Market Information
The common shares of the Company began trading on the New York Stock Exchange on April 24, 1998 under the symbol LHO. The following table sets forth for the periods indicated the high and low sale prices per common share and the cash distributions declared per share:
Calendar Year 2005
|
Calendar Year 2004
|
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High
|
Low
|
Distribution
|
High
|
Low
|
Distribution
|
|||||||||||||
First Quarter |
$ | 32.04 | $ | 27.34 | $ | 0.240 | $ | 23.89 | $ | 18.60 | $ | 0.210 | ||||||
Second Quarter |
$ | 32.92 | $ | 28.21 | $ | 0.240 | $ | 25.90 | $ | 19.84 | $ | 0.210 | ||||||
Third Quarter |
$ | 35.31 | $ | 31.24 | $ | 0.300 | $ | 29.39 | $ | 24.28 | $ | 0.240 | ||||||
Fourth Quarter |
$ | 37.40 | $ | 28.28 | $ | 0.300 | $ | 32.87 | $ | 27.36 | $ | 0.240 |
The closing price for the Companys common shares, as reported by the New York Stock Exchange on December 30, 2005, was $36.72 per share.
Shareholder Information
As of February 15, 2006, there were 146 record holders of the Companys common shares of beneficial interest, including shares held in street name by nominees who are record holders, and approximately 25,500 beneficial holders.
Distribution Information
In 2005, the Company paid $1.08 per common share in distributions, of which 87.8% represented ordinary income, 1.9% represented capital gain distribution, and 10.3% represented a return of capital for tax purposes. These distributions were paid monthly to the Companys common shareholders and common unitholders at a level of $0.08 and $0.10 per common share and limited partnership common unit for the months of January 2005 through June 2005 and July 2005 through December 2005, respectively.
19
The declaration of distributions by the Company is in the sole discretion of the Companys Board of
Trustees, and depends on the actual cash flow of the Company, its financial condition, capital expenditure requirements for the Companys hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors
Operating Partnership Units and Recent Sales of Unregistered Securities
The Operating Partnership issued 3,181,723 common units of limited partnership interest on April 24, 1998 (inception), in conjunction with the initial public offering. The following is a summary of common unit activity since inception:
Common Units issued at initial public offering |
3,181,723 | ||
Common Units redeemed to common shares of beneficial interest: |
|||
1999 |
(1,622,489 | ) | |
2000 |
(36,754 | ) | |
2001 |
(1,095,964 | ) | |
2002 |
(18,497 | ) | |
2004 |
(41,596 | ) | |
2005 |
(240,000 | ) | |
Common Units issued: |
|||
2000 |
16,667 | ||
|
|
||
Common Units outstanding at December 31, 2005 |
143,090 | ||
|
|
Holders of common units of limited partnership interest receive distributions per unit in the same manner as distributions on a per common share basis to the common shareholders of beneficial interest.
Common shares issued upon redemption of common units of limited partnership interest were issued in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933. The Company relied on the exemption based on representations given by the limited partners that redeemed the units.
In connection with the Companys acquisition of the Westin Copley Place in Boston, Massachusetts, and as part of the consideration for the hotel acquisition, the Operating Partnership issued 2,348,888 preferred units of limited partnership interest designated as the 7.25% Series C Cumulative Redeemable Preferred Units (liquidation preference $25 per unit). The issuance of the Series C Preferred Units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933. The Company relied on the exemption based on representations given by the seller receiving the units. A holder of Series C Preferred Units receives a preferred distribution of 7.25% of the $25 per unit liquidation value, or $1.8125 per unit.
Equity compensation information including the Companys equity compensation plan is incorporated into Part III of this report.
Item 6. | Selected Financial Data |
The following tables set forth selected historical operating and financial data for the Company. The selected historical operating and financial data for the Company for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 have been derived from the historical financial statements of the Company. The following selected financial information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and all of the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
20
LASALLE HOTEL PROPERTIES
Selected Historical Operating and Financial Data
(Unaudited, dollars in thousands, except share data)
For the year ended December 31,
|
||||||||||||||||||||
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||||||
Operating Data: |
||||||||||||||||||||
Revenues from continuing operations: |
||||||||||||||||||||
Hotel operating revenues |
$ | 372,224 | $ | 261,795 | $ | 166,158 | $ | 135,099 | $ | 104,478 | ||||||||||
Participating lease revenue |
21,527 | 18,635 | 21,284 | 21,909 | 32,364 | |||||||||||||||
Other income. |
862 | 187 | 919 | 19 | 827 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenues from continuing operations |
394,613 | 280,617 | 188,361 | 157,027 | 137,669 | |||||||||||||||
Expenses from continuing operations: |
||||||||||||||||||||
Hotel operating expenses |
256,668 | 186,698 | 123,085 | 97,154 | 72,669 | |||||||||||||||
Depreciation and other amortization |
48,850 | 38,933 | 31,665 | 28,272 | 24,731 | |||||||||||||||
Real estate, personal property taxes and insurance |
15,792 | 11,891 | 9,347 | 7,852 | 7,711 | |||||||||||||||
Ground rent |
3,986 | 3,493 | 3,561 | 3,208 | 3,279 | |||||||||||||||
General and administrative |
10,301 | 8,398 | 7,292 | 6,423 | 6,355 | |||||||||||||||
Impairment of investment in hotel property |
| | 2,453 | | 1,872 | |||||||||||||||
Lease termination, advisory transaction, subsidiary purchase and contingent lease termination expense |
1,000 | 850 | 10 | 2,520 | 1,929 | |||||||||||||||
Writedown of notes receivable |
| | | | 1,172 | |||||||||||||||
Other expenses |
185 | 632 | 251 | 165 | 976 | |||||||||||||||
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|
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|
|
|
|
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Total expenses from continuing operations |
336,782 | 250,895 | 177,664 | 145,594 | 120,694 | |||||||||||||||
Operating income |
57,831 | 29,722 | 10,697 | 11,433 | 16,975 | |||||||||||||||
Interest income |
788 | 361 | 353 | 344 | 657 | |||||||||||||||
Interest expense |
(24,354 | ) | (15,349 | ) | (15,050 | ) | (12,778 | ) | (17,992 | ) | ||||||||||
Income tax benefit |
2,123 | 3,507 | 5,605 | 2,850 | 1,657 | |||||||||||||||
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P. |
(300 | ) | (289 | ) | (40 | ) | (52 | ) | (43 | ) | ||||||||||
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P. |
(1,419 | ) | | | | | ||||||||||||||
Equity in earnings of Joint Venture |
753 | 853 | 304 | 458 | 616 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income from continuing operations |
35,422 | 18,805 | 1,869 | 2,255 | 1,870 | |||||||||||||||
Distributions to preferred shareholders |
(14,629 | ) | (12,532 | ) | (10,805 | ) | (8,410 | ) | | |||||||||||
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|
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|
|
|
|
|
||||||
Net income (loss) from continuing operations applicable to common shareholders |
20,793 | 6,273 | (8,936 | ) | (6,155 | ) | 1,870 | |||||||||||||
Net income (loss) from discontinued operations |
(26 | ) | 4,418 | 36,972 | 2,216 | 1,965 | ||||||||||||||
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|
|
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|
|
|
|
|
|
|
|
|
||||||
Net income (loss) applicable to common shareholders |
$ | 20,767 | $ | 10,691 | $ | 28,036 | $ | (3,939 | ) | $ | 3,835 | |||||||||
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|
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Net income (loss) from continuing operations applicable to common shareholders per common share: |
||||||||||||||||||||
basic (after dividends paid on unvested restricted shares) |
$ | 0.67 | $ | 0.23 | $ | (0.46 | ) | $ | (0.34 | ) | $ | 0.10 | ||||||||
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diluted (before dividends paid on unvested restricted shares) |
$ | 0.67 | $ | 0.23 | $ | (0.43 | ) | $ | (0.33 | ) | $ | 0.09 | ||||||||
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Net income (loss) applicable to common shareholders per common share: |
||||||||||||||||||||
basic (after dividends paid on unvested restricted shares) |
$ | 0.67 | $ | 0.39 | $ | 1.39 | $ | (0.22 | ) | $ | 0.21 | |||||||||
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diluted (before dividends paid on unvested restricted shares) |
$ | 0.67 | $ | 0.39 | $ | 1.37 | $ | (0.21 | ) | $ | 0.21 | |||||||||
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|
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Weighted average number of common shares outstanding: |
||||||||||||||||||||
basic |
30,637,644 | 26,740,506 | 20,030,723 | 18,413,602 | 18,321,730 | |||||||||||||||
diluted |
31,104,290 | 27,376,934 | 20,487,406 | 18,843,530 | 18,452,882 |
21
As of December 31,
|
||||||||||||||||||||
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Investment in hotel properties, net |
$ | 1,392,344 | $ | 739,733 | $ | 595,976 | $ | 495,488 | $ | 550,015 | ||||||||||
Total assets |
1,499,618 | 859,596 | 707,904 | 605,735 | 588,256 | |||||||||||||||
Borrowings under credit facilities |
30,655 | | | 99,390 | 175,400 | |||||||||||||||
Bonds payable, net |
42,500 | 42,500 | 42,500 | 42,500 | 42,500 | |||||||||||||||
Mortgage loans |
489,660 | 211,810 | 187,157 | 70,175 | 118,562 | |||||||||||||||
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P. |
2,597 | 4,554 | 5,721 | 5,262 | 5,589 | |||||||||||||||
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P. |
59,739 | | | | | |||||||||||||||
Redeemable preferred shares, liquidation preference |
206,548 | 127,298 | 127,298 | 99,798 | | |||||||||||||||
Total shareholders equity |
811,082 | 554,074 | 436,853 | 315,107 | 230,393 | |||||||||||||||
For the year ended December 31,
|
||||||||||||||||||||
2005
|
2004
|
2003
|
2002
|
2001
|
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Other Data: |
||||||||||||||||||||
Funds from operations (1) |
$ | 70,451 | $ | 48,448 | $ | 26,844 | $ | 30,785 | $ | 36,268 | ||||||||||
Cash provided by operating activities |
86,309 | 55,084 | 41,194 | 37,961 | 40,016 | |||||||||||||||
Cash used in investing activities |
(413,508 | ) | (172,468 | ) | (52,709 | ) | (41,548 | ) | (81,231 | ) | ||||||||||
Cash provided by financing activities |
305,250 | 114,725 | 39,755 | 7,390 | 42,519 | |||||||||||||||
Cash dividends declared per common share |
$ | 1.08 | $ | 0.900 | $ | 0.840 | $ | 0.440 | $ | 0.795 |
(1) | The Company considers the non-GAAP measure of funds from operations (FFO) to be a key supplemental measure of the Companys performance and should be considered along with, but not as an alternative to, net income as a measure of the Companys operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictable over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider supplemental measurements of performance to be helpful in evaluating a real estate companys operations. The Company believes that excluding the effect of extraordinary items, real estate-related depreciation and amortization, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, can facilitate comparison of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. However, FFO may not be helpful when comparing the Company to non-REITs. |
The White Paper on FFO approved by NAREIT in April 2002 defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization (excluding amortization of deferred finance costs) and after comparable adjustments for the Companys portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO consistent with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company.
FFO does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. FFO is not a measure of the Companys liquidity, nor is it indicative of funds available to fund the Companys cash needs, including its ability to make cash distributions. FFO does not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO may include funds that may not be available for managements discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or evaluation of the Companys operating performance.
22
See Non-GAAP Financial Measures below in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of FFO to net income applicable to common shareholders.
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
In 2005, the overall economy and the travel industry, including lodging, continued to be strong. We believe the lodging industry is in the midst of the fundamentally strong portion of a typical multi-year up-cycle, assuming a normal economic growth period. With a strong balance sheet and high quality hotel portfolio, the Company was able to take advantage of this environment, significantly increasing room revenue per available room (RevPAR), funds from operations (FFO), and earnings before interest, taxes, depreciation and amortization (EBITDA). The Companys revenues come primarily from hotel operating revenues from its hotels. Hotel operating revenues include room revenue, food and beverage revenue and other ancillary revenue such as golf revenue at two golf resorts and telephone and parking revenue.
For 2005, the Company had net income of $20.8 million, or $0.67 per diluted share. FFO was $70.5 million, or $2.25 per diluted share/unit and EBITDA was $109.9 million. RevPAR was $121.49. We consider RevPAR and EBITDA to be key measures of the performance of the individual hotels. RevPAR for the total portfolio increased 11.2% for 2005. The RevPAR increase is primarily attributable to an Average Daily Rate (ADR) increase of 7.8% to $170.43, while occupancy throughout the portfolio improved by 3.2% to 71.3%. The Companys EBITDA increased 43.9% due to increased lodging demand, aggressive asset management and property acquisitions. The Companys hotel portfolio EBITDA increased $17.6 million due to higher ADR, occupancy and margin improvements.
The Company uses RevPAR, EBITDA, FFO and ADR as measures to evaluate the hotels in its portfolio and potential acquisitions to determine each portfolio hotels contribution or acquisition hotels potential contribution toward reaching the Companys goal of maintaining a reliable stream of income and moderate growth to shareholders. The Company invests in capital improvements throughout the portfolio to continue to increase the competitiveness of its hotels and improve their financial performance. The Company actively seeks to acquire new hotel properties that meet its investment criteria. However, due to a high level of competitive capital resources, the Company continues to face significant competition for acquisitions that meet its investment criteria.
Please refer to Non-GAAP Financial Measures below for a detailed discussion of the Companys use of FFO and EBITDA and a reconciliation of FFO and EBITDA to net income, a GAAP measurement.
Critical Accounting Policies
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and the Companys other consolidated subsidiaries and partnerships. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain 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. In preparing these financial statements, management has utilized the information available including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. For example, included in the accompanying consolidated
23
financial statements is an estimated contingent lease termination expense of $1.0 million, $0.9 million and zero for the years ended December 31, 2005, 2004 and 2003, respectively, related to the Companys litigation with Meridien Hotels, Inc. (see Item 3. Legal Proceedings). Additionally, included in the accompanying consolidated financial statements is an estimated liability of $1.7 million related to the Companys litigation with Meridien Hotels, Inc. (see Item 3. Legal Proceedings), an estimated allowance for doubtful accounts of $1.0 million and an estimated deferred tax asset of $18.2 million as of December 31, 2005. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.
It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates. In addition, other companies may determine these estimates differently, which may impact comparability of the Companys results of operations to those of companies in similar businesses.
Revenue Recognition
For properties leased to third-party lessees, the Company recognizes lease revenue on an accrual basis pursuant to the terms of the respective participating leases. Base rent and participating rent are recognized based on quarterly thresholds, pursuant to the lease agreements. As of December 31, 2005, the Company leased two of its properties, Le Montrose Suite Hotel and San Diego Paradise Point Resort, to third parties. For properties leased by LHL, the Company recognizes hotel operating revenue on an accrual basis consistent with the hotel operations. As of December 31, 2005, 23 of the 26 hotels in which the Company owned an interest were leased to LHL.
For the Lansdowne Resort, the Company defers golf membership fees and recognizes revenue over the average expected life of an active membership (currently six years) on a straight-line basis. Golf membership, health club and executive club annual dues are recognized as earned throughout the membership year.
Investment in Hotel Properties
Upon acquisition, the Company allocates the purchase price of asset classes based on the fair value of the acquired real estate, furniture, fixtures and equipment, assumed debt, and intangible assets. The Companys investments in hotel properties are carried at cost and are depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, 20 years for golf course land improvements, 20 years for pool assets, and three to five years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.
The Company is required to make subjective assessments as to the useful lives and classification of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Companys net income. Should the Company change the expected useful life or classification of particular assets, it would result in a change in depreciation expense and annual net income.
The Company periodically reviews the carrying value of each hotel to determine if circumstances exist indicating impairment to the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value. These assessments have a direct impact on the Companys net income. The Company does not believe that there are any facts or circumstances indicating impairment in its hotels.
24
In accordance with the provisions of Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, a hotel is considered held for sale when a contract for sale is entered into or when management has committed to a plan to sell an asset, the asset is actively marketed and sale is expected to occur within one year.
Share-Based Compensation
The Company has applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the 1998 share option and incentive plan. Accordingly, no compensation costs have been recognized for share options granted to the Companys employees. The Company has not issued any options since 2002. Under Accounting Principles Board Opinion No. 25, no compensation expense is recognized upon the granting of stock options when the exercise price of such options equals the market price of the underlying shares on the date of grant. The Company recognizes compensation cost pursuant to FAS 123 for restricted shares issued based upon the fair market value of the common shares at the grant date. Compensation cost is recognized on a straight-line basis over the vesting period.
Comparison of the Year Ended December 31, 2005 to the Year Ended December 31, 2004
Hotel operating revenues
Hotel operating revenues from the hotels leased to LHL (23 hotels as of December 31, 2005), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking and other ancillary revenues) increased approximately $110.4 million, from $261.8 million in 2004 to $372.2 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:
| $29.5 million increase from Westin Copley Place, which was purchased in August 2005; |
| $18.5 million increase from Hilton San Diego Gaslamp Quarter, which was purchased in January 2005; |
| $14.5 million increase from Chaminade Resort and Conference Center, which was purchased in November 2004; |
| $7.2 million increase from Hilton Alexandria Old Town, which was purchased in May 2004; |
| $5.5 million increase from The Grafton on Sunset, which was purchased in January 2005; |
| $5.2 million increase from Indianapolis Marriott Downtown, which was purchased in February 2004; |
| $4.0 million increase from Onyx Hotel, which was purchased in May 2005; |
| $0.8 million increase from Hilton San Diego Resort, which was purchased in December 2005; |
| $0.2 million increase from University Tower Hotel, which was purchased in December 2005; and |
| $0.1 million increase from Washington Grande Hotel, which was purchased in December 2005. |
The remaining increase of $24.9 million, or 9.5% is attributable to an 11.2% increase in RevPAR for properties leased to LHL. The increase in RevPAR was primarily attributable to an increase in ADR of 7.8%.
The economy, the travel industry and the lodging business were all improved during 2005. On a year-over-year basis, overall industry demand for hotel rooms significantly outpaced supply growth throughout the year, with demand up an average 3.3% in 2005 and supply up only 0.4% for the same period. These positive lodging industry fundamentals led to very healthy increases in average daily rates. Pricing power was even stronger in 2005 than in 2004, with more major markets around the United States participating due to higher occupancy levels. It was the third year in the lodging industrys recovery and was the second year in a row of meaningful increases in RevPAR following the down years of 2001 and 2002. Business transient travel, group and leisure all continued to be very strong in 2005. International visitation was up for the second year in a row, benefiting
25
international gateway and resort markets in the U.S., including New York, Boston, Washington, D.C., Miami, San Francisco, Los Angeles, Seattle and Hawaii. A number of major urban markets reached record occupancy and ADR levels in 2005, including Washington, D.C., San Diego and New York City. Group business also continued to recover, with overall group volumes and food and beverage contributions up in 2005.
Participating lease revenue
Participating lease revenue from hotels leased to third-party lessees (two hotels as of December 31, 2005) increased $2.9 million from $18.6 million in 2004 to $21.5 million in 2005. Participating lease revenue includes (i) base rent and (ii) participating rent based on fixed percentages of hotel revenues pursuant to the respective participating lease. Approximately $2.7 million of this increase is from San Diego Paradise Point Resort due to a 13.6% increase in RevPAR in 2005. The remaining increase of $0.2 million is due to a 7.8% increase in RevPAR in 2005 at LeMontrose Suite Hotel.
Hotel operating expenses
Hotel operating expenses increased approximately $70.0 million from $186.7 million in 2004 to $256.7 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:
| $18.9 million increase from Westin Copley Place, which was purchased in August 2005; |
| $11.9 million increase from Chaminade Resort and Conference Center, which was purchased in November 2004; |
| $9.9 million increase from Hilton San Diego Gaslamp Quarter, which was purchased in January 2005; |
| $4.0 million increase from Hilton Alexandria Old Town, which was purchased in May 2004; |
| $3.8 million increase from Indianapolis Marriott Downtown, which was purchased in February 2004; |
| $3.0 million increase from The Grafton on Sunset, which was purchased in January 2005; |
| $2.6 million increase from Onyx Hotel, which was purchased in May 2005; |
| $0.8 million increase from Hilton San Diego Resort, which was purchased in December 2005; |
| $0.1 million increase from University Tower Hotel, which was purchased in December 2005; and |
| $0.1 million increase from Washington Grande Hotel, which was purchased in December 2005. |
The remaining increase of $14.9 million, or 8.0%, is a result of higher occupancies at the hotels as well as above-inflation increases in payroll and related employee costs and benefits, sales and marketing, insurance, energy costs and operator incentive fees.
Depreciation and other amortization
Depreciation and other amortization expense increased by approximately $10.0 million from $38.9 million in 2004 to $48.9 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:
| $4.4 million increase from Westin Copley Place, which was purchased in August 2005; |
| $2.4 million increase from Hilton San Diego Gaslamp Quarter, which was purchased in January 2005; |
| $0.9 million increase from Hilton Alexandria Old Town, which was purchased in May 2004; |
| $0.7 million increase from The Grafton on Sunset, which was purchased in January 2005; |
| $0.5 million increase from Chaminade Resort and Conference Center, which was purchased in November 2004; |
26
| $0.5 million increase from Indianapolis Marriott Downtown, which was purchased in February 2004; |
| $0.4 million increase from Onyx Hotel, which was purchased in May 2005; |
| $0.3 million increase from Hilton San Diego Resort, which was purchased in December 2005; |
| $0.1 million increase from University Tower Hotel, which was purchased in December 2005; and |
| $0.1 million increase from Washington Grande Hotel, which was purchased in December 2005. |
The remaining change is a decrease of $0.3 million and is due to certain assets becoming fully depreciated during 2005.
Real estate taxes, personal property taxes, insurance and ground rent
Real estate taxes, personal property taxes, insurance and ground rent expense increased approximately $4.4 million from $15.4 million in 2004 to $19.8 million in 2005. This increase includes amounts that are not comparable year-over-year as follows:
| $1.5 million increase from Westin Copley Place, which was purchased in August 2005; |
| $1.2 million increase from Hilton San Diego Gaslamp Quarter, which was purchased in January 2005; |
| $0.4 million increase from Chaminade Resort and Conference Center, which was purchased in November 2004; |
| $0.4 million increase from The Grafton on Sunset, which was purchased in January 2005; |
| $0.3 million increase from Hilton Alexandria Old Town, which was purchased in May 2004; and |
| $0.2 million increase from Onyx Hotel, which was purchased in May 2005. |
The remaining increase of $0.4 million, or 2.6%, is a result of an increase in ground rent for San Diego Paradise Point Resort and Harborside Hyatt Conference Center & Hotel. Real estate taxes generally increased, however these were offset by reductions in assessments due to appeals.
General and administrative expenses
General and administrative expense increased approximately $1.9 million from $8.4 million in 2004 to $10.3 million in 2005 primarily as a result of increases in payroll related expenses, executive compensation, director fees, legal fees, office rent and technology expenses.
Interest expense
Interest expense increased by approximately $9.1 million from $15.3 million in 2004 to $24.4 million in 2005 due to an increase in the Companys weighted average debt outstanding, and an increase in the weighted average interest rate, partly offset by an increase in capitalized interest. The Companys weighted average debt outstanding related to continuing operations increased from $281.9 million in 2004 to $435.0 million in 2005, which includes increases from:
| a secured loan financing on the Hilton Alexandria Old Town in August 2004; |
| additional borrowings to purchase the Chaminade Resort and Conference Center in November 2004; |
| additional borrowings to purchase the Hilton San Diego Gaslamp Quarter in January 2005; |
| additional borrowings to purchase The Grafton on Sunset in January 2005; |
| assumption of the mortgage and additional borrowing to purchase the Westin Copley Place in August 2005; |
| assumption of the mortgage and additional borrowing to purchase the University Tower Hotel in December 2005; |
27
| additional borrowing to purchase the Hilton San Diego Resort in December 2005; |
| additional borrowing to purchase the Washington Grande Hotel in December 2005 ; and |
| additional borrowings under the Companys credit facility to finance other capital improvements during 2005. |
The above borrowings are offset by paydowns on the line of credit from proceeds from:
| the sale of the Omaha Marriott on September 15, 2004; |
| a November 2004 common share offering; |
| an August 2005 preferred shares offering; |
| an October 2005 common share offering; |
| a December 2005 common share offering; and |
| operating cash flows. |
The Companys weighted average interest rate related to continuing operations increased from 4.6% in 2004 to 4.9% in 2005. Capitalized interest increased by approximately $0.4 million from $0.8 million in 2004 to $1.2 million in 2005, primarily due to 2005 capital expenditures related to the Lansdowne Resort development project.
Income taxes
Income tax benefit decreased approximately $1.2 million from $3.4 million in 2004 to $2.2 million in 2005. For 2005, the REIT incurred state and local income tax expense of approximately $1.5 million. LHLs net loss before income tax benefit decreased by approximately $0.8 million from $9.7 million in 2004 to $8.9 million in 2005. Accordingly, in 2005 LHL recorded a federal income tax benefit of approximately $2.7 million (using an estimated tax rate of 30.8%) and a state and local tax benefit of approximately $0.9 million (using an estimated tax rate of 10.7%). The portion of LHLs income tax benefit relating to the Omaha property, which the Company sold in 2004, was reclassified in 2004 to discontinued operations. The following table summarizes the change in income tax (benefit) expense (dollars in thousands):
For the year ended
December 31, |
||||||||
2005
|
2004
|
|||||||
REIT state and local tax expense |
$ | 1,469 | $ | 442 | ||||
LHL federal, state and local tax benefit |
(3,611 | ) | (3,821 | ) | ||||
|
|
|
|
|
|
|||
Total tax benefit |
(2,142 | ) | (3,379 | ) | ||||
|
|
|
|
|
|
|||
Less: LHL federal, state and local tax benefit (expense) related to discontinued operations |
19 | (128 | ) | |||||
|
|
|
|
|
|
|||
Total tax benefit from continuing operations |
$ | (2,123 | ) | $ | (3,507 | ) | ||
|
|
|
|
|
|
As of December 31, 2005, the Company had a deferred tax asset of $18.2 million primarily due to past and current years tax net operating losses. These loss carryforwards will expire in 2021 through 2025 if not utilized by then. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.
Minority interest
Minority interest of common units in the Operating Partnership represents the common units limited partners proportionate share of the equity in the Operating Partnership. Income is allocated to the common units minority interest based on the weighted average percentage ownership throughout the year. At December 31,
28
2005, the limited partners held 0.4% of the common units of the Operating Partnership. The following table summarizes the change in the common units minority interest (dollars in thousands):
For the year ended
December 31, |
||||||||
2005
|
2004
|
|||||||
Net income before common units minority interest |
$ | 35,696 | $ | 23,580 | ||||
Weighted average common units minority interest percentage |
0.84 | % | 1.516 | % | ||||
|
|
|
|
|
|
|||
Common units minority interest allocation |
300 | 357 | ||||||
Less: minority interest allocation related to discontinued operations |
| (68 | ) | |||||
|
|
|
|
|
|
|||
Total allocation of minority interest to continuing operations |
$ | 300 | $ | 289 | ||||
|
|
|
|
|
|
The minority interest of preferred units in the Operating Partnership represents the allocation of income of the Operating Partnership to the preferred units held by a third party. The increase from zero in 2004 to $1.4 million in 2005 is a result of the preferred units which were issued on August 31, 2005 related to the Westin Copley acquisition.
Discontinued operations
Net income from discontinued operations was the result of the sale of the Omaha property in September 2004. Net income from discontinued operations decreased by approximately $4.4 million from $4.4 million in 2004 to approximately zero in 2005. The following table summarizes net income from discontinued operations (dollars in thousands):
For the year ended
December 31, |
||||||||
2005
|
2004
|
|||||||
Net lease income from Omaha property |
$ | | $ | 1,669 | ||||
Net operating income (loss) from Omaha property |
(45 | ) | 309 | |||||
Gain on sale of Omaha property |
| 2,636 | ||||||
Minority interest expense related to Omaha property |
| (68 | ) | |||||
Income tax benefit (expense) related to Omaha property |
19 | (128 | ) | |||||
|
|
|
|
|
|
|||
Net income (loss) from discontinued operations |
$ | (26 | ) | $ | 4,418 | |||
|
|
|
|
|
|
Distributions to preferred shareholders
Distributions to preferred shareholders increased $2.1 million from $12.5 million in 2004 to $14.6 million in 2005 due to distribution on the Series D Preferred Shares, which were not outstanding in 2004 and were issued in August 2005.
Comparison of the Year Ended December 31, 2004 to the Year Ended December 31, 2003
Hotel operating revenues
Hotel operating revenues from the hotels leased to LHL (16 hotels as of December 31, 2004), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking and other ancillary revenues) increased approximately $95.6 million, from $166.2 million in 2003 to $261.8 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:
| $37.7 million increase from the Indianapolis Marriott Downtown, which was purchased in June 2003; |
| $15.6 million increase from the Lansdowne Resort, which was purchased in June 2003; |
29
| $9.4 million increase from the Westin City Center Dallas, which lease was transferred to LHL in July 2003; |
| $8.4 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004; |
| $5.7 million increase from the Hotel George, which was purchased in September 2003; and |
| $1.0 million increase from Chaminade Resort and Conference Center, which was purchased in November 2004. |
The remaining increase of $17.8 million, or 10.7%, is attributable to increases in RevPAR and associated food and beverage and other operating department revenues for other properties leased to LHL. While ADR increased, the majority of the increase in RevPAR is attributable to higher occupancies from stronger business travel.
Overall, travel levels improved in 2004, when the industry benefited from continued relatively strong leisure demand and significant increases in demand from business travels. On a year-over-year basis, overall industry demand for hotel rooms significantly outpaced supply growth throughout the year, with occupancies up an average of 4.9% during 2004. With demand improving during 2004, the Company began to find it easier to achieve increased ADRs. Nevertheless, both the leisure traveler and the business traveler, group and transient, continued to be price sensitive in 2004 and utilized an aggressive negotiation posture and internet sites to shop for the lowest rates. Additionally, the business was more competitive because transient guests tended to book their rooms closer to their time of stay than in the past, and transient rooms had prices lower than they otherwise would have. Despite these rate challenges, many of the Companys hotels experienced ADR increases during 2004, especially the urban and convention hotels.
Participating lease revenue
Participating lease revenue from hotels leased to third-party lessees (two hotels as of December 31, 2004) decreased $2.7 million from $21.3 million in 2003 to $18.6 million in 2004. Participating lease revenue includes (i) base rent and (ii) participating rent based on fixed percentages of gross hotel revenues pursuant to the respective participating lease. This decrease includes amounts that are not comparable year-over-year as follows:
| $1.6 million decrease from the Westin City Center Dallas, which lease was transferred to LHL in July 2003. |
The remaining decrease of $1.1 million, or 5.2%, is primarily as result of a decrease in RevPAR at San Diego Paradise Point Resort, which is leased to a third-party lessee. The lower RevPAR resulted from decreased occupancy and ADR from weak group and leisure demand and the difficult comparison to 2003s first quarter that included the significant benefits to the San Diego Paradise Point Resort as a result of the Super Bowl held in San Diego.
Hotel operating expenses
Hotel operating expenses increased approximately $63.6 million from $123.1 million in 2003 to $186.7 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:
| $25.2 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004; |
| $11.2 million increase from the Lansdowne Resort, which was purchased in June 2003; |
| $6.8 million increase from the Westin City Center Dallas, which lease was transferred to LHL in July 2003; |
| $4.8 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004; |
30
| $3.3 million increase from the Hotel George, which was purchased in September 2003; and |
| $1.5 million increase from Chaminade Resort and Conference Center, which was purchased in November 2004. |
The remaining increase of $10.8 million, or 8.8%, is a result of higher occupancies at the hotels as well as above inflation increases in payroll and related employee costs and benefits, sales and marketing, insurance and energy costs.
Depreciation and other amortization
Depreciation and other amortization expense increased by approximately $7.2 million from $31.7 million in 2003 to $38.9 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:
| $4.9 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004; |
| $1.7 million increase from the Lansdowne Resort, which was purchased in June 2003: |
| $1.2 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004; |
| $0.6 million increase from the Hotel George, which was purchased in September 2003; and |
| $0.1 million increase from the Chaminade Resort and Conference Center, which was purchased in November 2004. |
The remaining decrease of $1.3 million is due to certain furniture, fixture and equipment assets that were fully depreciated during 2003 and 2004.
Real estate taxes, personal property taxes, insurance and ground rent
Real estate taxes, personal property taxes, insurance and ground rent expenses increased approximately $2.5 million from $12.9 million in 2003 to $15.4 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:
| $1.3 million increase from the Indianapolis Marriott Downtown, which was purchased in February 2004; |
| $0.5 million increase from the Lansdowne Resort, which was purchased in June 2003; |
| $0.2 million increase from the Hotel George, which was purchased in September 2003; and |
| $0.2 million increase from the Hilton Alexandria Old Town, which was purchased in May 2004. |
The remaining real estate taxes, personal property taxes, insurance and ground rent increased by a net approximate $0.3 million in 2004 for the remaining hotels.
General and administrative expenses
General and administrative expenses increased approximately $1.1 million from $7.3 million in 2003 to $8.4 million in 2004, primarily as a result of increases in accounting fees, compliance costs and payroll-related expenses to executives and employees.
Interest expense
Interest expense increased by approximately $0.2 million from $15.1 million in 2003 to $15.3 million in 2004 due to an increase in the Companys weighted average debt outstanding, offset by a decrease in the
31
weighted average interest rate, and an increase in capitalized interest. The Companys weighted average debt outstanding related to continuing operations increased from $234.4 million in 2003 to $281.9 million in 2004, which includes increases from:
| additional borrowings to purchase San Diego Paradise Point Resort in December 2003; |
| additional borrowings to purchase Indianapolis Marriott Downtown in February 2004; |
| additional borrowings to purchase Hilton Alexandria Old Town in August 2004; |
| additional borrowings to purchase Chaminade Resort and Conference Center in November 2004; |
| additional borrowings to purchase Hotel George in September 2003; and |
| additional borrowings under the Companys credit facility to finance other capital improvements during 2004. |
The above borrowings are offset by paydowns on the line of credit from proceeds from:
| a June 2003 common share offering; |
| a September 2003 Series B Preferred Share offering; |
| a November 2003 common share offering; |
| a May 2004 common share offering; |
| the sale of the Omaha Marriott on September 15, 2004; |
| a November 2004 common share offering; and |
| operating cash flows. |
The Companys weighted average interest rate related to continuing operations decreased from 5.3% in 2003 to 4.6% in 2004. Capitalized interest increased by approximately $0.5 million from $0.3 million in 2003 to $0.8 million in 2004, primarily due to 2004 capital expenditures related to the Lansdowne Resort development project.
Income taxes
Income tax benefit decreased approximately $2.2 million from $5.6 million in 2003 to $3.4 million in 2004. For 2004, the REIT incurred state and local income tax expense of approximately $0.4 million. LHLs net loss before income tax benefit decreased by approximately $5.2 million from $14.9 million in 2003 to $9.7 million in 2004. Accordingly, for 2004, LHL recorded a federal income tax benefit of approximately $2.9 million (using an estimated tax rate of 30.8%) and a state and local tax benefit of approximately $0.9 million (using an estimated tax rate of 10.7%). The portion of LHLs income tax benefit relating to the Omaha property, the New Orleans property and the Key West property, which the Company sold in 2003, was reclassified to discontinued operations. The following table summarizes the income tax (benefit) expense (dollars in thousands):
For the year ended
December 31, |
||||||||
2004
|
2003
|
|||||||
REIT state and local tax expense |
$ | 442 | $ | 457 | ||||
LHL federal, state and local tax benefit |
(3,821 | ) | (6,099 | ) | ||||
|
|
|
|
|
|
|||
Total tax benefit |
(3,379 | ) | (5,642 | ) | ||||
|
|
|
|
|
|
|||
Less: LHL federal, state and local tax benefit (expense) related to discontinued operations |
(128 | ) | 37 | |||||
|
|
|
|
|
|
|||
Total tax expense (benefit) from continuing operations |
$ | (3,507 | ) | $ | (5,605 | ) | ||
|
|
|
|
|
|
32
As of December 31, 2004, the Company had a deferred tax asset of $14.5 million primarily due to past and current years tax net operating losses. These loss carryforwards will expire in 2021 through 2024 if not utilized by then. Management believes it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.
Minority interest
Minority interest in the Operating Partnership represents the limited partners proportionate share of the equity in the Operating Partnership. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. At December 31, 2004, the aggregate weighted average partnership interest held by the limited partners in the Operating Partnership was approximately 1.52%. The following table summarizes the change in minority interest (dollars in thousands):
For the year ended
December 31, |
||||||||
2004
|
2003
|
|||||||
Net income before minority interest |
$ | 23,580 | $ | 39,660 | ||||
Weighted average minority interest percentage at December 31 |
1.516 | % | 2.066 | % | ||||
|
|
|
|
|
|
|||
Minority interest expense |
357 | 819 | ||||||
Less: minority interest expense related to discontinued operations |
(68 | ) | (779 | ) | ||||
|
|
|
|
|
|
|||
Total continuing operations minority interest expense |
$ | 289 | $ | 40 | ||||
|
|
|
|
|
|
Discontinued operations
Net income from discontinued operations is a result of the sale of the Omaha property, the Holiday Inn Key West property and the New Orleans property in September 2004, July 2003 and April 2003, respectively. Net income from discontinued operations decreased by approximately $32.6 million from $37.0 million in 2003 to $4.4 million in 2004. The following table summarizes net income from discontinued operations from 2004 and 2003 (dollars in thousands):
For the year ended
December 31, |
||||||||
2004
|
2003
|
|||||||
Net lease loss from New Orleans property |
$ | | $ | (123 | ) | |||
Net operating income from New Orleans property |
| 59 | ||||||
Net lease income from Key West property |
| 299 | ||||||
Net operating loss from Key West property |
| (444 | ) | |||||
Net lease income from Omaha property |
1,669 | 971 | ||||||
Net operating income from Omaha property |
309 | 290 | ||||||
Gain on sale of New Orleans property |
| 37,087 | ||||||
Loss on sale of Key West property |
| (425 | ) | |||||
Gain on sale of Omaha property |
2,636 | | ||||||
Minority interest expense related to New Orleans property |
| 2 | ||||||
Minority interest expense related to Key West property |
| (758 | ) | |||||
Minority interest expense related to Omaha property |
(68 | ) | (23 | ) | ||||
Income tax expense related to New Orleans property |
| (24 | ) | |||||
Income tax benefit related to Key West property |
| 184 | ||||||
Income tax expense related to Omaha property |
(128 | ) | (123 | ) | ||||
|
|
|
|
|
|
|||
Net income from discontinued operations |
$ | 4,418 | $ | 36,972 | ||||
|
|
|
|
|
|
33
Distributions to preferred shareholders
Distributions to preferred shareholders increased $1.7 million from $10.8 million in 2003 to $12.5 million in 2004. The Series B Preferred Shares were issued on September 30, 2003. Distributions were paid for the Series B Preferred Shares for the entire first, second and third quarters of 2004, but there were no Series B Preferred Shares distributions in the first, second and third quarters of 2003. Distributions on the Series A Preferred Shares were paid for the full year in 2004 and 2003.
Non-GAAP Financial Measures
Funds From Operations and EBITDA
The Company considers the non-GAAP measures of FFO and earnings before interest, taxes, depreciation and amortization (EBITDA) to be key supplemental measures of the Companys performance and should be considered along with, but not as alternatives to, net income as a measure of the Companys operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO and EBITDA to be helpful in evaluating a real estate companys operations.
The White Paper on FFO approved by NAREIT in April 2002 defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization (excluding amortization of deferred finance costs) and after comparable adjustments for the Companys portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO consistent with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company.
With respect to FFO, the Company believes that excluding the effect of extraordinary items, real estate-related depreciation and amortization, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. However, FFO may not be helpful when comparing the Company to non-REITs.
With respect to EBITDA, the Company believes that excluding the effect of non-operating expenses and non-cash charges, and the portion of these items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and amortization, and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrues directly to common shareholders.
Neither FFO nor EBITDA represents cash generated from operating activities determined by GAAP and should not be considered as alternatives to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. Neither FFO nor EBITDA is a measure of the Companys liquidity, nor is FFO or EBITDA indicative of funds available to fund the Companys cash needs, including its ability to make cash distributions. Neither measurement reflects cash expenditures for long-term assets and other items that have been and will be incurred. FFO and EBITDA may include funds that may not be available for managements discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of the Companys operating performance.
34
The following is a reconciliation between net income applicable to common shareholders and FFO for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands):
For the year ended December 31,
|
|||||||||||
2005
|
2004
|
2003
|
|||||||||
Funds From Operations (FFO): |
|||||||||||
Net income applicable to common shareholders |
$ | 20,767 | $ | 10,691 | $ | 28,036 | |||||
Depreciation |
48,494 | 38,937 | 33,582 | ||||||||
Equity in depreciation of joint venture |
811 | 1,053 | 1,019 | ||||||||
Amortization of deferred lease costs |
79 | 46 | 50 | ||||||||
Minority interest: |
|||||||||||
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P. |
300 | 289 | 40 | ||||||||
Minority interest in discontinued operations |
| 68 | 779 | ||||||||
Net gain on sale of properties disposed of |
| (2,636 | ) | (36,662 | ) | ||||||
|
|
|
|
|
|
|
|
||||
FFO |
$ | 70,451 | $ | 48,448 | $ | 26,844 | |||||
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares and units outstanding: |
|||||||||||
Basic |
30,896,022 | 27,153,145 | 20,455,409 | ||||||||
Diluted |
31,362,668 | 27,789,574 | 20,912,092 |
The following is a reconciliation between net income applicable to common shareholders and EBITDA for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands):
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Earnings Before Interest, Taxes, |
||||||||||||
Depreciation and Amortization (EBITDA): |
||||||||||||
Net income applicable to common shareholders |
$ | 20,767 | $ | 10,691 | $ | 28,036 | ||||||
Interest |
24,354 | 13,081 | 14,331 | |||||||||
Equity in interest expense of joint venture |
787 | 573 | 590 | |||||||||
Income tax (benefit) expense: |
||||||||||||
Income tax benefit |
(2,123 | ) | (3,507 | ) | (5,605 | ) | ||||||
Income tax (benefit) expense from discontinued operations |
(19 | ) | 128 | (37 | ) | |||||||
Depreciation and other amortization |
48,850 | 41,314 | 37,213 | |||||||||
Equity in depreciation/amortization of joint venture |
900 | 1,164 | 1,130 | |||||||||
Minority interest: |
||||||||||||
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P. |
300 | 289 | 40 | |||||||||
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P. |
1,419 | | | |||||||||
Minority interest in discontinued operations |
| 68 | 779 | |||||||||
Distributions to preferred shareholders. |
14,629 | 12,532 | 10,805 | |||||||||
|
|
|
|
|
|
|
|
|
||||
EBITDA |
$ | 109,864 | $ | 76,333 | $ | 87,282 | ||||||
|
|
|
|
|
|
|
|
|
35
The Hotels
The following table sets forth historical comparative information with respect to occupancy, ADR and RevPAR for the total hotel portfolio for the years ended December 31, 2005 and 2004, respectively.
Year ended December 31,
|
|||||||||||
2005
|
2004
|
Variance
|
|||||||||
Total Portfolio |
|||||||||||
Occupancy |
71.3 | % | 69.1 | % | 3.2 | % | |||||
ADR |
$ | 170.43 | $ | 158.16 | 7.8 | % | |||||
RevPAR |
$ | 121.49 | $ | 109.22 | 11.2 | % |
Off-Balance Sheet Arrangements
Investment in Joint Venture
The Company is a party to a joint venture (the Joint Venture) arrangement with The Carlyle Group, an institutional investor that owns the 1,192-room Chicago Marriott Downtown in Chicago, Illinois. The Company owns a non-controlling 9.9% equity interest in the Joint Venture. The Company receives an annual preferred return in addition to its pro rata share of annual cash flow. The Company also has the opportunity to earn an incentive participation in net sale or refinancing proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of net sale or refinancing proceeds. The Chicago Marriott Downtown is leased to Chicago 540 Lessee, Inc., in which the Company also owns a non-controlling 9.9% equity interest. The Carlyle Group owns a 90.1% controlling interest in both the Joint Venture that owns the Chicago Marriott Downtown and Chicago 540 Lessee, Inc. Marriott International, Inc. operates the Chicago Marriott Downtown pursuant to a long-term incentive-based operating agreement. As the controlling partner, The Carlyle Group may elect to dispose of the Chicago Marriott Downtown without the Companys consent. The Company accounts for its non-controlling 9.9% equity interest in each of the Joint Venture that owns the Chicago Marriott Downtown and Chicago 540 Lessee, Inc. under the equity method of accounting.
The Joint Venture was subject to two mortgage loans for an aggregate principal amount of $120.0 million. The mortgage loans had two-year terms, and were due to expire in July 2004. On April 6, 2004, the Joint Venture refinanced its existing two mortgage loans with a new mortgage loan for an aggregate principal amount of $140.0 million. Upon refinancing, the Company received approximately $1.8 million in cash representing its prorated share of the proceeds. The new mortgage loan has a two-year term, expires in April 2006, and can be extended at the option of the Joint Venture for three additional one-year terms. The mortgage bears interest at the London InterBank Offered Rate plus 2.25%. The Joint Venture has purchased a cap on the London InterBank Offered Rate capping the London InterBank Offered Rate at 7.25%, effectively limiting the rate on the mortgage to 9.5%. As of December 31, 2005, the interest rate on this mortgage was 6.6%. Monthly interest-only payments are due in arrears throughout the term. The Chicago Marriott Downtown secures the mortgage. The Companys pro rata share of the mortgage loan is approximately $13.9 million and is included in the Companys liquidity and capital resources discussion and in calculating debt coverage ratios under the Companys credit facility. No guarantee exists on behalf of the Company for this mortgage.
On November 2, 2004, the Joint Venture obtained a three and a half year commitment for a $5.75 million credit facility to be used for partial funding of furniture, fixtures and equipment (FF&E) costs related to the property. The FF&E credit facility matures on the earlier of i) April 30, 2008, or ii) three years from the date on which the final borrowing is made. The borrower has an option to borrow portions of the principal debt bearing interest with reference to the base rate or to LIBOR, and portions may be converted from one interest basis to another. Base rate will be the greater of i) the rate established by the lender as a base rate and which is designated by the lender as its U.S. prime rate, or ii) the Federal Funds Rate plus 0.50%. LIBOR rate will be set two business days before the start of an interest period. The Joint Venture purchased a cap on London InterBank Offered Rate capping the London InterBank Offered Rate at 7.5%. Consistent with the Companys ownership interest, it is guaranteeing 9.9% of the credit facility. The Companys maximum exposure under the FF&E
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facility is $0.6 million, and the guarantee will expire at the maturity of the credit facility. In the event of default, any outstanding principal and accrued interest will be due and payable. As of December 31, 2005, the Companys pro rata share of the borrowings outstanding under the FF&E Facility was $0.5 million.
Tax Indemnification Agreement
Pursuant to the acquisition of the Westin Copley Place, the Company entered into a Tax Reporting and Protection Agreement (the Tax Agreement) with SCG Copley Square LLC (SCG). Under the Tax Agreement, the Company is required, among other things, to indemnify SCG (and its affiliates) for certain income tax liabilities that such entities would incur if the Westin Copley Place was transferred by the Company in a taxable transaction or if the Company fails to maintain a certain level of indebtedness with respect to the Westin Copley Place or its operations. The obligations of the Company under the Tax Protection Agreement (i) do not apply in the case of a foreclosure of the Westin Copley Place, if certain specified requirements are met, (ii) are limited to $20.0 million (although a limitation of $10.0 million is applicable to certain specified transactions), and (iii) terminates on the earlier of the 10 th anniversary of the Companys acquisition of the Westin Copley Place or January 1, 2016. The Company believes that the likelihood that the Company will be required to pay under this Tax Agreement is remote, and therefore, a liability has not been recorded.
Reserve Funds
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the management, franchise, and mortgage agreements. The Companys aggregate obligation under the reserve funds was approximately $30.2 million at December 31, 2005. Three management agreements, one franchise agreement and one mortgage agreement require that the Company reserve restricted cash ranging from 3.0% to 5.5% of the individual hotels annual revenues. As of December 31, 2005, $8.8 million was available in restricted cash reserves for future capital expenditures. Twenty of the management agreements require that the Company reserve funds of 4.0% of the individual hotels annual revenues but do not require the funds to be set aside in restricted cash. As of December 31, 2005, the total amount obligated for potential future capital expenditures but not set aside in restricted cash reserves was $21.5 million. In addition, one of the twenty hotels with a management agreement which does not require the cash to be set aside, also has a loan agreement which requires the Company to set aside an additional reserve of a minimal amount. Amounts will be recorded as incurred. As of December 31, 2005, purchase orders and letters of commitment totaling approximately $16.5 million have been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. Any unexpended amounts will remain the property of the Company upon termination of the participating leases.
The Company has no other off-balance sheet arrangements.
Liquidity and Capital Resources
The Companys principal source of cash to meet its cash requirements, including distributions to shareholders, is its pro rata share of hotel operating cash flow distributed by LHL and the Operating Partnerships cash flow from the participating leases. The Companys senior unsecured credit facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness and contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions. There are currently no other contractual or other arrangements limiting payment of distributions by the Operating Partnership. Similarly, LHL is a wholly-owned subsidiary of the Operating Partnership. Payments to the Operating Partnership are required pursuant to the terms of the lease agreements between LHL and the Operating Partnership relating to the properties owned by the Operating Partnership and leased by LHL. Except for the security deposits required under the participating leases for the two hotels not leased by LHL, the lessees obligations under the participating leases are unsecured and the lessees abilities to make rent payments to the Operating Partnership, and the Companys liquidity, including its ability to make distributions to shareholders, are dependent on the lessees abilities to generate sufficient cash flow from the operations of the hotels.
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In addition, cash flow from hotel operations is subject to all operating risks common to the hotel industry. These risks include:
| competition for guests and meetings from other hotels, including competition from internet wholesalers and distributors; |
| increases in operating costs including wages, benefits, insurance, property taxes and energy due to inflation and other factors, which may not be offset in the future by increases in room rates; |
| labor strikes, disruptions or lockouts that may impact operating performance; |
| dependence on demand from business and leisure travelers, which may fluctuate and be seasonal; |
| increases in energy costs, airline fares, and other expenses related to travel, which may deter traveling; |
| terrorism, terrorism alerts and warnings and military actions such as the war in Iraq, and SARS, pandemics or other medical events which may cause decreases in business and leisure travel; and |
| adverse affects of weak general and local economic conditions. |
These factors could adversely affect the ability of the hotel operators to generate revenues and therefore adversely affect the lessees of the Companys hotels and their ability to make rental payments to the Company pursuant to the participating leases and therefore impact the Companys liquidity.
Contractual Obligations
The following is a summary of the Companys obligations and commitments as of December 31, 2005 (dollars in thousands):
Total
Amounts Committed |
Amount of Commitment Expiration Per Period
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Less than
1 year |
1 to 3
years |
4 to 5
years |
Over 5
years |
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Contractual Obligations |
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Mortgage loans (3) |
$ | 659,447 | $ | 30,135 | $ | 113,666 | $ | 176,921 | $ | 338,725 | |||||
Ground rent (4) |
158,259 | 4,084 | 8,168 | 8,168 | 137,839 | ||||||||||
Massport bonds (3) |
44,338 | 1,575 | 42,763 | | | ||||||||||
Purchase commitments (1)
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16,500 | 16,500 | | | | ||||||||||
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Total contractual obligations |
$ | 878,544 | 52,294 | 164,597 | 185,089 | 476,564 | |||||||||
Commercial Commitments |
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Borrowings under credit facilities (3) |
$ | 35,345 | 1,876 | 33,469 | | | |||||||||
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Preferred Shares and Units |
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Dividends payable and redemption preferences on preferred shares and units (2) |
$ | 386,796 | 22,733 | 159,846 | 100,544 | 103,673 | |||||||||
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Total contractual obligations, commercial commitments and dividends on preferred shares and units excluding off-balance sheet arrangements |
$ | 1,300,685 | $ | 76,903 | $ | 357,912 | $ | 285,633 | $ | 580,237 | |||||
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Off-Balance Sheet Obligation |
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Mortgage loansCIGNA |
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Chicago Hotel Venture (3) |
$ | 14,113 | 14,113 | | | | |||||||||
Chicago Hotel VentureFF&E LOC Guarantee (3) |
506 | 208 | 298 | | | ||||||||||
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Total obligations and commitments |
$ | 1,315,304 | $ | 91,224 | $ | 358,210 | $ | 285,633 | $ | 580,237 | |||||
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(1) | As of December 31, 2005, purchase orders and letters of commitment totaling approximately $16.5 million had been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. |
(2) | The Class A, B, C and D preferred shares/units are redeemable at the option of the Company for $25.00 per share after the respective optional redemption date. The future obligations include future dividends on preferred shares/units through the optional redemption date and the redemption amount is included on the optional redemption date. |
(3) | Amounts include interest. Interest expense on fixed rate debt is computed based on the fixed interest rate of the debt. Interest expense on the variable interest computed based upon the rate at December 31, 2005. |
(4) | Amounts calculated based on the annual minimum future ground lease payments that extend through the term of the lease. |
Credit Facility
The Company has a senior unsecured credit facility from a syndicate of banks that provides for a maximum borrowing of up to $300.0 million. On June 9, 2005, the Company amended the credit facility to extend the credit facilitys maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness and contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions which, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) ninety percent of the funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar year basis. Borrowings under the facility bear interest at floating rates equal to, at the Companys option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of December 31, 2005, the Company was in compliance with all debt covenants and was not otherwise in default under the credit facility. For the years ended December 31, 2005 and 2004, the weighted average interest rate for borrowings under the senior unsecured credit facility was approximately 5.0% and 3.7%, respectively. The Company did not have any Adjusted Base Rate borrowings outstanding at December 31, 2005. Additionally, the Company is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the senior unsecured credit facility. The Company incurred an unused commitment fee of approximately $0.5 million and $0.5 million for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the Company had $30.0 million and zero, respectively, of outstanding borrowings under the senior unsecured credit facility.
LHL has a $25.0 million unsecured revolving credit facility to be used for working capital and general corporate purposes. On June 9, 2005, LHL amended the credit facility to extend the credit facility maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHLs option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of December 31, 2005, the Company was in compliance with all debt covenants and was not otherwise in default under the credit facility. The weighted average interest rate under the LHL credit facility for the years ended December 31, 2005 and 2004 was 4.9% and 3.6%, respectively. LHL is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the LHL credit facility. LHL incurred an immaterial commitment fee for each of the years ended December 31, 2005 and 2004. At December 31, 2005 and 2004, the Company had $0.7 million and zero, respectively, of outstanding borrowings under LHL credit facility.
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Debt
Debt at December 31, 2005 and December 31, 2004, consists of the following (in thousands):
Interest
Rate at
|
Maturity Date
|
Balance Outstanding at
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Debt |
December 31,
2005 |
December 31,
2004 |
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Credit Facilities |
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Senior Unsecured Credit Facility |
Floating | June 2008 | $ | 30,000 | $ | | ||||
LHL Unsecured Credit Facility |
Floating | June 2008 | 655 | | ||||||
Massport Bonds |
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Harborside Hyatt Conference
|
Floating(a) | March 2018 | 5,400 | 5,400 | ||||||
Harborside Hyatt Conference
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Floating(a) | March 2018 | 37,100 | 37,100 | ||||||
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Total bonds payable |
42,500 | 42,500 | ||||||||
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Mortgage debt |
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Indianapolis Marriott Downtown |
3.56%(c) | February 2007 | 57,000 | 57,000 | ||||||
Sheraton Bloomington Hotel Minneapolis South and Westin City Center Dallas |
8.10% | July 2009 | 41,744 | 42,665 | ||||||
San Diego Paradise Point Resort |
6.93% | February 2009 | 17,324 | 17,686 | ||||||
San Diego Paradise Point Resort |
4.61% | February 2009 | 45,235 | 46,180 | ||||||
Hilton Alexandria Old Town |
4.98% | September 2009 | 33,534 | 34,230 | ||||||
Le Montrose Suite Hotel |
8.08% | July 2010 | 13,847 | 14,049 | ||||||
Hilton San Diego Gaslamp Quarter |
5.35% | June 2012 | 59,600 | | ||||||
University Tower Hotel (d) |
6.28% | August 2014 | 11,376 | | ||||||
Westin Copley Place |
5.28% | August 2015 | 210,000 | | ||||||
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Total mortgage debt |
489,660 | 211,810 | ||||||||
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Total Debt (e) |
$ | 562,815 | $ | 254,310 | ||||||
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(a) | Variable interest rate based on a weekly floating rate. The interest rate at December 31, 2005 was 4.45% and 3.6% for the $5,400 and $37,100 bonds, respectively. The Company also incurs a 2% annual maintenance fee. |
(b) | The Massport bonds are secured by letters of credit issued by GE Capital Corporation that expire in 2007. The GE Capital letters of credit are secured by the Harborside Hyatt and a $6.0 million letter of credit from the Company. |
(c) | Variable interest rate of LIBOR plus 1%. The Company has entered into a three-year fixed interest rate swap that fixes the LIBOR rate at 2.56% and therefore, fixes the mortgage interest rate at 3.56%. |
(d) | Mortgage loan includes unamortized premium of $615 as of December 31, 2005. |
(e) | Debt does not include the Companys 9.9% share ($13,860) of the $140,000 debt of the joint venture which is secured by the Chicago Marriott Downtown or the Companys share ($465) of the Chicago Marriott line of credit facility which had a balance of $4,694 at December 31, 2005. |
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Properties Leased to LHL
Effective January 1, 2001, LHL became a wholly-owned subsidiary of the Company as provided for under the taxable-REIT subsidiary provisions of the Code. LHL leased 23 hotels as of December 31, 2005 and currently leases the following 24 hotels owned by the Company:
Seaview Resort and Spa
LaGuardia Airport Marriott
Harborside Hyatt Conference Center & Hotel
Hotel Viking
Topaz Hotel
Hotel Rouge
Hotel Madera
Hotel Helix
Holiday Inn on the Hill
Sheraton Bloomington Hotel Minneapolis South
Lansdowne Resort
Westin City Center Dallas |
Hotel George
Indianapolis Marriott Downtown
Hilton Alexandria Old Town
Chaminade Resort and Conference Center
Hilton San Diego Gaslamp Quarter
The Grafton on Sunset
Onyx Hotel
Westin Copley Place
University Tower Hotel
Hilton San Diego Resort
Washington Grande Hotel
LeParc Suite Hotel |
Equity Issuances
In June 2003, the Company completed an underwritten public offering of 2,041,000 common shares. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $29.1 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. On July 1, 2003, the Company issued an additional 204,000 common shares pursuant to an over-allotment option for approximately $2.9 million after deducting underwriting discounts and commissions.
In September 2003, the Company completed an underwritten public offering of 1,000,000 shares of 8 3 / 8 % Series B Cumulative Redeemable Preferred Shares (liquidation preference $25 per share). After deducting underwriting discounts and commission, the Company raised net proceeds of approximately $24.4 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. On October 1, 2003, the Company issued an additional 100,000 Series B Preferred Shares pursuant to an over-allotment option for approximately $2.4 million after deducting underwriting discounts and commissions.
In November 2003, the Company completed an underwritten public offering of 3,000,000 common shares. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $50.0 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility.
On May 12, 2004, the Company completed an underwritten public offering of 2,700,000 common shares. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $55.4 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. The Company sold an additional 300,000 common shares on May 13, 2004, pursuant to an over-allotment option for approximately $6.2 million after deducting underwriting discounts and commissions.
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On November 16, 2004, the Company completed an underwritten public offering of 1,750,000 common shares. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $54.9 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund in part, the Companys acquisition of Chaminade Resort and Conference Center and Hilton San Diego Gaslamp Quarter.
On August 19, 2005, the Company completed an underwritten public offering of 3,000,000 shares of 7 1 / 2 % Series D Cumulative Redeemable Preferred Shares (liquidation preference of $25.00 per share). After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $73.0 million. On August 30, 2005, the Company issued an additional 170,000 Series D Preferred Shares pursuant to an over-allotment option for approximately $4.1 million after deducting underwriting discounts and commissions. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund, in part, the Companys acquisition of the Westin Copley Place.
On October 12, 2005, the Company completed an underwritten public offering of 2,200,000 common shares. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $74.3 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund, in part, the Companys acquisitions of the University Tower Hotel, the Hilton San Diego Resort, and the Washington Grande Hotel (formerly the Holiday Inn Downtown).
On December 9, 2005, the Company completed an underwritten public offering of 3,450,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $113.4 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund, in part, the Companys acquisitions of the University Tower Hotel, the Hilton San Diego Resort, and the Washington Grande Hotel (formerly the Holiday Inn Downtown).
Sources and Uses of Cash
At December 31, 2005, the Company had approximately $10.2 million of cash and cash equivalents and approximately $20.8 million of restricted cash reserves.
Net cash provided by operating activities was approximately $86.3 million for the year ended December 31, 2005 primarily due to the distribution of available hotel operating cash by LHL and participating lease revenues, which were offset by payments for real estate taxes, personal property taxes, insurance and ground rent.
Net cash used in investing activities was approximately $413.5 million for the year ended December 31, 2005 primarily due to the purchases of the Hilton San Diego Gaslamp Quarter, The Grafton on Sunset, Onyx Hotel, Westin Copley Place, University Tower Hotel, Hilton San Diego Resort and Washington Grande Hotel, outflows for improvements and additions at the hotels, the funding of restricted cash reserves, offset by proceeds from restricted cash reserves.
Net cash provided by financing activities was approximately $305.3 million for the year ended December 31, 2005, comprised of borrowings under the senior unsecured credit facility, proceeds from mortgage loans, proceeds from the exercise of share options and proceeds from the October 12, 2005 and December 9, 2005 common share offerings and the August 19, 2005 preferred share offering, offset by repayments of borrowings under the senior unsecured credit facility, payment of distributions to the common shareholders and unitholders and payments of distributions to preferred shareholders and mortgage loan repayments.
The Company has considered its short-term (one year or less) liquidity needs and the adequacy of its estimated cash flow from operations and other expected liquidity sources to meet these needs. The Company believes that its principal short-term liquidity needs are to fund normal recurring expenses, debt service
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requirements, distributions on the preferred shares and the minimum distribution required to maintain the Companys REIT qualification under the Code. The Company anticipates that these needs will be met with cash flows provided by operating activities and using availability under the senior unsecured credit facility. The Company also considers capital improvements and property acquisitions as short-term needs that will be funded either with cash flows provided by operating activities, utilizing availability under the senior unsecured credit facility, the issuance of other indebtedness, or the issuance of additional equity securities.
The Company expects to meet long-term (greater than one year) liquidity requirements such as property acquisitions, scheduled debt maturities, major renovations, expansions and other nonrecurring capital improvements utilizing availability under the senior unsecured credit facility, estimated cash flows from operations, the issuance of long-term unsecured and secured indebtedness and the issuance of additional equity securities. The Company expects to acquire or develop additional hotel properties only as suitable opportunities arise, and the Company will not undertake acquisition or development of properties unless stringent acquisition/development criteria have been achieved.
Reserve Funds
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the management, franchise, and mortgage agreements. The Companys aggregate obligation under the reserve funds was approximately $30.2 million at December 31, 2005. Three management agreements, one franchise agreement and one mortgage agreement require that the Company reserve restricted cash ranging from 3.0% to 5.5% of the individual hotels annual revenues. As of December 31, 2005, $8.8 million was available in restricted cash reserves for future capital expenditures. Twenty of the management agreements require that the Company reserve funds of 4.0% of the individual hotels annual revenues but do not require the funds to be set aside in restricted cash. As of December 31, 2005, the total amount obligated for potential future capital expenditures but not set aside in restricted cash reserves was $21.5 million. In addition, one of the twenty hotels with a management agreement which does not require the cash to be set aside, also has a loan agreement which requires the Company to set aside an additional reserve of a minimal amount. Amounts will be recorded as incurred. As of December 31, 2005, purchase orders and letters of commitment totaling approximately $16.5 million have been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. Any unexpended amounts will remain the property of the Company upon termination of the participating leases.
The Joint Venture lease requires that the Joint Venture reserve restricted cash of 5.0% of the Chicago Marriott Downtowns annual revenues; however, the Joint Venture is not consolidated in the Companys financial statements and, therefore, the amount of restricted cash reserves relating to the Joint Venture is not recorded on the Companys books and records.
Subsequent Events
On January 1, 2006, the Company repurchased 27,675 common shares of beneficial interest related to executives and employees surrendering shares to pay taxes at the time restricted shares vested. The Company re-issued these 27,675 treasury shares related to (i) compensation to the Board of Trustees and (ii) issuance of restricted common shares of beneficial interest to the Companys executive officers.
On January 6, 2006, the joint venture that owns the Chicago Marriott Downtown in which the Company holds a non-controlling 9.9% equity interest, signed a term sheet to refinance its mortgage and furniture, fixtures and equipment line of credit by obtaining a new $220.0 million mortgage with a variable interest rate of LIBOR plus 1.85%. Upon closing, the Companys pro rata share of the mortgage loan will be approximately $21.8 million.
On January 13, 2006, the Company declared monthly cash distributions to shareholders of the Company and partners of the Operating Partnership, in the amount of $0.10 per common share of beneficial interest/unit for each of the months of January, February and March 2006.
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On January 13, 2006, the Company paid its December 2005 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and common units of limited partnership interest to shareholders and unit holders of record as of December 31, 2005.
On January 13, 2006, the Company paid its preferred distribution of $0.64 per Series A Preferred Share for the quarter ended December 31, 2005 to Series A preferred shareholders of record at the close of business on January 1, 2006.
On January 13, 2006, the Company paid its preferred distribution of $0.52 per Series B Preferred Share for the quarter ended December 31, 2005 to Series B preferred shareholders of record at the close of business on January 1, 2006.
On January 13, 2006, the Company paid its preferred distribution of $0.47 per Series D Preferred Share for the quarter ended December 31, 2005 to Series D preferred shareholders of record at the close of business on January 1, 2006.
On January 13, 2006, the Company paid its preferred distribution of $0.45 per Series C Unit for the quarter ended December 31, 2005 to Series C preferred unitholders of record at the close of business on January 1, 2006.
On January 17, 2006, the Company signed an agreement to acquire a 100% interest in the House of Blues Hotel, a 367-room, full-service hotel, and related Marina City retail and parking facilities, all located in Chicago, Illinois, for $114.5 million subject to customary closing conditions and requirements. The closing is expected to occur during the first quarter of 2006.
On January 27, 2006, the Company granted 34,697 restricted common shares of beneficial interest to the Companys executive officers. The restricted shares granted vest over three years, starting January 1, 2008. These common shares were issued under the 1998 share option and incentive plan.
On January 27, 2006, the Company acquired a 100% interest in the LeParc Suite Hotel, a 154-room upscale full-service hotel located in West Hollywood, California, for $47.0 million. The source of the funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL and Outrigger Lodging Services was retained to manage the property.
On January 27, 2006, 92,893 common units of limited partnership interest in the Operating Partnership were redeemed for an equal number of common shares in the Company.
On January 30, 2006, the Company signed an agreement to acquire a 100% interest in the Westin Michigan Avenue, a 751-room, upscale full-service hotel located in Chicago, Illinois, for $215.0 million, subject to customary closing conditions and requirements. The closing is expected to occur during the first quarter of 2006. The property will continue to be managed by Starwood Hotels & Resorts.
On February 7, 2006, the Company completed an underwritten public offering of 3,250,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $119.8 million. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and for general corporate purposes including acquisitions. The Company granted the underwriters an option to purchase up to 487,500 additional common shares to cover over-allotments. This option may be exercised any time before March 3, 2006. As of February 22, 2006 this option has not been exercised.
On February 8, 2006, the Company completed an underwritten public offering of 3,050,000 shares of 8.0% Series E Cumulative Redeemable Preferred Shares (the Series E Preferred Shares) par value $0.01 per share (liquidation preference $25.00 per share). After deducting underwriting discounts and commissions and other
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offering costs, the Company raised net proceeds of approximately $74.3 million. The net proceeds will be used to repay existing indebtedness under the Companys senior unsecured credit facility and for general corporate purposes including acquisitions. On February 16, 2006, the Company issued an additional 450,000 Series E Preferred Shares pursuant to an over-allotment option for approximately $11.0 million after deducting underwriters discounts and commissions.
On February 15, 2006, the Company paid its January 2006 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of January 31, 2006.
On February 15, 2006, the tax-exempt special project revenue bond and the taxable special project revenue bond, both issued by the Massachusetts Port Authority, were remarketed with the supporting letters of credit being provided by Royal Bank of Scotland, replacing GE Commercial Credit. The cost of the supporting letters of credit was reduced from 2% to 1.35%. The bonds are secured by the letters of credit and the letters of credit are secured by the Harborside Hyatt Conference Center & Hotel.
On February 21, 2006, the Washington Grande Hotel (formerly the Holiday Inn Downtown) was closed for renovations. The Company plans to invest over $21 million in a renovation and repositioning similar to those performed on the Companys DC Urban Collection purchased in March 2001. After completion of the renovation and repositioning in 2007, the hotel will be operated as a luxury high-style, independent hotel.
Inflation
The Companys revenues come primarily from its pro rata share of the Operating Partnerships cash flow from the participating leases and the LHL hotel operating revenues, thus the Companys revenues will vary based on changes in the underlying hotels revenues. Therefore, the Company relies entirely on the performance of the hotels and the lessees abilities to increase revenues to keep pace with inflation. The hotel operators can change room rates quickly, but competitive pressures may limit the lessees and hotel operators abilities to raise rates faster than inflation or even at the same rate.
The Companys expenses (primarily real estate taxes, property and casualty insurance, administrative expenses and LHL hotel operating expenses) are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy costs, property and casualty insurance, liability insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation, and except for instances in which the properties are subject to periodic real estate tax reassessments.
Derivative/Financial Instruments
In the normal course of business, the Company is exposed to the effects of interest rate changes. As of December 31, 2005, approximately 15.2% (including the Companys $14.3 million pro rata portion of indebtedness relating to the Companys joint venture investment in the Chicago Marriott Downtown hotel) of the Companys borrowings were subject to variable rates. The Company limits the risks associated with interest rate changes by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used primarily to align rate movements between interest rates associated with the Companys hotel operating revenue, participating lease revenue and other financial assets with interest rates on related debt, and manage the cost of borrowing obligations. The Company may utilize derivative financial instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential in order to qualify for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures.
45
The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.
To manage interest rate risk, the Company may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying exposure. The Company utilizes a variety of borrowings including lines of credit and medium and long-term financings. To reduce overall interest cost, the Company uses interest rate instruments, typically interest rate swaps, to convert a portion of its variable rate debt to fixed rate debt. Interest rate differentials that arise under these swap contracts are recognized in interest expense over the life of the contracts. The resulting cost of funds is usually lower than that which would have been available if debt with matching characteristics was issued directly.
To determine the fair values of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing as of each valuation date. For the majority of financial instruments including most derivatives and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The table below provides information about financial instruments that are sensitive to changes in interest rates, including mortgage obligations, bonds, lines of credit and an interest rate swap. For debt obligations, the table presents scheduled maturities and related weighted average interest rates by expected maturity dates. The debt securing the Indianapolis Marriott Downtown has been included in fixed rate debt because the Company has an interest rate swap in place which is not used for trading purposes and effectively fixes the interest rate on the debt.
(Dollars in million) |
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
|||||||||||||||||||||
Fixed Rate Debt |
$ | 3,580 | $ | 60,816 | $ | 4,054 | $ | 128,495 | $ | 13,181 | $ | 279,534 | $ | 489,660 | ||||||||||||||
Weighted Average Interest |
6.2 | % | 3.7 | % | 6.2 | % | 6.0 | % | 8.0 | % | 5.3 | % | 5.4 | % | ||||||||||||||
Variable Rate Debt |
| $ | 42,500 | $ | 30,655 | | | | $ | 73,155 | ||||||||||||||||||
Weighted Average Interest |
| 3.7 | % | 6.1 | % | | | | 4.7 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total |
$ | 3,580 | $ | 103,316 | $ | 34,709 | $ | 128,495 | $ | 13,181 | $ | 279,534 | $ | 562,815 | ||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above presents the principal amount of debt maturing each year, including annual amortization of principal, through December 31, 2010 and thereafter and weighted average interest rates for the debt maturing in each specified period. This table reflects indebtedness outstanding as of December 31, 2005 and does not reflect indebtedness incurred after that date. The Companys ultimate exposure to interest rate fluctuations depends on the amount of indebtedness that bears interest at variable rates, the time at which the interest rate is adjusted, the amount of adjustment, the ability to prepay or refinance variable rate indebtedness and hedging strategies used to reduce the impact of any increases in rates.
The Company employs interest rate swaps to hedge against interest rate fluctuations. On February 27, 2004, the Company entered into a three-year fixed interest rate swap that fixes the LIBOR at 2.56% for $57.0 million of the Companys mortgage loan secured by the Indianapolis hotel and therefore fixes the mortgage rate at 3.56%.
46
The Company is exposed to market risk from changes in interest rates. The Company seeks to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring the Companys variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. As of December 31, 2005, approximately $87.5 million of the Companys aggregate indebtedness (15.2% of total indebtedness), including the Companys $14.3 million pro rata portion of indebtedness relating to the Companys joint venture investment in the Chicago Marriott Downtown hotel, was subject to variable interest rates.
If market rates of interest on the Companys variable rate long-term debt increase by 0.25%, the increase in interest expense on the variable long-term rate debt would decrease future earnings and cash flows by approximately $0.3 million annually. On the other hand, if market rates of interest on the variable rate long-term debt decrease by 0.25%, the decrease in interest expense on the variable rate long-term debt would increase future earnings and cash flows by approximately $0.3 million annually. This assumes that the amount outstanding under the Companys variable rate debt remains at $87.5 million, the balance at December 31, 2005.
Item 8. | Consolidated Financial Statements and Supplementary Data |
See Index to the Financial Statements on page F-1.
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Companys financial reports and to the members of senior management and the Board of Trustees.
Based on managements evaluation as of December 31, 2005, the principal executive officer and principal financial officer of the Company have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Managements Report on Internal Control Over Financial Reporting The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in 13a-15(f) of the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
The Company acquired Onyx Hotel, Westin Copley Place, University Tower Hotel, Hilton San Diego Resort and Washington Grande Hotel, formerly the Holiday Inn Downtown, on May 18, 2005, August 31, 2005, December 8, 2005, December 15, 2005, and December 16, 2005, respectively, and has excluded from its
47
assessment of effectiveness of internal control over financial reporting as of December 31, 2005, these hotels internal control over financial reporting associated with total assets of $524.5 million and total revenues of $34.8 million as of and for the year ended December 31, 2005.
Changes in Internal Controls There was no change to the Companys internal controls over financial reporting during the fourth quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.
Item 10. | Trustees and Executive Officers of the Registrant |
The information required by this item is incorporated by reference to the material in the Companys Proxy Statement for the 2006 Annual Meeting of Shareholders (the Proxy Statement) under the captions Election of Trustees and Audit Committee Report.
Item 11. | Executive Compensation |
The information required by this item is incorporated by reference to the material in the Proxy Statement under the captions Equity Compensation Plans, Election of Trustees and Principal and Management Shareholders.
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The information required by this item is incorporated by reference to the material in the Proxy Statement under the captions Equity Compensation Plan, Election of Trustees and Principal and Management Shareholders.
Item 13. | Certain Relationships and Related Transactions |
None.
Item 14. | Principal Accountant Fees and Services |
The information required by this item is incorporated by reference to the material in the Proxy Statement under the caption Ratification of Appointment of Independent Registered Public AccountantsFee Disclosure.
48
Item 15. | Exhibits and Financial Statement Schedules |
(a) | 1. Financial Statements |
Included herein at pages F-1 though F-39
2. Financial Statement Schedules |
The following financial statement schedule is included herein at pages F-40 and F-41.
Schedule III Real Estate and Accumulated Depreciation
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
3. Exhibits |
The following exhibits are filed as part of this Annual Report on Form 10-K:
Exhibit
Number |
Description of Exhibit |
|
2.1 | Purchase and Sale Agreement dated as of May 6, 2004, by and between LNR Alexandria Limited Partnership, a Delaware limited partnership, and LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership (16) | |
2.2 | Purchase and Sale Agreement dated as of December 17, 2003, by and between Convention Hotel Partners, LLC, an Indiana limited liability company, and LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership (17) | |
2.3 | Purchase and Sale Agreement dated as of January 26, 2006, by and between JER/WMA, LLC, a Delaware limited liability company, and LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership (13) | |
3.1 | Articles of Amendment and Restatement of Declaration of Trust of the Registrant (including all articles supplementary) | |
3.2 | Amended and Restated Bylaws of the Registrant (4) | |
4.1 | Form of Common Share of Beneficial Interest (1) | |
4.2 | Common Share Purchase Right dated April 29, 1998 (LaSalle Partners) (3) | |
4.3 | Common Share Purchase Right dated April 29, 1998 (Steinhardt) (3) | |
4.4 | Common Share Purchase Right dated April 29, 1998 (Cargill) (3) | |
10.1 | Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of April 29, 1998 (3) | |
10.2 | First Amendment to the Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of March 6, 2002 (9) | |
10.3 | Second Amendment to the Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of September 30, 2003 | |
10.4 | Form of Third Amendment to the Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P. (12) | |
10.5 | Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of August 22, 2005 (11) |
49
Exhibit
Number |
Description of Exhibit |
|
10.6 | Fifth Amendment to the Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of February 6, 2006 (19) | |
10.7 | Form of Articles of Incorporation and Bylaws of the Advisor (1) | |
10.8 | Contribution and Sale Agreement, dated August 12, 2005, by and among LaSalle Hotel Properties, LaSalle Hotel Operating Partnership, L.P., LaSalle Hotel Lessee, Inc., W. Copley Boston Corporation, and SCG Copley Square LLC (12) | |
10.9 | Omnibus Contribution Agreement By and Among LaSalle Hotel Operating Partnership, L.P. and the Contributors named herein (1) | |
10.10 | Contribution Agreement (Steinhardt) (1) | |
10.11 | Contribution Agreement (Cargill) (1) | |
10.12 | Contribution Agreement (OLS Visalia) (1) | |
10.13 | Contribution Agreement (OLS Le Montrose) (1) | |
10.14 | Contribution Agreement (Durbin) (1) | |
10.15 | Contribution Agreement (Radisson) (1) | |
10.16 | Form of Management Agreement (1) | |
10.17 | Form of Lease (1) | |
10.18 | Form of Lease with Affiliated Lessees (1) | |
10.19 | Form of Supplemental Representations, Warranties and Indemnity Agreement (1) | |
10.20 | Form of Pledge and Security Agreement (1) | |
10.21 | Subscription Agreement (with registration rights), dated as of May 28, 1998, by WestGroup San Diego Associates, Ltd. (2) | |
10.22 | Lease Agreement, dated as of June 1, 1998, by and between LHO Mission Bay Hotel, L.P. and WestGroup San Diego Associates, Ltd. (2) | |
10.23 | Promissory Note Secured by Leasehold Mortgage in the original principal amount of $210,000,000 made by LHO Backstreets, L.L.C. and dated as of August 30, 2005 (14) | |
10.24 | Leasehold Mortgage and Absolute Assignment of Rents and Leases and Security Agreement (and Fixture Filing) by LHO Backstreets, L.L.C., as Mortgagor, and Mortgage Electronic Registration Systems, Inc., as Mortgagee and dated August 30, 2005 (14) | |
10.25 | Registration Rights Agreement, dated as of April 29, 1998, with respect to Common Shares which may be Issued upon Exchange of Operating Partnership Units (LaSalle Partners) (3) | |
10.26 | Registration Rights Agreement, dated as of April 29, 1998, with respect to Common Shares which may be Issued upon Exchange of Operating Partnership Units (Steinhardt) (3) | |
10.27 | Registration Rights Agreement, dated as of April 29, 1998, with respect to Common Shares which may be Issued upon Exchange of Operating Partnership Units (Cargill) (3) | |
10.28 | Registration Rights Agreement, dated as of April 29, 1998, with respect to Common Share Purchase Rights (LaSalle Partners) (3) | |
10.29 | Registration Rights Agreement, dated as of April 29, 1998, with respect to Common Share Purchase Rights (Steinhardt) (3) | |
10.30 | Registration Rights Agreement, dated as of April 29, 1998, with respect to Common Share Purchase Rights (Cargill) (3) | |
10.31 | Loan and Trust Agreement, dated as of December 15, 1990, as amended and restated as of June 27, 1991, among the Massachusetts Port Authority, Logan Harborside Associates II Limited Partnership, and Shawmut Bank, N.A., as trustee (3) |
50
Exhibit
Number |
Description of Exhibit |
|
10.32 | Credit Enhancement Agreement, dated as of June 27, 1991, among the Massachusetts Port Authority, Logan Harborside Associates II Limited Partnership and Shawmut Bank, N.A. (3) | |
10.33 | Form of First Amendment to Lease with Affiliated Lessee (5) | |
10.34 | LaSalle Hotel Properties 1998 Share Option and Incentive Plan, as amended through April 21, 2005 (6)* | |
10.35 | Form of Second Amendment to Lease with Affiliate Lessee (5) | |
10.36 | Amended and Restated Advisory Agreement and Employee Lease Agreement dated January 1, 2000 between LaSalle Hotel Properties and LaSalle Hotel Advisors, Inc. (7) | |
10.37 | Stock Purchase Agreement dated July 28, 2000 by and among LaSalle Hotel Operating Partnership, L.P. and LaSalle Hotel Co-Investment, Inc., LPI Charities and LaSalle Hotel Properties (8) | |
10.38 | Amended and Restated Senior Unsecured Credit Agreement entered into on June 9, 2005 among Bank of Montreal, Bank of America, N.A., the other lenders named therein and LaSalle Hotel Operating Partnership, L.P. (15) | |
10.39 | Guaranty and Contribution Agreement made as of June 9, 2005 by LaSalle Hotel Properties and certain of its subsidiaries (15) | |
10.40 | Environmental Indemnification Agreement made as of June 9, 2005 by LaSalle Hotel Operating Partnership, L.P., LaSalle Hotel Properties and certain of their subsidiaries (15) | |
10.41 | Termination and Services Agreement dated December 28, 2000 by and among LaSalle Hotel Properties, and LaSalle Hotel Advisors, Inc. and LaSalle Investment Management, Inc. (8) | |
10.42 | Change in Control Severance Agreement between Jon E. Bortz and LaSalle Hotel Properties dated as of January 28, 2002 (10)* | |
10.43 | Change in Control Severance Agreement between Hans S. Weger and LaSalle Hotel Properties dated as of January 28, 2002 (10)* | |
10.44 | Change in Control Severance Agreement between Michael D. Barnello and LaSalle Hotel Properties dated as of January 28, 2002 (10)* | |
12.1 | Calculation of the Registrants Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends (18) | |
21 | List of subsidiaries | |
23 | Consent of KPMG LLP | |
24.1 | Power of Attorney (included in Part IV of this Annual Report on Form 10-K) | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Represents management contract or compensatory plan or agreement. |
(1) | Previously filed as an exhibit to the Registrants Registration Statement on Form S-11 (No. 333-45647) and incorporated to Amendment No. 1 herein by reference. |
(2) | Previously filed as an exhibit to the Registrants Form 8-K (No. 001-14045) report filed with the SEC on June 15, 1998 and incorporated herein by reference. |
51
(3) | Previously filed as an exhibit to the Registrants Form 10-Q (No. 001-14045) filed with the SEC on August 14, 1998 and incorporated herein by reference. |
(4) | Previously filed as an exhibit to the Registrants Form S-3 (No. 333-104054) filed with the SEC on March 27, 2003 and incorporated herein by reference. |
(5) | Previously filed as an exhibit to the Registrants Form 10-Q (No. 001-14045) filed with the SEC on May 12, 1999 and incorporated herein by reference. |
(6) | Previously filed as an exhibit to the Registrants Registration Statement on Form S-8 (No. 333-125058) filed with the SEC on May 19, 2005 and incorporated herein by reference. |
(7) | Previously filed as an exhibit to the Registrants Form 10-Q (No. 001-14045) filed with the SEC on August 2, 2000 and incorporated herein by reference. |
(8) | Previously filed as an exhibit to the Registrants Form 10-K (No. 001-14045) filed with the SEC on March 27, 2001 and incorporated herein by reference. |
(9) | Previously filed as an exhibit to the Registrants Form 8-K report filed with the SEC on March 12, 2002 and incorporated herein by reference. |
(10) | Previously filed as an exhibit to Registrants Form 10-K filed with the SEC on February 19, 2003 and incorporated herein by reference. |
(11) | Previously filed as an exhibit to Registrants Form 8-K report filed with the SEC on August 24, 2005 and incorporated herein by reference. |
(12) | Previously filed as an exhibit to Registrants Form 8-K report filed with the SEC on August 16, 2005 and incorporated herein by reference. |
(13) | Previously filed as an exhibit to Registrants Form 8-K report filed with the SEC on January 30, 2006 and incorporated herein by reference. |
(14) | Previously filed as an exhibit to Registrants Form 8-K report filed with the SEC on September 7, 2005 and incorporated herein by reference. |
(15) | Previously filed as an exhibit to Registrants Form 8-K report filed with the SEC on June 14, 2005 and incorporated herein by reference. |
(16) | Previously filed as an exhibit to Registrants Form 8-K/A report filed with the SEC on July 1, 2004 and incorporated herein by reference. |
(17) | Previously filed as an exhibit to Registrants Form 8-K/A report filed with the SEC on March 3, 2004 and incorporated herein by reference. |
(18) | Previously filed as an exhibit to Registrants Registration Statement on Form S-3ASR (No. 333-131384) and incorporated herein by reference. |
(19) | Previously filed as an exhibit to Registrants Form 8-K report filed with the SEC on February 8, 2006 and incorporated herein by reference. |
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LASALLE HOTEL PROPERTIES | ||||||||
Dated: February 22, 2006 |
BY: |
/s/ H ANS S. W EGER |
||||||
Hans S. Weger | ||||||||
Executive Vice President and
Chief Financial Officer |
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and trustees of LaSalle Hotel Properties, hereby severally constitute Jon E. Bortz, Michael D. Barnello and Hans S. Weger, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and trustees to enable LaSalle Hotel Properties to comply with the provisions of the Securities Exchange Act of 1934, as amended and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated.
Date |
Signature |
|||
February 22, 2006 |
/s/ J ON E. B ORTZ Jon E. Bortz |
Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||
February 22, 2006 |
/s/ D ARRYL H ARTLEY -L EONARD Darryl Hartley-Leonard |
Trustee | ||
February 22, 2006 |
/s/ K ELLY L. K UHN Kelly L. Kuhn |
Trustee | ||
February 22, 2006 |
/s/ W ILLIAM S. M C C ALMONT William S. McCalmont |
Trustee | ||
February 22, 2006 |
/s/ D ONALD S. P ERKINS Donald S. Perkins |
Trustee | ||
February 22, 2006 |
/s/ S TUART L. S COTT Stuart L. Scott |
Trustee | ||
February 22, 2006 |
/s/ D ONALD A. W ASHBURN Donald A. Washburn |
Trustee | ||
February 22, 2006 |
/s/ M ICHAEL D. B ARNELLO Michael D. Barnello |
Chief Operating Officer and Executive Vice President of Acquisitions |
||
February 22, 2006 |
/s/ H ANS S. W EGER Hans S. Weger |
Executive Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
LASALLE HOTEL PROPERTIES
F-1
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees
LaSalle Hotel Properties:
We have audited the consolidated financial statements of LaSalle Hotel Properties (the Company) as listed in the accompanying Index to Financial Statements. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying Index to Financial Statements. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaSalle Hotel Properties as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of LaSalle Hotel Properties internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2006 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
February 22, 2006
F-2
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees
LaSalle Hotel Properties:
We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting , that LaSalle Hotel Properties (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that LaSalle Hotel Properties maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by COSO. Also, in our opinion, LaSalle Hotel Properties maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by COSO.
LaSalle Hotel Properties acquired Onyx Hotel, Westin Copley Place, University Tower Hotel, Hilton San Diego Resort and Washington Grande Hotel on May 18, 2005, August 31, 2005, December 8, 2005, December 15, 2005 and December 16, 2005, respectively, and management excluded from its assessment of the effectiveness of LaSalle Hotel Properties internal control over financial reporting as of December 31, 2005, these hotels internal control over financial reporting associated with total assets of approximately $524,473,000 and total revenues of approximately $34,752,000 included in the consolidated financial statements of LaSalle Hotel Properties as of and for the year ended December 31, 2005. Our audit of internal control over financial reporting of LaSalle Hotel Properties also excluded an evaluation of the internal control over financial reporting of these hotels.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LaSalle Hotel Properties as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 22, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
February 22, 2006
F-3
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31, 2005 |
December 31, 2004 |
|||||||
Assets: |
||||||||
Investment in hotel properties, net (Note 4) |
$ | 1,392,344 | $ | 739,733 | ||||
Property under development (Note 4) |
11,681 | 32,508 | ||||||
Investment in joint venture (Note 2) |
978 | 1,341 | ||||||
Cash and cash equivalents |
10,153 | 32,102 | ||||||
Restricted cash reserves (Note 9) |
20,845 | 7,430 | ||||||
Rent receivable |
2,238 | 1,527 | ||||||
Hotel receivables (net of allowance for doubtful accounts of approximately $987 and $255, respectively) |
17,678 | 8,227 | ||||||
Deferred financing costs, net |
4,504 | 4,283 | ||||||
Deferred tax asset |
18,176 | 14,500 | ||||||
Prepaid expenses and other assets |
21,021 | 17,945 | ||||||
|
|
|
|
|
|
|||
Total assets |
$ | 1,499,618 | $ | 859,596 | ||||
|
|
|
|
|
|
|||
Liabilities and Shareholders Equity: |
||||||||
Borrowings under credit facilities (Note 8) |
$ | 30,655 | $ | | ||||
Bonds payable (Note 8) |
42,500 | 42,500 | ||||||
Mortgage loans (including unamortized premium of $615 and zero, respectively) (Note 8) |
489,660 | 211,810 | ||||||
Accounts payable and accrued expenses (Note 9) |
47,992 | 35,338 | ||||||
Advance deposits |
4,623 | 4,423 | ||||||
Accrued interest |
2,531 | 1,181 | ||||||
Distributions payable |
8,239 | 5,554 | ||||||
Liabilities of assets sold (Note 6) |
| 162 | ||||||
|
|
|
|
|
|
|||
Total liabilities |
626,200 | 300,968 | ||||||
Minority interest of common units in LaSalle Hotel Operating Partnership, L.P. (Note 2) |
2,597 | 4,554 | ||||||
Minority interest of preferred units in LaSalle Hotel Operating Partnership, L.P |
59,739 | | ||||||
Commitments and contingencies (Note 9) |
| | ||||||
Shareholders Equity: |
||||||||
Preferred shares, $.01 par value, 20,000,000 shares authorized, (Note 10)
|
40 | 40 | ||||||
8 3 / 8 % Series B (liquidation preference $27,500)1,100,000 shares issued and outstanding at December 31, 2005 and 2004, respectively |
11 | 11 | ||||||
7 1 / 4 % Series Czero shares issued and outstanding at December 31, 2005 and 2004, respectively |
| | ||||||
7 1 / 2 % Series D (liquidation preference $79,250)- 3,170,000 and 0 shares issued and outstanding at December 31, 2005 and 2004, respectively |
32 | | ||||||
Common shares of beneficial interest, $.01 par value, 100,000,000 shares authorized and 36,053,809 and 29,880,047 shares issued and outstanding at December 31, 2005 and 2004, respectively (Note 10) |
361 | 299 | ||||||
Additional paid-in capital, including offering costs of $36,790 and $31,853 at December 31, 2005 and 2004, respectively |
898,483 | 617,742 | ||||||
Deferred compensation |
(3,507 | ) | (2,332 | ) | ||||
Accumulated other comprehensive income (Note 12) |
1,353 | 965 | ||||||
Distributions in excess of retained earnings |
(85,691 | ) | (62,651 | ) | ||||
|
|
|
|
|
|
|||
Total shareholders equity |
811,082 | 554,074 | ||||||
|
|
|
|
|
|
|||
Total liabilities and shareholders equity |
$ | 1,499,618 | $ | 859,596 | ||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Revenues: |
||||||||||||
Hotel operating revenues: |
||||||||||||
Room revenue |
$ | 225,920 | $ | 152,100 | $ | 92,951 | ||||||
Food and beverage revenue |
115,699 | 86,404 | 56,266 | |||||||||
Other operating department revenue |
30,605 | 23,291 | 16,941 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Total hotel operating revenues |
372,224 | 261,795 | 166,158 | |||||||||
Participating lease revenue |
21,527 | 18,635 | 21,284 | |||||||||
Other income |
862 | 187 | 919 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Total revenues |
394,613 | 280,617 | 188,361 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Expenses: |
||||||||||||
Hotel operating expenses: |
||||||||||||
Room |
54,138 | 38,912 | 25,069 | |||||||||
Food and beverage |
78,828 | 59,951 | 40,256 | |||||||||
Other direct |
17,177 | 13,349 | 9,371 | |||||||||
Other indirect (Note 14) |
106,525 | 74,486 | 48,389 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Total hotel operating expenses |
256,668 | 186,698 | 123,085 | |||||||||
Depreciation and other amortization |
48,850 | 38,933 | 31,665 | |||||||||
Real estate taxes, personal property taxes and insurance |
15,792 | 11,891 | 9,347 | |||||||||
Ground rent (Note 9) |
3,986 | 3,493 | 3,561 | |||||||||
General and administrative |
10,301 | 8,398 | 7,292 | |||||||||
Impairment of investment in hotel property |
| | 2,453 | |||||||||
Lease termination expenses (Note 9) |
1,000 | 850 | 10 | |||||||||
Other expenses |
185 | 632 | 251 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
336,782 | 250,895 | 177,664 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Operating income |
57,831 | 29,722 | 10,697 | |||||||||
Interest income |
788 | 361 | 353 | |||||||||
Interest expense |
(24,354 | ) | (15,349 | ) | (15,050 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Income (loss) before income tax benefit, minority interest, equity in earnings of Joint Venture and discontinued operations |
34,265 | 14,734 | (4,000 | ) | ||||||||
Income tax benefit (Note 15) |
2,123 | 3,507 | 5,605 | |||||||||
Minority interest of common units in LaSalle Hotel Operating |
||||||||||||
Partnership, L.P |
(300 | ) | (289 | ) | (40 | ) | ||||||
Minority interest of preferred units in LaSalle Hotel Operating |
||||||||||||
Partnership, L.P |
(1,419 | ) | | | ||||||||
Equity in earnings of Joint Venture (Note 2) |
753 | 853 | 304 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
35,422 | 18,805 | 1,869 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Discontinued operations (Note 6): |
||||||||||||
Income (loss) from operations of properties disposed of, including gain on disposal of assets |
(45 | ) | 4,614 | 37,714 | ||||||||
Minority interest, net of tax |
| (68 | ) | (779 | ) | |||||||
Income tax benefit (expense) (Note 15) |
19 | (128 | ) | 37 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net income (loss) from discontinued operations |
(26 | ) | 4,418 | 36,972 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net income |
35,396 | 23,223 | 38,841 | |||||||||
Distributions to preferred shareholders |
(14,629 | ) | (12,532 | ) | (10,805 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders |
$ | 20,767 | $ | 10,691 | $ | 28,036 | ||||||
|
|
|
|
|
|
|
|
|
F-5
LASALLE HOTEL PROPERTIES
Consolidated Statements of OperationsContinued
(Dollars in thousands, except per share data)
For the year ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Earnings per Common ShareBasic: |
||||||||||
Income (loss) applicable to common shareholders before discontinued operations and after dividends paid on unvested restricted shares |
$ | 0.67 | $ | 0.23 | $ | (0.46 | ) | |||
Discontinued operations |
| 0.16 | 1.85 | |||||||
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders after dividends paid on unvested restricted shares |
$ | 0.67 | $ | 0.39 | $ | 1.39 | ||||
|
|
|
|
|
|
|
||||
Earnings per Common ShareDiluted: |
||||||||||
Income (loss) applicable to common shareholders before discontinued operations |
$ | 0.67 | $ | 0.23 | $ | (0.43 | ) | |||
Discontinued operations |
| 0.16 | 1.80 | |||||||
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders |
$ | 0.67 | $ | 0.39 | $ | 1.37 | ||||
|
|
|
|
|
|
|
||||
Weighted average number of common shares outstanding: |
||||||||||
Basic |
30,637,644 | 26,740,506 | 20,030,723 | |||||||
Diluted |
31,104,290 | 27,376,934 | 20,487,406 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Consolidated Statements of Shareholders Equity
(Dollars in thousands, except per share data)
Preferred
Shares |
Treasury
Shares |
Common
Shares of Beneficial Interest |
Additional
Paid-In Capital |
Deferred
Compensation |
Accumulated
Other Comprehensive Loss |
Distributions
in Excess of Retained Earnings |
Total
|
||||||||||||||||||||||
Balance, December 31, 2002 |
$ | 40 | $ | | $ | 187 | $ | 374,383 | $ | (1,914 | ) | $ | (1,050 | ) | $ | (56,539 | ) | $ | 315,107 | ||||||||||
Issuance of shares, net of offering costs |
11 | | 52 | 108,261 | | | | 108,324 | |||||||||||||||||||||
Options exercised |
| | 1 | 661 | | | | 662 | |||||||||||||||||||||
Unit conversions |
| | | | | | | | |||||||||||||||||||||
Deferred compensation |
| | 1 | 2,419 | (2,420 | ) | | | | ||||||||||||||||||||
Amortization of deferred compensation |
| | | | 940 | | | 940 | |||||||||||||||||||||
Unrealized loss on interest rate derivatives |
| | | | | 1,050 | | 1,050 | |||||||||||||||||||||
Distributions declared ($0.84 per common share) |
| | | | | | (17,266 | ) | (17,266 | ) | |||||||||||||||||||
Distributions ($ 2.56 per Series A preferred share) |
| | | | | | (10,229 | ) | (10,229 | ) | |||||||||||||||||||
Distributions ($ 2.09 per Series B preferred share) |
| | | | | | (576 | ) | (576 | ) | |||||||||||||||||||
Net income |
| | | | | | 38,841 | 38,841 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, December 31, 2003 |
51 | | 241 | 485,724 | (3,394 | ) | | (45,769 | ) | 436,853 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Issuance of shares, net of offering costs |
| 7,051 | 44 | 109,757 | | | (165 | ) | 116,687 | ||||||||||||||||||||
Repurchase of common shares (treasury shares) |
| (611 | ) | | | | | | (611 | ) | |||||||||||||||||||
Options exercised |
| 43 | 6 | 6,353 | | | (6 | ) | 6,396 | ||||||||||||||||||||
Stock rights exercised |
| (6,490 | ) | 8 | 14,563 | | | (2,842 | ) | 5,239 | |||||||||||||||||||
Unit conversions |
| | | 1,155 | | | | 1,155 | |||||||||||||||||||||
Deferred compensation |
| 7 | | 190 | (197 | ) | | | | ||||||||||||||||||||
Amortization of deferred compensation |
| | | | 1,259 | | | 1,259 | |||||||||||||||||||||
Unrealized gain on interest rate derivatives |
| | | | | 965 | | 965 | |||||||||||||||||||||
Distributions declared ($0.90 per common share) |
| | | | | | (24,558 | ) | (24,558 | ) | |||||||||||||||||||
Distributions ($ 2.56 per Series A preferred share) |
| | | | | | (10,229 | ) | (10,229 | ) | |||||||||||||||||||
Distributions ($ 2.09 per Series B preferred share) |
| | | | | | (2,305 | ) | (2,305 | ) | |||||||||||||||||||
Net income |
| | | | | | 23,223 | 23,223 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, December 31, 2004 |
$ | 51 | $ | | $ | 299 | $ | 617,742 | $ | (2,332 | ) | $ | 965 | $ | (62,651 | ) | $ | 554,074 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Issuance of shares, net of offering costs |
32 | 1,896 | 56 | 266,706 | | | (10,154 | ) | 258,536 | ||||||||||||||||||||
Repurchase of common shares (treasury shares) |
| (2,936 | ) | | | | | | (2,936 | ) | |||||||||||||||||||
Options exercised |
| 75 | 2 | 2,678 | | | (21 | ) | 2,734 | ||||||||||||||||||||
Stock rights exercised |
| | 1 | 1,889 | | | | 1,890 | |||||||||||||||||||||
Unit conversions |
| | 3 | 7,954 | | | | 7,957 | |||||||||||||||||||||
Deferred compensation |
| 965 | | 1,514 | (2,437 | ) | | (42 | ) | | |||||||||||||||||||
Amortization of deferred compensation |
| | | | 1,262 | | | 1,262 | |||||||||||||||||||||
Unrealized gain on interest rate derivatives |
| | | | | 388 | | 388 | |||||||||||||||||||||
Distributions declared ($1.08 per common share) |
| | | | | | (33,590 | ) | (33,590 | ) | |||||||||||||||||||
Distributions ($ 2.56 per Series A preferred share) |
| | | | | | (10,229 | ) | (10,229 | ) | |||||||||||||||||||
Distributions ($ 2.09 per Series B preferred share) |
| | | | | | (2,303 | ) | (2,303 | ) | |||||||||||||||||||
Distributions ($1.88 per Series D preferred share) |
| | | | | | (2,097 | ) | (2,097 | ) | |||||||||||||||||||
Net income |
| | | | | | 35,396 | 35,396 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, December 31, 2005 |
$ | 83 | $ | | $ | 361 | $ | 898,483 | $ | (3,507 | ) | $ | 1,353 | $ | (85,691 | ) | $ | 811,082 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Consolidated Statements of Cash Flows
(Dollars in thousands, except per share data)
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 35,396 | $ | 23,223 | $ | 38,841 | ||||||
Adjustments to reconcile net income to net cash flow provided by operating activities: |
||||||||||||
Depreciation and other amortization |
48,850 | 39,046 | 33,702 | |||||||||
Amortization of deferred financing costs |
1,638 | 2,268 | 3,511 | |||||||||
Minority interest in LaSalle Hotel Operating Partnership, L.P. |
1,719 | 357 | 819 | |||||||||
Gain on sale of property disposed of |
| (2,636 | ) | (37,087 | ) | |||||||
Loss on sale of property disposed of |
| | 425 | |||||||||
Impairment of investment in hotel property |
| | 2,453 | |||||||||
Gain on extinguishment of debt |
| (70 | ) | | ||||||||
Gain on disposition of minority interest in other partnerships |
| (10 | ) | | ||||||||
Income tax benefit |
(3,611 | ) | (3,936 | ) | (5,642 | ) | ||||||
Deferred compensation |
1,262 | 1,259 | 899 | |||||||||
Equity in earnings of unconsolidated entities |
(753 | ) | (853 | ) | (304 | ) | ||||||
Changes in assets and liabilities: |
||||||||||||
Rent receivable |
(711 | ) | 589 | 520 | ||||||||
Hotel receivables, net |
(3,305 | ) | 2,724 | (5,410 | ) | |||||||
Deferred tax asset |
(65 | ) | (140 | ) | (567 | ) | ||||||
Prepaid expenses and other assets |
(561 | ) | (7,286 | ) | 6,147 | |||||||
Mortgage loan premium |
| (75 | ) | 2,015 | ||||||||
Accounts payable and accrued expenses |
5,840 | 372 | (834 | ) | ||||||||
Advance deposits |
(740 | ) | 559 | 2,266 | ||||||||
Accrued interest |
1,350 | (307 | ) | (560 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Net cash flow provided by operating activities |
86,309 | 55,084 | 41,194 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Cash flows from investing activities: |
||||||||||||
Improvements and additions to hotel properties |
(53,596 | ) | (37,161 | ) | (27,024 | ) | ||||||
Acquisition of hotel properties |
(347,505 | ) | (181,020 | ) | (74,895 | ) | ||||||
Distributions from joint venture |
1,116 | 3,000 | 1,396 | |||||||||
Purchase of office furniture and equipment |
(108 | ) | (441 | ) | (203 | ) | ||||||
Repayment of notes receivable |
| | 1,319 | |||||||||
Funding of restricted cash reserves |
(18,408 | ) | (7,444 | ) | (22,207 | ) | ||||||
Proceeds from restricted cash reserves |
4,993 | 22,002 | 18,956 | |||||||||
Proceeds from sale of investment in hotel properties |
| 28,596 | 49,949 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net cash flow used in investing activities |
(413,508 | ) | (172,468 | ) | (52,709 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Cash flows from financing activities: |
||||||||||||
Borrowings under credit facilities |
547,761 | 304,315 | 124,766 | |||||||||
Repayments under credit facilities |
(517,106 | ) | (304,315 | ) | (224,156 | ) | ||||||
Proceeds from mortgage loans |
59,600 | 91,400 | 65,000 | |||||||||
Repayments of mortgage loans |
(3,126 | ) | (64,732 | ) | (1,673 | ) | ||||||
Mortgage loan premium |
| (1,870 | ) | | ||||||||
Payment of deferred financing costs |
(1,863 | ) | (1,592 | ) | (3,022 | ) | ||||||
Purchase of treasury shares |
(1,046 | ) | | | ||||||||
Proceeds from exercise of stock options |
2,736 | 12,060 | 662 | |||||||||
Proceeds from issuance of preferred shares |
79,250 | | 27,500 | |||||||||
Proceeds from issuance of common shares |
190,171 | 119,625 | 83,919 | |||||||||
Payment of preferred offering costs |
(2,318 | ) | | (732 | ) | |||||||
Payment of common offering costs |
(2,664 | ) | (3,392 | ) | (2,360 | ) | ||||||
Distributions-preferred shares/units |
(13,498 | ) | (12,532 | ) | (10,229 | ) | ||||||
Distributions-common shares/units |
(32,647 | ) | (24,242 | ) | (19,920 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net cash flow provided by financing activities |
305,250 | 114,725 | 39,755 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in cash and cash equivalents |
(21,949 | ) | (2,659 | ) | 28,240 | |||||||
Cash and cash equivalents, beginning of year |
32,102 | 34,761 | 6,521 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents, end of year |
$ | 10,153 | $ | 32,102 | $ | 34,761 | ||||||
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Notes to Consolidated Financial Statements
(Dollars in thousands, expect per share data)
1. Organization and Initial Public Offering
LaSalle Hotel Properties (the Company) was organized in the state of Maryland on January 15, 1998 as a real estate investment trust (REIT) as defined in the Internal Revenue Code. The Company was formed to own hotel properties. The Company had no operations prior to April 24, 1998, at which time the Company completed its initial public offering. The Company buys, owns and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets.
As of December 31, 2005, the Company owned interests in 26 hotels with approximately 8,300 suites/rooms located in eleven states and the District of Columbia. The Company owns 100% equity interests in 25 of the hotels and a non-controlling 9.9% equity interest in a joint venture that owns one hotel. Each hotel is leased under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. An independent hotel operator manages each hotel. Two of the hotels are leased to unaffiliated lessees (affiliates of whom also operate these hotels) and 23 of the hotels are leased to the Companys taxable-REIT subsidiary, LaSalle Hotel Lessee, Inc. (LHL), or a wholly-owned subsidiary of LHL (see Note 14). Lease revenue from LHL and its wholly-owned subsidiaries is eliminated in consolidation. The hotel that is owned by the joint venture that owns the Chicago Marriott Downtown is leased to Chicago 540 Lessee, Inc. in which the Company has a non-controlling 9.9% equity interest (see Note 2).
Substantially all of the Companys assets are held by, and all of its operations are conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Company owned approximately 99.6% of the common units of the Operating Partnership at December 31, 2005. The remaining 0.4% is held by limited partners who hold 143,090 limited partnership common units at December 31, 2005. Common units of the Operating Partnership are redeemable for cash or, at the option of the Company, for a like number of common shares of beneficial interest, par value $0.01 per share, of the Company. In addition, another limited partner owns 2,348,888 preferred units of limited interest in the Operating Partnership having an aggregate liquidation value of approximately $58,722 and bearing an annual cumulative distribution of 7.25% on the liquidation preference. The hotels are leased under participating leases that provide for rental payments equal to the greater of (i) base rent or (ii) participating rent based on fixed percentages of gross hotel revenues.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and its subsidiaries and partnerships in which it has a controlling interest. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is determined by using available market information and appropriate valuation methodologies. Borrowings under the senior unsecured credit facility, borrowings under LHLs credit facility and the
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Massachusetts Port Authority Special Project Revenue Bonds bear interest at variable market rates, carrying values approximate market value at December 31, 2005 and 2004, respectively. The carrying amount of the Companys other debt approximates fair value. The carrying amount of the Companys other financial instruments approximate fair value because of the relatively short maturities of these instruments.
Investment in Hotel Properties
Upon acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures and equipment, assumed debt and intangible assets. The Companys investments in hotel properties are carried at cost and are depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, 20 years for golf course land improvements, 20 years for pool assets, and three to five years for furniture, fixtures and equipment. Furniture fixtures and equipment under capital leases are carried at the present value of the minimum lease payments.
The Company periodically reviews the carrying value of each hotel to determine if circumstances exist indicating impairment to the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value. The Company does not believe that there are any facts or circumstances indicating impairment of any of its hotels.
In July 2003, the Companys management changed its intent from holding its investment in the Holiday Inn Beachside Resort to selling the property due to the projected cost of renovating the property and receiving an unsolicited offer to purchase the property. As a result, the Company wrote down its investment in the Holiday Inn Beachside Resort by $2,453 to its estimated fair value, net of estimated costs to sell. The Board of Trustees approved managements plan to sell the asset in July 2003, and the asset was sold in July 2003.
In accordance with the provisions of Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, a hotel is considered held for sale when a contract for sale is entered into or when management has committed to a plan to sell an asset, the asset is actively marketed and sale is expected to occur within one year.
Interest and real estate taxes incurred during the renovation period are capitalized and depreciating over the lives of the renovated assets. Capitalized interest for the years ended December 31, 2005, 2004 and 2003 was $1,178, $783 and $289, respectively.
Intangible Assets
The Company has an intangible asset for rights to build in the future at the Lansdowne Resort, which has an indefinite useful life. The Company does not amortize intangible assets with indefinite useful lives. The non-amortizable intangible asset is reviewed annually for impairment and more frequently if events or circumstances indicate that the asset may be impaired. If a non-amortizable intangible asset is subsequently determined to have a finite useful life, the intangible asset will be written down to the lower of its fair value or carrying amount and then amortized prospectively, based on the remaining useful life of the intangible asset. The intangible asset for rights to build in the future is included in property under development in the accompanying consolidated balance sheets.
Investment in Joint Venture
Investment in joint venture represents the Companys non-controlling 9.9% equity interest in each of (i) the joint venture that owns the Chicago Marriott Downtown and (ii) Chicago 540 Lessee, Inc., both of which are associated with the Chicago Marriott Downtown. The Carlyle Group owns a 90.1% controlling interest in both
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the Chicago 540 Hotel Venture and Chicago 540 Lessee, Inc. The Company accounts for its investment in joint venture under the equity method of accounting, and receives an annual preferred return in addition to its pro rata share of annual cash flow. The Company also has the opportunity to earn an incentive participation in net sale proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of net sale or refinancing proceeds. Marriott International, Inc. operates the Chicago Marriott Downtown pursuant to a long-term incentive-based operating agreement.
The joint venture that owns the Chicago Marriott Downtown and in which the Company holds a non-controlling 9.9% ownership interest was subject to two mortgage loans for an aggregate amount of $120,000. The mortgage loans had two-year terms, and were due to expire in July 2004. On April 6, 2004, the joint venture that owns the Chicago Marriott Downtown refinanced its existing two mortgage loans with a new mortgage loan for an aggregate amount of $140,000. Upon refinancing, the Company received approximately $1,822 in cash representing its prorated share of the proceeds. The new mortgage loan has a two-year term, expires in April 2006, and can be extended at the option of the joint venture for three additional one-year terms. The mortgage bears interest at the London InterBank Offered Rate plus 2.25%. The joint venture has purchased a cap on the London InterBank Offered Rate capping the London InterBank Offered Rate at 7.25%, effectively limiting the rate on the mortgage to 9.5%. As of December 31, 2005, the interest rate on this mortgage was 6.63%. Monthly interest-only payments are due in arrears throughout the term. The Chicago Marriott Downtown secures the mortgage. The Companys pro rata share of the loan is $13,860 and is included in the Companys liquidity and capital resources discussion and in calculating debt coverage ratios under the Companys credit facility. No guarantee exists on behalf of the Company for this mortgage.
On November 2, 2004, the Chicago 540 Hotel Venture, in which the Company has a non-controlling 9.9% ownership interest, obtained a three and a half year commitment for a $5,750 FF&E credit facility to be used for partial funding of the FF&E costs related to the property. The FF&E credit facility matures on the earlier of (i) April 30, 2008, or (ii) three years from the date on which the final borrowing is made. The borrower has an option to borrow portions of the principal debt bearing interest with reference to the base rate or to LIBOR, and portions may be converted from one interest basis to another. Base rate will be the greater of (i) the rate established by the lender as a base rate and which is designated by the lender as its U.S. prime rate, or (ii) the Federal Funds Rate plus 0.50%. LIBOR rate will be set two business days before the start of an interest period. The Chicago 540 Hotel Venture purchased a cap on London InterBank Offered Rate capping the London InterBank Offered Rate at 7.5%. Consistent with ownership interest, the Company is guaranteeing 9.9% of the credit facility. The Companys maximum exposure under the FF&E facility is $569, and the guarantee will expire at the maturity of the credit facility. In the event of default, any outstanding principal and accrued interest will be due and payable. As of December 31, 2005 and 2004 there was $4,694 and zero, respectively outstanding under the FF&E credit facility. The Companys pro rata share of the borrowings outstanding under the FF&E facility was $465 and zero at December 31, 2005 and 2004, respectively. The Company believes that the likelihood that the Company will be required to pay under the guarantee is remote, and therefore, a liability has not been recorded. The Companys pro rata share of the outstanding borrowings is included in the Companys liquidity and capital resources discussion and in calculating debt coverage ratios under the Companys credit facility.
Derivative/Financial Instruments
In the normal course of business, the Company is exposed to the effects of interest rate changes. As of December 31, 2005, approximately 15.2% (including the Companys $14,325 pro rata portion of indebtedness relating to the Companys joint venture investment in the Chicago Marriott Downtown) of the Companys borrowings were subject to variable rates. The Company limits the risks associated with interest rate changes by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used primarily to align rate movements between interest rates associated with the Companys hotel operating revenue, participating lease revenue and other financial assets with interest rates on related debt, and manage the cost of borrowing obligations. The Company utilizes derivative financial
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instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential in order to qualify for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures.
The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives.
To manage interest rate risk, the Company may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying exposure. The Company utilizes a variety of borrowings including lines of credit and medium and long-term financings. To reduce overall interest cost, the Company uses interest rate instruments, typically interest rate swaps, to convert a portion of its variable rate debt to fixed rate debt. Interest rate differentials that arise under these swap contracts are recognized in interest expense over the life of the contracts. The resulting cost of funds is usually lower than that which would have been available if debt with matching characteristics was issued directly.
To determine the fair values of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing as of each valuation date. For the majority of financial instruments including most derivatives and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Restricted Cash Reserves
At December 31, 2005, the Company held $20,845 in restricted cash reserves. Included in such amounts are (i) $8,758 of reserve funds relating to the hotels with leases or operating agreements requiring the Company to maintain restricted cash to fund future capital expenditures, (ii) $8,778 as security for a surety bond in furtherance of the Companys appeal from the June 9, 2005 court judgment with respect to the New Orleans hotel, (iii) $500 for future renovations and conversion costs expected to be incurred because of the Bloomington property re-branding under the Sheraton brand affiliation and (iv) $2,809 deposited in mortgage escrow accounts pursuant to mortgage obligations to pre-fund a portion of certain hotel expenses.
Deferred Financing Costs
Financing costs related to long-term debt are recorded at cost and are amortized as interest expense over the life of the related debt instrument. Accumulated amortization at December 31, 2005 and 2004 was $9,017 and $7,406, respectively.
Revenue Recognition
For properties not leased by LHL, the Company recognizes lease revenue on an accrual basis pursuant to the terms of each participating lease. Base and participating rent are each recognized based on quarterly thresholds
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pursuant to each participating lease (see Note 13). For properties leased by LHL, the Company recognizes hotel operating revenue on an accrual basis consistent with the hotel operations.
For the Lansdowne Resort, the Company defers golf membership fees and recognizes revenue over the average expected life of an active membership (currently six years) on a straight-line basis. Golf membership, health club and executive club annual dues are recognized as earned throughout the membership year. As of December 31, 2005 and 2004 deferred membership revenue was $7,766 and $5,615, respectively. The Company recorded revenue of $1,751, $956, and $311 for the years ended December 31, 2005, 2004, and 2003, respectively.
Minority Interest
Minority interest in the Operating Partnership represents the limited partners proportionate share of the equity in the Operating Partnership. During 2005 and 2004, respectively, 240,000 and 41,596 common units of limited partnership interest were redeemed by unitholders. At December 31, 2005, the limited partners held 143,090 common units of limited partnership interest. At December 31, 2005, the limited partners held 2,348,888 preferred units. Income is allocated to the common unit minority interest based on the weighted average percentage ownership throughout the year and to the preferred unit minority interest based upon 7.25% on the liquidation preference.
Outstanding Operating Partnership units of limited partnership interest are redeemable for cash or, at the option of the Company, for a like number of shares of beneficial interest of the Company.
Stock-Based Compensation
Prior to 2003, the Company applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the 1998 share option and incentive plan. Accordingly, no compensation costs were recognized for stock options granted to the Companys employees, as all options granted under the plan had an exercise price equal to the market value of the underlying stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement No. 123 prospectively for all options granted to employees and members of the Board of Trustees. No options were granted during 2005, 2004 and 2003. Options granted under the 1998 share option and incentive plan vest over three to four years, therefore the costs related to stock-based compensation for 2005, 2004 and 2003 are less than that which would have been recognized if the fair value based method had been applied to all grants since the original effective date of Statement No. 123.
The Company has applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the 1998 share option and incentive plan. Accordingly, no compensation costs have been recognized. Had compensation cost for all of the options granted under the Companys 1998 share option and incentive plan been determined in accordance with the method required by Statement No. 123, the Companys net income and net income per common share for 2005, 2004 and 2003 would approximate the pro forma amounts below (in thousands, except per share data).
2005
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2003
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Net income available to common shareholders |
$ | 20,767 | $ | 10,691 | $ | 28,036 | ||||||
Stock-based employee compensation expense |
(30 | ) | (76 | ) | (89 | ) | ||||||
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Proforma net income |
$ | 20,737 | $ | 10,615 | $ | 27,947 | ||||||
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Proforma net income per common share: |
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Basic (after dividends paid on unvested restricted shares) |
$ | 0.67 | $ | 0.39 | $ | 1.38 | ||||||
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Diluted (before dividends paid on unvested restricted shares) |
$ | 0.67 | $ | 0.39 | $ | 1.36 | ||||||
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From time to time, the Company awards restricted stock shares under the 1998 share option and incentive plan to trustees, executive officers and employees, which vest over three or four years. The Company recognizes compensation expense over the vesting period equal to the fair market value of the shares on the date of issuance, adjusted for any forfeiture. In 2005, 2004 and 2003, 79,242, 9,465 and 134,436 shares, respectively, of restricted stock were granted to certain trustees, executive officers and employees. In 2005 and 2004, 3,162 and 3,466 shares, respectively, were forfeited. Deferred compensation expense for the years ended December 31, 2005, 2004 and 2003 was $1,262, $1,259 and $940, respectively. The weighted average grant date fair value per share granted during 2005, 2004 and 2003 was $31.70, $26.57 and $18.01, respectively. Under these awards 233,370 shares were outstanding at December 31, 2005.
Reclassification
Certain 2004 and 2003 financial statement accounts have been reclassified to conform with 2005 presentations.
Recently Issued Accounting Pronouncements
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143. FIN 47 refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction, or development and through the normal operation of the asset. This interpretation is effective no later than the end of fiscal years ending after December 31, 2005. Adoption did not have a material effect on the Companys consolidated financial statements.
In June 2005, the FASB ratified the EITFs consensus on Issue No. 04-5 Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. This consensus established the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the consensus provides additional guidance. This consensus is currently applicable to the Company for new or modified partnerships, and will otherwise be applicable to existing partnerships in 2006. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership. The Company is currently evaluating the effect of this consensus on its Joint Venture.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company in the first interim or annual reporting period beginning after June 15, 2005. Adoption is not expected to have a material effect on the Company.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1998. To qualify as a REIT, the Company must meet a number of
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organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders. It is the Companys current intention to adhere to these requirements and maintain the Companys qualification for taxation as a REIT. As a REIT, the Company generally is not subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its 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. As a wholly-owned taxable-REIT subsidiary of the Company, LHL is required to pay income taxes at the applicable rates.
Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares of beneficial interest outstanding during the year excluding the weighted average number of unvested restricted shares. Diluted earnings per share is based on the weighted average number of common shares of beneficial interest outstanding plus the effect of in-the-money stock options.
3. Acquisition of Hotel Properties
On February 10, 2004, the Company acquired a 100% interest in the Indianapolis Marriott Downtown, a 615-room, AAA Four Diamond full-service hotel located in downtown Indianapolis, Indiana, for $106,000. The source of the funding for the acquisition was the Companys senior unsecured credit facility, a portion of which was repaid when the Company entered into a mortgage agreement secured by the Indianapolis property in February 2004. The property is leased to LHL, and White Lodging Services Corporation manages the property.
On May 28, 2004, the Company acquired a 100% interest in the Hilton Alexandria Old Town, a 241-room, upscale full-service hotel located in the heart of historic downtown Alexandria, Virginia, for $59,000. The source of the funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL, and Sandcastle Resorts & Hotels manages the property.
On November 18, 2004, the Company acquired a 100% interest in the Chaminade Resort and Conference Center, a 153-room, AAA Four Diamond resort and executive conference center located in Santa Cruz, California, for $18,500. The source of the funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL, and Benchmark Hospitality manages the property.
On January 6, 2005, the Company acquired a 100% interest in the Hilton San Diego Gaslamp Quarter, a 282-room urban upscale full-service hotel located in the historic Gaslamp district of San Diego, California for $85,120. The source of funding for the acquisition was the Companys senior unsecured credit facility, a portion of which was repaid when the Company entered into a mortgage agreement secured by the Gaslamp property in June 2005. The property is leased to LHL, and is managed by Davidson Hotel Company.
On January 10, 2005, the Company acquired a 100% interest in The Grafton on Sunset, an upscale full-service hotel with 108 well-appointed guestrooms and suites, located in the heart of West Hollywood, for $25,540. The source of funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL, and is managed by Outrigger Lodging Services.
On May 18, 2005, the Company acquired a 100% interest in the Onyx Hotel, an urban, luxury full-service hotel with 112 well-appointed guestrooms, located in historic downtown Boston, for approximately $28,671. The source of funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL, and is managed by Kimpton Hotel & Restaurant Group, LLC.
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On August 31, 2005, the Company acquired a 100% interest in the Westin Copley Place, a 803-room, AAA Four Diamond, urban full-service hotel located in downtown Boston, Massachusetts, for aggregate consideration of $324,000 after expenses. The source of funding for the acquisition was the assumption of a $210,000 first mortgage on the property which does not allow for prepayment without penalty prior to May 31, 2015, $59,000 in preferred units of the Operating Partnership and the balance with proceeds from the Companys senior unsecured credit facility. The property is leased to LHL, and Starwood Hotels and Resorts continues to manage the property. Pursuant to the acquisition of the Westin Copley Place, the Company entered into a Tax Reporting and Protection Agreement (the Tax Agreement) with SCG Copley Square LLC (SCG). Under the Tax Agreement, the Company is required, among other things, to indemnify SCG (and its affiliates) for certain income tax liabilities that such entities would incur if the Westin Copley Place was transferred by the Company in a taxable transaction or if the Company fails to maintain a certain level of indebtedness with respect to the Westin Copley Place or its operations. The obligations of the Company under the Tax Protection Agreement (i) do not apply in the case of a foreclosure of the Westin Copley Place, if certain specified requirements are met, (ii) are limited to $20,000 (although a limitation of $10,000 is applicable to certain specified transactions), and (iii) terminate on the earlier of the tenth anniversary of the Companys acquisition of the Westin Copley Place or January 1, 2016. The Company believes that the likelihood that the Company will be required to pay under the Tax Agreement is remote, and therefore, a liability has not been recorded.
On December 8, 2005, the Company acquired a 100% interest in The University Tower Hotel, an urban, upscale full-service hotel with 158 stylish guestrooms located in Seattles University District, two blocks from the University of Washington and within minutes of downtown Seattle, Washington, for approximately $26,400. The source of funding for the acquisition was the assumption of an approximately $10,761 first mortgage on the property and the balance with the Companys senior unsecured credit facility. The Company leases the hotel to LHL, and Noble House Hotels & Resorts was selected to manage the property.
On December 15, 2005, the Company acquired a 100% interest in the Hilton San Diego Resort, a AAA Four Diamond, full-service resort with 357 guestrooms/suites, located directly on the waterfront of Mission Bay Park, the largest aquatic preserve in the United States, for approximately $90,392. The source of funding for the acquisition was the December 9, 2005 common share equity offering and the Companys senior unsecured credit facility. The property is leased to LHL and Noble House Hotels & Resorts was selected to manage the property.
On December 16, 2005, the Company acquired a 100% interest in the Holiday Inn Downtown and renamed it the Washington Grande Hotel, an urban, full-service hotel with 212 guestrooms, located in the heart of downtown Washington, DC, for approximately $44,600. The source of funding for the acquisition was the Companys senior unsecured credit facility. The Company anticipates investing over $21,000 in a renovation and repositioning similar to those performed on the Companys DC Urban Collection purchased in March 2001. Upon anticipated completion of the renovation and repositioning in 2007, the hotel will be operated as a luxury high-style, independent hotel. The Company leases the hotel to LHL.
4. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2005 and 2004 consists of the following:
December 31,
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Land |
$ | 140,874 | $ | 96,404 | ||||
Buildings and improvements |
1,287,192 | 683,936 | ||||||
Furniture, fixtures and equipment |
190,118 | 136,681 | ||||||
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1,618,184 | 917,021 | |||||||
Accumulated depreciation |
(225,840 | ) | (177,288 | ) | ||||
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$ | 1,392,344 | $ | 739,733 | |||||
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The December 31, 2005 balance of investment in hotel properties excludes $11,681 of property under development for Lansdowne Resort, San Diego Paradise Point Resort, Sheraton Bloomington Hotel Minneapolis South and Chaminade Resort and Conference Center in the amounts of $8,166, $239, $584, and $2,692, respectively. The December 31, 2004 balance of investment in hotel properties excludes $32,508 of property under development for Lansdowne Resort and San Diego Paradise Point in the amounts of $32,495 and $13, respectively.
The hotels owned, excluding owned through the joint venture, as of December 31, 2005 are located in California (six), the District of Columbia (seven), Indiana, Massachusetts (three), Minnesota, New Jersey, New York, Rhode Island, Texas, Virginia (two) and Washington State.
5. Notes Receivable
The Company provided working capital to LHL and the other lessees in exchange for working capital notes receivable. The working capital notes receivable to third party lessees was $295 at both December 31, 2005 and 2004. The working capital notes receivable bear interest at either 5.6% or 9.0% per annum and have terms identical to the terms of the related participating lease. The working capital notes receivable are payable in monthly installments of interest only.
6. Discontinued Operations
Effective May 9, 2005, the Company entered into an exclusive listing agreement for the sale of the Seaview Resort and Spa. The asset was classified as held for sale at that time because the property was being actively marketed and the sale was expected to occur within one year; accordingly, depreciation was suspended. Based on initial pricing expectations, the Company expected to recognize a gain on the sale; therefore, no impairment had been recognized. In September 2005, the Company changed its intent to sell the Seaview Resort and Spa. Though pricing was above the book value of the asset, it was below the Companys target. The Company evaluated the carrying value of the hotel and determined no impairment exists. The Company reclassified the Seaview Resort and Spa as held and used and adjusted for depreciation expense of $1,040 in the third quarter that would have been recognized had the asset been continuously classified as held and used.
On August 1, 2002, the Company classified the New Orleans property as held for sale and accordingly, depreciation was suspended. On April 21, 2003, the Company sold the New Orleans Grande Hotel for $92,500 resulting in a gain of approximately $37,087. The gain is recorded in discontinued operations in the accompanying consolidated financial statements. Total revenues related to the asset of $6,267, comprised of primarily participating rent and hotel operating revenues, and income before income tax expense related to the asset of $62 for the year ended December 31, 2003, are included in discontinued operations.
In July 2003, management of the Company changed its intent from holding its investment in the Holiday Inn Beachside Resort, located in Key West, Florida, to selling the property due to the projected cost of renovating the property and receiving an unsolicited offer to purchase the property. As a result, the Company wrote down its investment in the Holiday Inn Beachside Resort by $2,453 during the second quarter 2003 to its estimated fair value, net of estimated costs to sell. The writedown is recorded in impairment of investment in hotel property in the accompanying consolidated financial statements. On July 16, 2003, the Board of Trustees approved managements commitment to a plan to sell the Holiday Inn Beachside Resort. The asset was classified as held for sale at that time because sale was expected to occur within one year; accordingly, depreciation was suspended. On July 25, 2003, the Company sold the Holiday Inn Beachside Resort for $17,170. The Company recognized a loss on the sale of the asset of $425 at the time of the sale. The loss is recorded in discontinued operations in the accompanying consolidated financial statements. Total revenues related to the asset of $5,429, comprised of primarily participating rent and hotel operating revenues, and income before income tax benefit related to the asset of $903 for the year ended December 31, 2003, are included in discontinued operations.
F-17
Effective January 16, 2004, the Company entered into an exclusive listing agreement for the sale of its Omaha property. The asset was classified as held for sale at that time because the property was being actively marketed and sale was expected to occur within one year; accordingly, depreciation was suspended. On September 15, 2004, the Company sold the Omaha Marriott hotel for $28,500, resulting in a gain of approximately $2,636. The gain is recorded in discontinued operations in the accompanying consolidated financial statements. Total revenues related to the asset of $9,828, comprised of primarily hotel operating revenues, and income before income tax expense related to the asset of $1,910 for the year ended December 31, 2004 are included in discontinued operations. Revenues and expenses for the year ended December 31, 2003 have been reclassified to conform to the current presentation.
The Company allocates interest expense to discontinued operations for debt that is to be assumed or that is required to be repaid as a result of the disposal transaction. The Company allocated $0, $0 and $1,678 of interest expense to discontinued operations for the years ended December 31, 2005, 2004 and 2003, respectively.
As of December 31, 2004, the Company had unsettled assets and liabilities of $0 and $162, respectively, related to the sale of the Omaha property. At December 31, 2005 and 2004, the Company had no assets and liabilities for assets held for sale.
7. Disposition of Land
On March 15, 2005, the Company sold approximately 8 acres of land located at the Lansdowne Resort for $1,500, resulting in income of approximately $418, net of closing cost, which is included in other income on the consolidated financial statements. At the time the Company purchased the Lansdowne Resort, the seller had entered into a contract with a third party for the sale of the 8 acres. The 8 acre contract was assigned to the Company at closing and the purchase/sale agreement related to the acquisition of the resort required the Company to pay the seller upon completion of the sale $1,080 of net sale proceeds which represented the expected sales price for the land. On March 21, 2005, the Company made the $1,080 payment to the seller resulting in the gain of $418.
F-18
8. Long-Term Debt
Debt at December 31, 2005 and December 31, 2004, consists of the following (in thousands):
Interest Rate at December 31, 2005 |
Maturity Date |
Balance Outstanding at
|
|||||||||
December 31, | December 31, | ||||||||||
Debt |
2005
|
2004
|
|||||||||
Credit Facilities |
|||||||||||
Senior Unsecured Credit Facility |
Floating | June 2008 | $ | 30,000 | $ | | |||||
LHL Unsecured Credit Facility |
Floating | June 2008 | 655 | | |||||||
Massport Bonds |
|||||||||||
Harborside Hyatt Conference Center & Hotel (b) |
Floating | (a) | March 2018 | 5,400 | 5,400 | ||||||
Harborside Hyatt Conference Center & Hotel (b) |
Floating | (a) | March 2018 | 37,100 | 37,100 | ||||||
|
|
|
|
||||||||
Total bonds payable |
42,500 | 42,500 | |||||||||
|
|
|
|
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Mortgage debt |
|||||||||||
Indianapolis Marriott Downtown |
3.56 | %(c) | February 2007 | 57,000 | 57,000 | ||||||
Sheraton Bloomington Hotel Minneapolis |
|||||||||||
South and Westin City Center Dallas |
8.10 | % | July 2009 | 41,744 | 42,665 | ||||||
San Diego Paradise Point Resort |
6.93 | % | February 2009 | 17,324 | 17,686 | ||||||
San Diego Paradise Point Resort |
4.61 | % | February 2009 | 45,235 | 46,180 | ||||||
Hilton Alexandria Old Town |
4.98 | % | September 2009 | 33,534 | 34,230 | ||||||
Le Montrose Suite Hotel |
8.08 | % | July 2010 | 13,847 | 14,049 | ||||||
Hilton San Diego Gaslamp Quarter |
5.35 | % | June 2012 | 59,600 | | ||||||
University Tower Hotel (d) |
6.28 | % | August 2014 | 11,376 | | ||||||
Westin Copley Place |
5.28 | % | August 2015 | 210,000 | | ||||||
|
|
|
|
||||||||
Total mortgage debt |
489,660 | 211,810 | |||||||||
|
|
|
|
||||||||
Total Debt (e) |
$ | 562,815 | $ | 254,310 | |||||||
|
|
|
|
(a) | Variable interest rate based on a weekly floating rate. The interest rate at December 31, 2005 was 4.45% and 3.6% for the $5,400 and $37,100 bonds, respectively. The Company also incurs a 2% annual maintenance fee. |
(b) | The Massport bonds are secured by letters of credit issued by GE Capital Corporation that expire in 2007. The GE Capital letters of credit are secured by the Harborside Hyatt and a $6.0 million letter of credit from the Company. |
(c) | Variable interest rate of LIBOR plus 1%. The Company has entered into a three-year fixed interest rate swap that fixes the LIBOR rate at 2.56% and therefore, fixes the mortgage interest rate at 3.56%. |
(d) | Mortgage loan includes unamortized premium of $615 as of December 31, 2005. |
(e) | Debt does not include the Companys 9.9% share ($13,860) of the $140,000 debt of the joint venture which is secured by the Chicago Marriott Downtown or the Companys share ($465) of the Chicago Marriott line of credit facility which had a balance of $4,694 at December 31, 2005. |
F-19
Future scheduled mortgage debt principal payments at December 31, 2005 are as follows (dollars in thousands):
2006 |
$ | 3,521 | |
2007 |
60,749 | ||
2008 |
3,983 | ||
2009 |
128,425 | ||
2010 |
13,108 | ||
Thereafter |
279,259 | ||
|
|
||
489,045 | |||
Premium on mortgage loan |
615 | ||
|
|
||
$ | 489,660 | ||
|
|
Credit Facility
The Company has a senior unsecured credit facility from a syndicate of banks that provides for a maximum borrowing of up to $300,000. On June 9, 2005, the Company amended the credit facility to extend the credit facilitys maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness and contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions which, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) ninety percent of the funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar year basis. Borrowings under the facility bear interest at floating rates equal to, at the Companys option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of December 31, 2005, the Company was in compliance with all debt covenants and was not otherwise in default under the credit facility. For the years ended December 31, 2005 and 2004, the weighted average interest rate for borrowings under the senior unsecured credit facility was approximately 5.0% and 3.7%, respectively. The Company did not have any Adjusted Base Rate borrowings outstanding at December 31, 2005. Additionally, the Company is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the senior unsecured credit facility. The Company incurred an unused commitment fee of approximately $0.5 million and $0.5 million for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the Company had $30,000 and zero, respectively, of outstanding borrowings under the senior unsecured credit facility.
LHL has a $25,000 unsecured revolving credit facility to be used for working capital and general corporate purposes. On June 9, 2005, LHL amended the credit facility to extend the credit facility maturity date to June 9, 2008 with a one-year extension option and to reduce the applicable margin pricing by a range of 0.25% to 0.5%. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHLs option, either (i) London InterBank Offered Rate plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of December 31, 2005, the Company was in compliance with all debt covenants and was not otherwise in default under the credit facility. The weighted average interest rate under the LHL credit facility for the years ended December 31, 2005 and 2004 was 4.9% and 3.6%, respectively. LHL is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 0.2% of the unused portion of the LHL credit facility. LHL incurred an immaterial commitment fee for each of the years ended December 31, 2005 and 2004. At December 31, 2005 and 2004, the Company had $655 and zero, respectively, of outstanding borrowings under LHL credit facility.
F-20
Bonds Payable
The Company is the obligor with respect to a $37,100 tax-exempt special project revenue bond and $5,400 taxable special project revenue bond, both issued by the Massachusetts Port Authority (collectively, the MassPort Bonds). The MassPort Bonds, which mature on March 1, 2018, bear interest based on a weekly floating rate and have no principal reductions prior to their scheduled maturities. The MassPort Bonds may be redeemed at any time at the Companys option without penalty. The bonds are secured by letters of credit issued by GE Capital Corporation that expire in 2007 and the letters of credit are collateralized by the Harborside Hyatt Conference Center & Hotel and a $6,000 letter of credit from the Company. If GE Capital Corporation fails to renew its letters of credit at expiration and an acceptable replacement provider cannot be found, the Company may be required to pay-off the bonds. For the years ended December 31, 2005 and 2004, the weighted average interest rate on the MassPort bonds was 2.6% and 1.3%, respectively. Interest expense for the years ended December 31, 2005 and 2004 was $1,109 and $552, respectively. In addition to interest payments, the Company incurs a 2.0% annual maintenance fee, which is included in amortization of deferred finance fees. At December 31, 2005, the Company had outstanding bonds payable of $42,500.
Mortgage Loans
On June 8, 2005 the Company entered into a $59,600 seven-year mortgage loan that is secured by the Hilton San Diego Gaslamp Quarter. The mortgage loan matures on June 1, 2012 and does not allow for prepayment without penalty prior to February 1, 2012. The mortgage loan bears interest at a fixed rate of 5.35% and requires interest only payments through maturity.
On August 31, 2005, in connection with the acquisition of the Westin Copley Place, the Company assumed a $210,000 ten-year mortgage secured by the Westin Copley Place. The mortgage loan matures on August 31, 2015, and does not allow for prepayment without penalty prior to May 31, 2015. The mortgage loan bears interest at 5.28% and has monthly interest only payments until maturity. The loan contains cash management and lock-box provisions that allow the lender to direct net income from the hotel to ensure that items such as real estate taxes, insurance, and property maintenance are adequately funded.
On December 8, 2005, in connection with the acquisition of the University Tower Hotel, the Company assumed a $10,761 mortgage secured by the University Tower Hotel. The mortgage loan matures on August 1, 2014 and does not allow prepayment without penalty. The mortgage loan bears interest at 6.276% and has monthly interest and principal payments of $73. As the market interest rate at the date of acquisition was below the mortgage interest rate, the Company recorded a loan premium of $619 which is recorded as an increase to the carrying value of the loan. The loan premium is amortized as interest expense for the remaining life of the loan.
F-21
9. Commitments and Contingencies
Ground and Air Rights Leases
Four of the Companys hotels, San Diego Paradise Point Resort, Harborside Hyatt Conference Center & Hotel, Indianapolis Marriott Downtown and Hilton San Diego Resort and the parking lot at Sheraton Bloomington Hotel Minneapolis South are subject to ground leases under non-cancelable operating leases expiring from 2016 to June 2099. The Westin Copley Place is subject to a long term air rights lease which expires on December 14, 2077 and requires no payments through maturity. In addition, one of the two golf courses, the Pines, at Seaview Resort and Spa is subject to a ground lease, which expires on December 31, 2012 and may be renewed for 15 successive periods of 10 years. The ground leases related to the Pines golf course and the Indianapolis Marriott Downtown require future ground rent of one dollar per year. Total ground lease expense for the years ended December 31, 2005, 2004 and 2003 was $3,986, $3,493 and $3,689, respectively. Future minimum ground lease payments (without reflecting future applicable Consumer Price Index increases) are as follows (dollars in thousands):
2006 |
$ | 4,084 | |
2007 |
4,084 | ||
2008 |
4,084 | ||
2009 |
4,084 | ||
2010 |
4,084 | ||
Thereafter |
137,839 | ||
|
|
||
$ | 158,259 | ||
|
|
Reserve Funds
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the management, franchise, and mortgage agreements. The Companys aggregate obligation under the reserve funds was approximately $30,212 at December 31, 2005. Three management agreements, one franchise agreement and one mortgage agreement require that the Company reserve restricted cash ranging from 3.0% to 5.5% of the individual hotels annual revenues. As of December 31, 2005, $8,758 was available in restricted cash reserves for future capital expenditures. Twenty of the management agreements require that the Company reserve funds of 4.0% of the individual hotels annual revenues but do not require the funds to be set aside in restricted cash. As of December 31, 2005, the total amount obligated for potential future capital expenditures but not set aside in restricted cash reserves was $21,454. In addition, one of the twenty hotels with a management agreement which does not require the cash to be set aside, also has a loan agreement which requires the Company to set aside an additional reserve of $16 per month. Amounts will be recorded as incurred. As of December 31, 2005, purchase orders and letters of commitment totaling approximately $16,500 have been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. Any unexpended amounts will remain the property of the Company upon termination of the participating leases.
The joint venture lease requires that the joint venture reserve restricted cash of 5.0% of the Chicago Marriott Downtowns annual revenues; however, the joint venture is not consolidated in the Companys financial statements and the amount of restricted cash reserves relating to the joint venture is not recorded on the Companys books and records.
Litigation
The Company has engaged Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its Dallas hotel under the Westin brand affiliation. Meridien Hotels, Inc. (Meridien) affiliates had been operating the Dallas property as a wrongful holdover tenant, until the Westin brand conversion occurred on July 14, 2003 under court order.
F-22
On December 20, 2002, affiliates of Meridien abandoned the Companys New Orleans hotel. The Company entered into a lease with a wholly-owned subsidiary of LHL and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property thereafter was sold on April 21, 2003 for $92,500.
In connection with the termination of the Meridien affiliates at these hotels, the Company is currently in litigation with Meridien and related affiliates. The Company believes its sole potential obligation in connection with the termination of the leases is to pay fair market value of the leases, if any. With respect to the Dallas hotel, the Company has obtained a judgment from the court that Meridien defaulted and that Meridien is not entitled to the payment of fair market value. The Companys damage claims against Meridien went to trial in March 2005, and a final judgment was entered for the Company in the amount of $3,903, plus post-judgment interest. Meridien has indicated that it plans to appeal. With respect to the New Orleans hotel, arbitration of the fair market value of the New Orleans lease commenced in October 2002. On December 19, 2002, the arbitration panel determined that Meridien was entitled to an award of approximately $5,700, subject to adjustment (reduction) by the courts to account for Meridiens holdover. In order to dispute the arbitration decision, the Company was required to post a $7,800 surety bond, which was secured by $5,900 of restricted cash. The Company successfully challenged the award on appeal, and the dispute was remanded to the trial court. Meridiens request for rehearing was denied on March 31, 2004, and Meridien did not petition to the Louisiana Supreme Court. In June 2004, the $7,800 surety bond was released and the $5,900 restricted cash securing it was returned to the Company. The issue of default by the lessee and the Companys wrongful holdover claim, as well as Meridiens damage claims arising from the termination of its leasehold, among other claims, went to trial in February 2005. On June 9, 2005, the trial court issued its judgment denying the Companys default claim as well as Meridiens fraud claim, and re-determined fair market value to be $8,572, plus interest. The Company has noticed an appeal from the trial courts judgment. On July 18, 2005, the Company posted a $8,633 surety bond, which was secured by $8,778 of restricted cash.
On April 22, 2005, the Company filed suit against Meridien in Delaware state court alleging certain defaults, including non-payment of rent and other breaches in connection with the transition at the New Orleans hotel. Preliminary motions are set to be heard in February 2006. That matter has not yet been set for trial.
In 2002, the Company recognized a net $2,520 contingent lease termination expense and reversed previously deferred assets and liabilities related to the termination of both the New Orleans property and Dallas property leases and recorded a corresponding contingent liability included in accounts payable and accrued expenses in the accompanying consolidated financial statements. The Company believes, however, it is owed holdover rent per the lease terms due to Meridiens failure to vacate the properties as required under the leases. The contingent lease termination expense was, therefore, net of the holdover rent the Company believes it is entitled to for both properties. In 2003, the Company adjusted this liability by additional holdover rent of $827 that it believes it is entitled to for the Dallas property. These amounts were recorded as other income in the Companys December 31, 2003 consolidated financial statements. The contingent lease termination expense recognized cumulatively since 2002 is comprised of (dollars in thousands):
Expense
Recognized Quarter Ended December 31, 2002 |
Expense
Recognized Year Ended December 31, 2004 |
Expense
Recognized Year Ended December 31, 2005 |
Cumulative
Expense Recognized as of December 31, 2005 |
||||||||||||
Estimated arbitration award |
$ | 5,749 | $ | | $ | | $ | 5,749 | |||||||
Legal fees related to litigation |
2,610 | 1,350 | 1,000 | 4,960 | |||||||||||
Holdover rent |
(4,844 | ) | | | (4,844 | ) | |||||||||
Expected reimbursement of legal fees |
(995 | ) | (500 | ) | | (1,495 | ) | ||||||||
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|
|
|
|
|
|
|
|
|
|
|||||
Net contingent lease termination expense |
$ | 2,520 | $ | 850 | $ | 1,000 | $ | 4,370 | |||||||
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|
|
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|
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|
F-23
In September 2004, after evaluating the ongoing Meridien litigation, the Company accrued additional net legal fees of $850 due to litigation timeline changes in order to conclude this matter. In June 2005, after further evaluation of the ongoing Meridien litigation, the Company accrued an additional $1,000 in legal fees. As a result, the net contingent lease termination liability has a balance of approximately $1,688 as of December 31, 2005, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. Based on the claims the Company has against Meridien, the Company is and will continue to challenge Meridiens claim that it is entitled to the payment of fair market value, and will continue to seek reimbursement of legal fees and damages. These amounts may exceed or otherwise may be used to offset any amounts potentially owed to Meridien, and therefore, ultimately may offset or otherwise reduce any contingent lease termination expense. Additionally, the Company cannot provide any assurances that the holdover rents or any damages will be collectible from Meridien or that the amounts due will not be greater than the recorded contingent lease termination expense.
The Company maintained a lien on Meridiens security deposit on both disputed properties with an aggregate value of approximately $3,300, in accordance with the lease agreements. The security deposits were liquidated in May 2003 with the proceeds used to partially satisfy Meridiens outstanding obligations. The judgment entered by the Dallas Court already incorporates a set-off in the amount of $989 attributable to the security deposit for the Dallas property.
Meridien also has sued the Company and one of the Companys officers alleging that certain actions taken in anticipation of re-branding the Dallas and New Orleans hotels under the Westin brand affiliation constituted unfair trade practices, false advertising, trademark infringement, trademark dilution and tortious interference. The parties have reached an agreement to settle this matter through dismissal of all claims with prejudice, with no consideration to be paid from either party to the other, although settlement documents have not yet been fully executed.
The Company does not believe that the amount of any fees or damages it may be required to pay on any of the litigation related to Meridien will have a material adverse effect on the Companys financial condition or results of operations, taken as a whole. The Companys management has discussed this contingency and the related accounting treatment with the audit committee of its Board of Trustees.
The Company initiated a lawsuit against Marriott Hotel Services, Inc. in the Supreme Court of the State of New York, County of New York, in connection with Marriotts implementation of certain expenditures without the Companys approval at the LaGuardia Airport Marriott. The Company alleged breach of contract and breach of fiduciary duty by Marriott Hotel Services, Inc., among other claims. The trial court dismissed the Companys claims before receiving any evidence, and the Company has appealed from the courts decision. The appeal was argued in January 2006, and a decision has not yet been issued by the appeals court.
The Company accrues for future legal fees related to contingent liabilities based upon managements estimate. The Company is not presently subject to any other material litigation nor, to the Companys knowledge, is any other litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.
10. Shareholders Equity
Stock Purchase Rights
In connection with the acquisition of the initial hotels, the Company granted 1,280,569 rights to purchase common shares of beneficial interest at the exercise price of $18.00 per share. The Company has recorded these rights in shareholders equity at their fair value on the date of grant. All rights had a one-year vesting period and a 10-year term. In 2005, 2004 and 2003, 198,000, 921,583 and zero, respectively, stock purchase rights were exercised. At December 31, 2005, there were 160,986 exercisable rights remaining.
F-24
Common Shares of Beneficial Interest
On June 26, 2003, the Company completed an underwritten public offering of 2,041,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $29,105. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. The Company sold an additional 204,000 common shares on July 1, 2003, pursuant to an over-allotment option for approximately $2,909 after deducting underwriting discounts and commissions.
In November 2003, the Company completed an underwritten public offering of 3,000,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $49,950. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility.
On May 12, 2004, the Company completed an underwritten public offering of 2,700,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $55,350. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. The Company sold an additional 300,000 common shares on May 13, 2004, pursuant to an over-allotment option for approximately $6,150 after deducting underwriting discounts and commissions.
On November 16, 2004, the Company completed an underwritten public offering of 1,750,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $54,933. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund future acquisitions.
On October 12, 2005, the Company completed an underwritten public offering of 2,200,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $74,316. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund future acquisitions.
On December 9, 2005, the Company completed an underwritten public offering of 3,450,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $113,440. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and to fund future acquisitions.
Treasury Shares
Treasury shares are accounted for under the cost method. During the year ended December 31, 2005, the Company repurchased 90,732 common shares of beneficial interest related to (i) executives and employees surrendering shares to pay taxes at the time restricted shares vested, (ii) holders of rights to purchase common shares of beneficial interest surrendering shares to pay the exercise price at the time of exercising their rights and (iii) forfeiture of restricted shares by employees leaving the Company. The Company re-issued 90,732 common shares of beneficial interest related to (i) restricted shares granted to executives in January 2005 (ii) executives and employees exercising stock options and (iii) the common share of beneficial interest equity offering in October 2005.
As of December 31, 2005, there were no common shares of beneficial interest in treasury.
Preferred Shares
On September 30, 2003, the Company completed an underwritten public offering of 1,000,000 shares of 8 3 / 8 % Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share (liquidation preference
F-25
$25.00 per share). After deducting underwriting discounts and commissions, the Company raised net proceeds of approximately $24,409. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. On October 1, 2003, the Company issued an additional 100,000 Series B Preferred Shares pursuant to an over-allotment option for approximately $2,441 after deducting underwriting discounts and commissions.
On August 19, 2005, the Company completed an underwritten public offering of 3,000,000 shares of 7 1 / 2 % Series D Cumulative Redeemable Preferred Shares (the Series D Preferred Shares), par value $0.01 per share (liquidation preference of $25.00 per share). After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $72,841. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility. On August 30, 2005, the Company issued an additional 170,000 Series D Preferred Shares pursuant to the exercise of an over-allotment option for approximately $4,138 after deducting underwriting discounts and commissions.
In connection with the Westin Copley Place acquisition, on August 24, 2005, the Company designated 2,450,000 shares of the authorized but unissued preferred shares as 7.25% Series C Cumulative Redeemable Preferred Shares (the Series C Preferred Shares), par value $0.01 per share (liquidation preference of $25.00 per share). These shares were authorized in conjunction with the issuance of 2,348,888 7.25% Series C Preferred Units to facilitate the redemption of 7.25% Series C Preferred Units. As of December 31, 2005, there were no Series C Preferred Shares outstanding.
The Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares (collectively, the Preferred Shares) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions; the Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for the current and all past dividend periods. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. Difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares. The Company may not optionally redeem the Series A Preferred Shares, Series B Preferred Shares or Series D Preferred Shares prior to March 6, 2007, September 30, 2008 and August 24, 2010, respectively, except in limited circumstances relating to the Companys continuing qualification as a REIT. The Company may not optionally redeem the Series C Preferred Shares prior to January 1, 2021 except in limited circumstances relating to the Companys continuing qualification as a REIT and during the period from January 1, 2016 to and including December 31, 2016 upon giving notice as specified. After those dates, the Company may, at its option, redeem the Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. Accordingly, the Preferred Shares will remain outstanding indefinitely unless the Company decides to redeem them.
Common Operating Partnership Units
The outstanding units of limited partnership interest are redeemable for cash, or at the option of the Company, for a like number of common shares of beneficial interest of the Company.
On September 17, 2004, 41,596 units of limited partnership interest were converted to common shares. On May 10, 2005, 80,000 units of limited partnership interest were converted to common shares. On both July 8, 2005 and July 29, 2005, 80,000 (for a total of 160,000 units) common units of limited partnership interest were converted to common shares.
As of December 31, 2005, the Operating Partnership had 143,090 units outstanding, representing a 0.4% partnership interest held by the limited partners.
F-26
Preferred Operating Partnership Units
On August 31, 2005, 2,348,888 7.25% Series C Preferred Units (the Preferred Units) were issued in connection with the acquisition of the Westin Copley Place. The Preferred Units have no stated maturity date or mandatory redemption. The Preferred Units pay a cumulative, quarterly dividend at a fixed rate and are redeemable for 7.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (liquidation preference $25 per share), $.01 par value per share, of the Company or cash at the Companys election. The Company is not required to set aside funds to redeem the Preferred Units and the Company may not optionally redeem the Preferred Units prior to January 1, 2021, except the Company may redeem the Series C Preferred Units during the period from January 1, 2016 to and including December 31, 2016 upon giving notice as specified. At December 31, 2005, the face value of the Preferred Units and accrued but unpaid dividends was $59,739 and is recorded on the accompanying balance sheet as minority interest of preferred units in LaSalle Hotel Operating Partnership net of original issuance costs of $402.
11. Share Option and Incentive Plan
In April 1998, the Board of Trustees adopted and the then current shareholders approved the 1998 share option and incentive plan that is currently administered by the Compensation Committee of the Board of Trustees. The Companys employees and the hotel operators and their employees generally are eligible to participate in the 1998 share option and incentive plan.
The 1998 share option and incentive plan authorizes, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of share options in lieu of cash trustees fees, (iv) grants of common shares of beneficial interest in lieu of cash compensation, and (v) the making of loans to acquire common shares of beneficial interest in lieu of compensation. The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than 100% of the fair market value of the common shares of beneficial interest on the date of grant. Options under the plan vest over a period determined by the Compensation Committee of the Board of Trustees, which is generally a three-year period. The duration of each option is also determined by the Compensation Committee; however, the duration of each option shall not exceed 10 years from date of grant.
On April 21, 2005, the common shareholders approved an amendment to the 1998 share option and incentive plan, increasing the number of common shares of beneficial interest authorized for issuance under the 1998 share option and incentive plan from 1,900,000 to 2,800,000. Accordingly, at December 31, 2005 and 2004, 2,800,000 and 1,900,000 shares, respectively, were authorized for issuance under the 1998 share option and incentive plan. At December 31, 2005, there were 1,081,531 common shares available for future grant under the 1998 share option and incentive plan.
From time to time, the Company awards restricted stock shares under the 1998 Share Option and Incentive Plan to members of the Board of Trustees, executives, and employees. The restricted shares generally vest over three or four years based on continued employment. The Company measures compensation cost for the restricted shares based upon the fair market value of its common stock at the date of grant. Compensation cost is recognized on a straight-line basis over the vesting period and is included in general and administrative expense in the accompanying consolidated financial statements. The Company granted 79,242, 9,465, and 134,436 shares in 2005, 2004 and 2003, respectively, to members of the Board of Trustees, executives, and employees. In 2005, 2004, and 2003 there were 3,162, 3,466 and zero, respectively, forfeitures of restricted stock. The Company recorded $1,262, $1,259, and $940 of compensation expense related to the restricted stock grants in 2005, 2004, and 2003, respectively.
The Company issues common shares of beneficial interest to the independent members of the Board of Trustees for at least half of their compensation in lieu of cash. The Trustees may elect to receive the remaining half in cash or additional common shares. A portion of the shares issued may be deferred. These common shares
F-27
are issued under the 1998 Share Option and Incentive Plan. The Company issued an aggregate of 10,680, 5,255, and 6,761 shares, including 4,798, 4,241, and 5,448 deferred shares, related to the Trustees compensation for the years 2005, 2004 and 2003, respectively.
A summary of the Companys stock option activity for the years ended December 31, 2005, 2004 and 2003 is as follows:
2005
|
2004
|
2003
|
|||||||||||||||||||
Shares
|
Weighted
Average Exercise Price |
Shares
|
Weighted
Average Exercise Price |
Shares
|
Weighted
Average Exercise Price |
||||||||||||||||
Options outstanding at beginning of year |
246,533 | $ | 10.97 | 742,368 | $ | 11.25 | 792,206 | $ | 11.38 | ||||||||||||
Options granted |
| | | | | | |||||||||||||||
Options exercised |
(97,800 | ) | 10.85 | (490,503 | ) | 11.42 | (49,838 | ) | 13.27 | ||||||||||||
Options forfeited |
| | (5,332 | ) | 8.55 | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
Outstanding at end of the year |
148,733 | $ | 11.05 | 246,533 | $ | 10.97 | 742,368 | $ | 11.25 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Weighted average remaining life outstanding |
5.6 years | 6.3 years | 5.7 years | ||||||||||||||||||
Range of exercise prices |
$
$ |
8.55 to
18.00 |
|
$
$ |
8.55 to
18.00 |
|
$
$ |
8.55 to
18.00 |
|
||||||||||||
Exercisable at end of the year |
98,732 | $ | 12.31 | 204,866 | $ | 11.20 | 539,311 | $ | 11.78 | ||||||||||||
Available for future grant at year end |
1,081,531 | 269,306 | 283,032 | ||||||||||||||||||
Weighted average per share fair value of options granted during the year |
n/a | n/a | n/a |
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2005
|
2004
|
2003
|
|||||
Expected life |
n/a | n/a | 8.27 | years | |||
Expected volatility |
n/a | n/a | 23.94 | % | |||
Risk-free interest rate |
n/a | n/a | 4.70 | % | |||
Dividend yield |
n/a | n/a | 10.40 | % |
12. Financial Instruments: Derivatives and Hedging
The Company employs interest rate swaps to hedge against interest rate fluctuations. Unrealized gains and losses are reported in other comprehensive income with no effect recognized in earnings as long as the characteristics of the swap and the hedged item are closely matched. On February 27, 2004, the Company entered into a three-year fixed interest rate swap that fixes the London Interbank offered rate at 2.56% for $57,000 of the Companys mortgage loan secured by the Indianapolis hotel and therefore fixes the mortgage rate at 3.56%. As of December 31, 2005 and 2004, there was $1,353 and $965, respectively, in unrealized gain included in accumulated other comprehensive income. The hedge was effective in offsetting the variable cash flows; therefore no gain or loss was realized during the year ended December 31, 2005 or 2004.
The following table summarizes the notional value and fair value of the Companys derivative financial instrument. The notional value at December 31, 2005 provides an indication of the extent of the Companys involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.
F-28
At December 31, 2005:
Hedge Type |
Notional Value |
Interest Rate |
Maturity |
Fair Value |
||||
Swap-Cash Flow |
$57,000 | 2.555% | 2/9/07 | $1,353 |
At December 31, 2005, the derivative instrument was reported at its fair value of $1,353 and is included within prepaid expenses and other assets in the accompanying consolidated financial statements.
Interest rate hedges that are designated as cash flow hedges hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars, and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income/loss or in earnings depending on the type of hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains and losses are reported in accumulated other comprehensive income/loss. Over time, the unrealized gains and losses reported in accumulated other comprehensive income/loss will be reclassified to earnings. This reclassification is consistent with when the hedged items are also recognized in earnings. For the year ended December 31, 2005, the Company reclassified $444 of accumulated other comprehensive income to earnings as a reduction of interest expense. For the year ended December 31, 2004, the Company reclassified $504 of accumulated other comprehensive income to earnings as interest expense.
The Company hedges its exposure to the variability in future cash flows for transactions it anticipates entering into in the foreseeable future. During the forecast period, unrealized gains and losses in the hedging instrument will be reported in accumulated other comprehensive income/loss. Once the hedged transaction takes place, the hedge gains and losses will be reported in earnings during the same period in which the hedged item is recognized in earnings.
13. Participating Leases
The participating leases have non-cancelable terms ranging from five to 11 years (from commencement), subject to earlier termination upon the occurrence of certain contingencies, as defined. Each participating lease requires the applicable lessee to pay the greater of (i) base rent in a fixed amount or (ii) participating rent based on certain percentages of room revenue, food and beverage revenue and telephone and other revenue at the applicable hotel. Participating rent applicable to room and other hotel revenues varies by lease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified quarterly threshold amounts. Both the base rent and the participating rent thresholds used in computing percentage rents applicable to room and other hotel revenues, including food and beverage revenues, are subject to annual adjustments based on increases in the United States Consumer Price Index published by the Bureau of Labor Statistics of the United States of America Department of Labor, U.S. City Average, Urban Wage Earners and Clerical Workers. Participating lease revenues from non-LHL leased properties, for the years ended December 31, 2005, 2004 and 2003 were $21,527, $18,635, and $21,284, of which $9,886, $7,376 and $8,578, respectively, was in excess of base rent. Rent from properties leased to LHL, a wholly-owned subsidiary, is eliminated in consolidation.
Future minimum rentals from non-LHL leased properties (without reflecting future applicable Consumer Price Index increases) to be received by the Company pursuant to the participating leases for each of the years in the period 2006 to 2009 are as follows.
2006 |
$ | 12,060 | |
2007 |
12,060 | ||
2008 |
6,630 | ||
2009 |
920 | ||
|
|
||
$ | 31,670 | ||
|
|
F-29
14. LHL
A significant portion of the Companys revenue is derived from operating revenues generated by the hotels leased by LHL.
Included in other indirect hotel operating expenses, including indirect operating expenses related to discontinued operations, are the following expenses incurred by the hotels leased by LHL:
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
General and administrative |
$ | 32,249 | $ | 24,433 | $ | 18,303 | ||||||
Sales and marketing |
24,176 | 18,534 | 13,143 | |||||||||
Repairs and maintenance |
15,578 | 11,579 | 8,601 | |||||||||
Utilities and insurance |
15,467 | 10,231 | 7,604 | |||||||||
Management and incentive fees |
13,440 | 9,279 | 7,175 | |||||||||
Franchise fees |
4,071 | 2,465 | 794 | |||||||||
Other expenses |
1,589 | 1,297 | 936 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Total other indirect expenses |
106,570 | 77,818 | 56,556 | |||||||||
Other indirect hotel operating expenses related to discontinued operations |
(45 | ) | (3,332 | ) | (8,167 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Total other indirect expenses related to continuing operations |
$ | 106,525 | $ | 74,486 | $ | 48,389 | ||||||
|
|
|
|
|
|
|
|
|
As of December 31, 2005, LHL leases the following 23 hotels owned by the Company:
| Seaview Resort and Spa |
| LaGuardia Airport Marriott |
| Harborside Hyatt Conference Center & Hotel |
| Hotel Viking |
| Topaz Hotel |
| Hotel Rouge |
| Hotel Madera |
| Hotel Helix |
| Holiday Inn on the Hill |
| Sheraton Bloomington Hotel Minneapolis South |
| Lansdowne Resort |
| Westin City Center Dallas |
| Hotel George |
| Indianapolis Marriott Downtown |
| Hilton Alexandria Old Town |
| Chaminade Resort and Conference Center |
| Hilton San Diego Gaslamp Quarter |
| The Grafton on Sunset |
| Onyx Hotel |
| Westin Copley Place |
| University Tower Hotel |
| Hilton San Diego Resort |
| Washington Grande Hotel |
The two remaining hotels in which the Company owns an interest, excluding the joint venture that owns the Chicago Marriott Downtown, are leased directly to affiliates of the current hotel operators of those respective hotels.
F-30
15. Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1998. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders. It is the Companys current intention to adhere to these requirements and maintain the Companys qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its 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. LHL is a wholly-owned taxable-REIT subsidiary of the Company and as such is required to pay income taxes at the applicable rates.
The following is a reconciliation between the GAAP net income and taxable income for the REIT for the years ended December 31, 2005 (estimated), 2004 and 2003:
2005
|
2004
|
2003
|
||||||||||
(estimated) | ||||||||||||
GAAP Net income available to common shareholders |
$ | 20,767 | $ | 10,691 | $ | 28,036 | ||||||
Add: LHL GAAP net loss |
5,247 | 5,867 | 8,822 | |||||||||
Add: Preferred dividends paid |
14,629 | 12,532 | 10,805 | |||||||||
Add: Book depreciation and amortization |
48,439 | 38,454 | 33,702 | |||||||||
Less: Tax depreciation and amortization |
(40,521 | ) | (32,819 | ) | (28,539 | ) | ||||||
Book/tax difference on gains/losses from capital transactions |
469 | 1,347 | (38,973 | ) | ||||||||
Other book/tax differences, net |
(1,901 | ) | (1,098 | ) | 815 | |||||||
|
|
|
|
|
|
|
|
|
||||
Adjusted taxable income subject to 90% dividend requirement |
$ | 47,129 | $ | 34,974 | $ | 14,668 | ||||||
|
|
|
|
|
|
|
|
|
The following is a reconciliation between cash dividends paid on common shares of beneficial interest and preferred shares and the dividends paid deduction for the years ended December 31, 2005 (estimated), 2004 and 2003:
2005
|
2004
|
2003
|
||||||||
(estimated) | ||||||||||
Cash dividends paid on common shares of beneficial interest |
$ | 33,590 | $ | 23,722 | $ | 19,503 | ||||
Cash dividends paid on preferred shares |
13,143 | 12,532 | 10,229 | |||||||
Less: Dividends designated to prior year |
| | (3,928 | ) | ||||||
Common shares of beneficial interest |
| | 1,690 | |||||||
|
|
|
|
|
|
|
||||
Dividends paid deduction |
$ | 46,733 | $ | 36,254 | $ | 27,494 | ||||
|
|
|
|
|
|
|
F-31
For federal income tax purposes, the cash distributions paid to the Companys common shareholders of beneficial interest and preferred shareholders may be characterized as ordinary income, return of capital (generally non-taxable) or capital gains. The following characterizes distributions paid per common share of beneficial interest and preferred share for the years ended December 31, 2005 (estimated), 2004 and 2003:
2005
|
2004
|
2003
|
||||||||||||||||
$
|
%
|
$
|
%
|
$
|
%
|
|||||||||||||
(estimated) | ||||||||||||||||||
Common shares of beneficial interest |
||||||||||||||||||
Ordinary income |
$ | 0.9482 | 87.79 | % | $ | 0.8032 | 89.24 | % | $ | 0.8400 | 100.00 | % | ||||||
Return of capital |
0.1117 | 10.34 | % | | | | | |||||||||||
Capital gain |
0.0201 | 1.87 | % | | | | | |||||||||||
Unrecaptured Section 1250 gain |
| | 0.0968 | 10.76 | % | | | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$ | 1.0800 | 100.00 | % | $ | 0.9000 | 100.00 | % | $ | 0.8400 | 100.00 | % | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Preferred shares (Series A) |
||||||||||||||||||
Ordinary income |
$ | 2.5093 | 97.92 | % | $ | 2.2895 | 89.35 | % | $ | 2.5625 | 100.00 | % | ||||||
Capital Gain |
0.0532 | 2.08 | % | | | | | |||||||||||
Unrecaptured Section 1250 gain |
| | 0.2730 | 10.65 | % | | | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$ | 2.5625 | 100.00 | % | $ | 2.5625 | 100.00 | % | $ | 2.5625 | 100.00 | % | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Preferred shares (Series B) |
||||||||||||||||||
Ordinary income |
$ | 2.0503 | 97.92 | % | $ | 1.8707 | 89.35 | % | $ | | | |||||||
Capital gain |
0.0435 | 2.08 | % | 0.2230 | 10.65 | % | | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$ | 2.0938 | 100.00 | % | $ | 2.0937 | 100.00 | % | $ | | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Preferred shares (Series D) |
||||||||||||||||||
Ordinary income |
$ | 0.1887 | 97.92 | % | $ | | | $ | | | ||||||||
Capital gain |
0.0040 | 2.08 | % | | | | | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
$ | 0.1927 | 100.00 | % | $ | | | $ | | | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit of $2,142 is comprised of state and local tax expense of $1,469 on the Operating Partnerships income and federal, state and local tax benefit of $3,611 on LHLs loss of $8,858 before income tax benefit.
The components of the LHL income tax (benefit) expense were as follows:
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Federal: |
||||||||||||
Current |
$ | | $ | | $ | | ||||||
Deferred |
(2,728 | ) | (2,921 | ) | (4,682 | ) | ||||||
State and local: |
||||||||||||
Current |
65 | 115 | | |||||||||
Deferred |
(948 | ) | (1,015 | ) | (1,417 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Total income tax benefit |
$ | (3,611 | ) | $ | (3,821 | ) | $ | (6,099 | ) | |||
|
|
|
|
|
|
|
|
|
F-32
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Computed Expected federal tax benefit (at 34.5%) |
$ | (3,056 | ) | $ | (3,342 | ) | $ | (5,147 | ) | |||
State income taxes benefit, net of federal income tax effect |
(620 | ) | (563 | ) | (1,044 | ) | ||||||
Other expense, net |
65 | 84 | 92 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Income tax benefit |
$ | (3,611 | ) | $ | (3,821 | ) | $ | (6,099 | ) | |||
|
|
|
|
|
|
|
|
|
The components of LHLs deferred tax assets as of December 31, 2005, 2004 and 2003 were as follows:
December 31,
|
|||||||||
2005
|
2004
|
2003
|
|||||||
LHL Net operating loss |
$ | 12,684 | $ | 10,648 | $ | 8,446 | |||
Accrued vacations |
1,813 | 1,416 | 1,165 | ||||||
Bad debts |
410 | 106 | 161 | ||||||
Golf membership |
3,269 | 2,330 | 652 | ||||||
|
|
|
|
|
|
||||
Total deferred tax assets |
$ | 18,176 | $ | 14,500 | $ | 10,424 | |||
|
|
|
|
|
|
For the year ended December 31, 2005, LHL recorded an income tax benefit of $3,611 that is included in the accompanying consolidated financial statements. The Company has estimated its income tax benefit using a combined federal and state rate of 41.5%. As of December 31, 2005, the Company had a deferred tax asset of $18,176 primarily due to past and current years tax net operating losses. These loss carryforwards will expire in 2021 thru 2025 if not utilized by then. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is required. Reversal of deferred tax asset in the subsequent year cannot be reasonably estimated.
F-33
16. Earnings Per Common Share
The limited partners outstanding limited partnership units in the Operating Partnership (which may be converted to common shares of beneficial interest) 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 common share is presented below:
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Numerator: |
||||||||||||
Net income (loss) applicable to common shareholders before discontinued operations and dividends paid on unvested restricted shares |
$ | 20,793 | $ | 6,273 | $ | (8,936 | ) | |||||
Discontinued operations |
(26 | ) | 4,418 | 36,972 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders before dividends paid on unvested restricted shares |
20,767 | 10,691 | 28,036 | |||||||||
Dividends paid on unvested restricted shares |
(225 | ) | (232 | ) | (215 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders, after dividends paid on unvested restricted shares |
$ | 20,542 | $ | 10,459 | $ | 27,821 | ||||||
|
|
|
|
|
|
|
|
|
||||
Denominator: |
||||||||||||
Weighted average number of common sharesbasic |
30,637,644 | 26,740,506 | 20,030,723 | |||||||||
Effect of dilutive securities: |
||||||||||||
Unvested restricted shares |
203,039 | 258,820 | 250,171 | |||||||||
Common stock options |
263,607 | 377,608 | 206,512 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common sharesdiluted |
31,104,290 | 27,376,934 | 20,487,406 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Basic Earnings Per Common Share: |
||||||||||||
Net income (loss) applicable to common shareholders before discontinued operations and after dividends paid on unvested restricted shares |
$ | 0.67 | $ | 0.23 | $ | (0.46 | ) | |||||
Discontinued operations |
| 0.16 | 1.85 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders after dividends paid on unvested restricted shares |
$ | 0.67 | $ | 0.39 | $ | 1.39 | ||||||
|
|
|
|
|
|
|
|
|
||||
Diluted Earnings Per Common Share: |
||||||||||||
Net income (loss) applicable to common shareholders before discontinued operations |
$ | 0.67 | $ | 0.23 | $ | (0.43 | ) | |||||
Discontinued operations |
| 0.16 | 1.80 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net income applicable to common shareholders per weighted average common share |
$ | 0.67 | $ | 0.39 | $ | 1.37 | ||||||
|
|
|
|
|
|
|
|
|
17. Comprehensive Income
For the year ended December 31, 2005, comprehensive income was $21,155. As of December 31, 2005 and 2004, the Companys accumulated other comprehensive gain was $1,353 and $965, respectively. The change in accumulated other comprehensive gain was entirely due to the Companys unrealized gains on its interest rate derivative. The interest rate derivative expires on February 9, 2007. For the year ended December 31, 2005, the Company reclassified $444 of accumulated other comprehensive income to earnings as a reduction of interest expense. For the year ended December 31, 2004, the Company reclassified $504 of accumulated other comprehensive income to earnings as interest expense.
F-34
18. Supplemental Information to Statements of Cash Flows
For the year ended December 31,
|
||||||||||||
2005
|
2004
|
2003
|
||||||||||
Interest paid |
$ | 21,642 | $ | 13,388 | $ | 14,891 | ||||||
|
|
|
|
|
|
|
|
|
||||
Interest capitalized |
$ | 1,178 | $ | 783 | $ | 289 | ||||||
|
|
|
|
|
|
|
|
|
||||
Income taxes paid, net of refunds |
$ | 799 | $ | 537 | $ | 586 | ||||||
|
|
|
|
|
|
|
|
|
||||
Distributions payable (common shares) |
$ | 3,620 | $ | 2,421 | $ | 1,720 | ||||||
|
|
|
|
|
|
|
|
|
||||
Distributions payable (preferred shares) |
$ | 4,619 | $ | 3,133 | $ | 3,133 | ||||||
|
|
|
|
|
|
|
|
|
||||
Issuance of common shares for board of trustees compensation |
$ | 206 | $ | 43 | $ | 36 | ||||||
|
|
|
|
|
|
|
|
|
||||
In conjunction with the LHL lease transitions the Company assumed the following assets and liabilities: |
||||||||||||
Accounts receivable, net |
$ | | $ | | $ | 9 | ||||||
Other assets |
| | 82 | |||||||||
Liabilities |
| | (91 | ) | ||||||||
|
|
|
|
|
|
|
|
|
||||
Total net assets |
$ | | $ | | $ | | ||||||
|
|
|
|
|
|
|
|
|
||||
In conjunction with the hotel dispositions, the Company disposed of the following assets and liabilities: |
||||||||||||
Sale of real estate |
$ | | $ | (25,755 | ) | $ | (71,562 | ) | ||||
Mortgage loans assumed |
| | 58,072 | |||||||||
Other assets |
| 63 | (652 | ) | ||||||||
Liabilities |
| (268 | ) | 855 | ||||||||
Gain/loss on sale of properties disposed of |
| (2,636 | ) | (36,662 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Disposition of hotel properties |
$ | | $ | (28,596 | ) | $ | (49,949 | ) | ||||
|
|
|
|
|
|
|
|
|
||||
In conjunction with the hotel acquisitions, the Company assumed the following assets and liabilities: |
||||||||||||
Purchase of real estate |
$ | 626,930 | $ | 183,918 | $ | 141,908 | ||||||
Mortgage loan assumed |
(221,380 | ) | | (62,845 | ) | |||||||
Issuance of preferred units |
(58,722 | ) | | | ||||||||
Other assets |
8,268 | 1,010 | 7,189 | |||||||||
Liabilities |
(7,591 | ) | (3,908 | ) | (11,357 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Acquisition of hotel properties |
$ | 347,505 | $ | 181,020 | $ | 74,895 | ||||||
|
|
|
|
|
|
|
|
|
||||
Exchange of units for common shares: |
||||||||||||
Minority interest in operating partnership |
$ | (7,957 | ) | $ | (1,155 | ) | $ | | ||||
Common Shares of beneficial interest |
3 | 0 | 0 | |||||||||
Additional paid-in capital |
7,954 | 1,155 | | |||||||||
|
|
|
|
|
|
|
|
|
||||
$ | | $ | | $ | | |||||||
|
|
|
|
|
|
|
|
|
19. Pro Forma Financial Information (Unaudited)
The following condensed pro forma financial information is presented as if the following acquisitions as discussed in Note 3 had been consummated and leased as of January 1, 2004.
| Indianapolis Marriott Downtown |
| Hilton Alexandria Old Town |
| Chaminade Resort and Conference Center |
F-35
| Hilton San Diego Gaslamp Quarter |
| The Grafton on Sunset |
| Onyx Hotel |
| Westin Copley Place |
| University Tower Hotel |
| Hilton San Diego Resort |
| Washington Grande Hotel |
The following condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated and all the hotels had been leased at the beginning of the respective periods presented, nor does it purport to represent the results of operations for future periods.
For the year ended
December 31, |
||||||
2005
|
2004
|
|||||
Total revenues |
$ | 493,562 | $ | 453,976 | ||
Net income applicable to common shareholders of beneficial interest |
$ | 18,111 | $ | 9,217 | ||
Net income applicable to common shareholders of beneficial interest per weighted average common share: |
||||||
basic (after dividends paid on unvested restricted shares) |
$ | 0.50 | $ | 0.25 | ||
diluted (before dividends paid on unvested restricted shares) |
$ | 0.50 | $ | 0.25 | ||
Weighted average number of common shares outstanding |
||||||
basic |
35,850,770 | 35,850,770 | ||||
diluted |
36,327,871 | 36,327,871 |
20. Subsequent Events
On January 1, 2006, the Company repurchased 27,675 common shares of beneficial interest related to executives and employees surrendering shares to pay taxes at the time restricted shares vested. The Company re-issued these 27,675 treasury shares related to (i) compensation to the Board of Trustees and (ii) issuance of restricted common shares of beneficial interest to the Companys executive officers.
On January 6, 2006, the joint venture that owns the Chicago Marriott Downtown in which the Company holds a noncontrolling 9.9% equity interest, signed a term sheet to refinance its mortgage and furniture, fixtures and equipment line of credit by obtaining a new $220,000 mortgage with a variable interest rate of LIBOR plus 1.85%. Upon closing, the Companys pro rata share of the mortgage loan will be approximately $21,800.
On January 13, 2006, the Company declared monthly cash distributions to shareholders of the Company and partners of the Operating Partnership, in the amount of $0.10 per common share of beneficial interest/unit for each of the months of January, February and March 2006.
On January 13, 2006, the Company paid its December 2005 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and common units of limited partnership interest to shareholders and unit holders of record as of December 31, 2005.
On January 13, 2006, the Company paid its preferred distribution of $0.64 per Series A Preferred Share for the quarter ended December 31, 2005 to Series A preferred shareholders of record at the close of business on January 1, 2006.
On January 13, 2006, the Company paid its preferred distribution of $0.52 per Series B Preferred Share for the quarter ended December 31, 2005 to Series B preferred shareholders of record at the close of business on January 1, 2006.
F-36
On January 13, 2006, the Company paid its preferred distribution of $0.47 per Series D Preferred Share for the quarter ended December 31, 2005 to Series D preferred shareholders of record at the close of business on January 1, 2006.
On January 13, 2006, the Company paid its preferred distribution of $0.45 per Series C Unit for the quarter ended December 31, 2005 to Series C preferred unitholders of record at the close of business on January 1, 2006.
On January 17, 2006, the Company signed an agreement to acquire a 100% interest in the House of Blues Hotel, a 367-room, full-service hotel, and related Marina City retail and parking facilities, all located in Chicago, Illinois, for $114,500 subject to customary closing conditions and requirements. The closing is expected to occur during the first quarter of 2006.
On January 27, 2006, the Company granted 34,697 restricted common shares of beneficial interest to the Companys executive officers. The restricted shares granted vest over three years, starting January 1, 2008. These common shares were issued under the 1998 share option and incentive plan.
On January 27, 2006, the Company acquired a 100% interest in the LeParc Suite Hotel, a 154-room upscale full-service hotel located in West Hollywood, California, for $47,000. The source of the funding for the acquisition was the Companys senior unsecured credit facility. The property is leased to LHL and Outrigger Lodging Services was retained to manage the property.
On January 27, 2006, 92,893 common units of limited partnership interest in the Operating Partnership were redeemed for an equal number of common shares in the Company.
On January 30, 2006, the Company signed an agreement to acquire a 100% interest in the Westin Michigan Avenue, a 751-room, upscale full-service hotel located in Chicago, Illinois, for $215,000, subject to customary closing conditions and requirements. The closing is expected to occur during the first quarter of 2006. The property will continue to be managed by Starwood Hotels & Resorts.
On February 7, 2006, the Company completed an underwritten public offering of 3,250,000 common shares of beneficial interest, par value $0.01 per share. After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $119,758. The net proceeds were used to repay existing indebtedness under the Companys senior unsecured credit facility and for general corporate purposes including acquisitions. The Company granted the underwriters an option to purchase up to 487,500 additional common shares to cover over-allotments. This option may be exercised any time before March 3, 2006. As of February 22, 2006 this option has not been exercised.
On February 8, 2006, the Company completed an underwritten public offering of 3,050,000 shares of 8.0% Series E Cumulative Redeemable Preferred Shares (the Series E Preferred Shares) par value $0.01 per share (liquidation preference $25.00 per share). After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $74,324. The net proceeds will be used to repay existing indebtedness under the Companys senior unsecured credit facility and for general corporate purposes including acquisitions. On February 16, 2006, the Company issued an additional 450,000 Series E Preferred Shares pursuant to an over-allotment option for approximately $10,984 after deducting underwriters discounts and commissions.
On February 15, 2006, the Company paid its January 2006 monthly distribution of $0.10 per share/unit on its common shares of beneficial interest and units of limited partnership interest to shareholders and unit holders of record as of January 31, 2006.
On February 15, 2006, the tax-exempt special project revenue bond and the taxable special project revenue bond, both issued by the Massachusetts Port Authority, were remarketed with the supporting letters of credit
F-37
being provided by Royal Bank of Scotland, replacing GE Commercial Credit. The cost of the supporting letters of credit was reduced from 2% to 1.35%. The bonds are secured by the letters of credit and the letters of credit are secured by the Harborside Hyatt Conference Center & Hotel.
On February 21, 2006, the Washington Grande Hotel (formerly the Holiday Inn Downtown) was closed for renovations. The Company plans to invest over $21,000 in a renovation and repositioning similar to those performed on the Companys DC Urban Collection purchased in March 2001. After completion of the renovation and repositioning in 2007, the hotel will be operated as a luxury high-style, independent hotel.
21. Quarterly Operating Results (Unaudited)
The Companys unaudited consolidated quarterly operating data for the years ended December 31, 2005 and 2004 (in thousands, except per share data) follows. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also managements opinion, however, that quarterly operating data for hotel enterprises are not indicative of results to be achieved in succeeding quarters or years.
Year Ended December 31, 2005
|
||||||||||||||||
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||
Total revenues from continuing operations |
$ | 73,021 | $ | 100,671 | $ | 110,970 | $ | 111,492 | ||||||||
Total expenses from continuing operations |
72,806 | 87,254 | 95,828 | 104,844 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income from continuing operations |
215 | 13,417 | 15,142 | 6,648 | ||||||||||||
Net loss from discontinued operations |
(26 | ) | | | | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
189 | 13,417 | 15,142 | 6,648 | ||||||||||||
Distributions to preferred shareholders |
(3,133 | ) | (3,133 | ) | (3,744 | ) | (4,619 | ) | ||||||||
|
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|
|
|
|
|
|
|
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|
|
|||||
Net income (loss) applicable to common shareholders |
$ | (2,944 | ) | $ | 10,284 | $ | 11,398 | $ | 2,029 | |||||||
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Earnings per weighted average common share outstandingbasic: |
||||||||||||||||
Income (loss) applicable to common shareholders before discontinued operations and after dividends paid on unvested restricted shares |
$ | (0.10 | ) | $ | 0.34 | $ | 0.38 | $ | 0.06 | |||||||
Discontinued operations |
| | | | ||||||||||||
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|
|
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|
|||||
Net income (loss) applicable to common shareholders after dividends paid on unvested restricted shares |
$ | (0.10 | ) | $ | 0.34 | $ | 0.38 | $ | 0.06 | |||||||
|
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|
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|||||
Earnings per weighted average common share outstandingdiluted: |
||||||||||||||||
Income (loss) applicable to common shareholders before discontinued operations |
$ | (0.10 | ) | $ | 0.34 | $ | 0.37 | $ | 0.06 | |||||||
Discontinued operations |
| | | | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||
Net income (loss) applicable to common shareholders |
$ | (0.10 | ) | $ | 0.34 | $ | 0.37 | $ | 0.06 | |||||||
|
|
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|
|
|
|
|
|
|
|
|||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic |
29,701,695 | 29,822,566 | 30,022,302 | 32,964,510 | ||||||||||||
Diluted |
30,202,017 | 30,287,688 | 30,492,289 | 33,393,874 |
F-38
Year Ended December 31, 2004
|
||||||||||||||||
First Quarter |
Second
Quarter |
Third Quarter |
Fourth
Quarter |
|||||||||||||
Total revenues from continuing operations |
$ | 50,647 | $ | 79,206 | $ | 82,269 | $ | 69,709 | ||||||||
Total expenses from continuing operations |
54,197 | 69,792 | 72,276 | 66,761 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income (loss) from continuing operations |
(3,550 | ) | 9,414 | 9,993 | 2,948 | |||||||||||
Net income (loss) from discontinued operations |
496 | 818 | 3,179 | (75 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income (loss) |
(3,054 | ) | 10,232 | 13,172 | 2,873 | |||||||||||
Distributions to preferred shareholders |
(3,133 | ) | (3,133 | ) | (3,133 | ) | (3,133 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income (loss) applicable to common shareholders |
$ | (6,187 | ) | $ | 7,099 | $ | 10,039 | $ | (260 | ) | ||||||
|
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|
|||||
Earnings per weighted average common share outstandingbasic: |
||||||||||||||||
Income (loss) applicable to common shareholders before discontinued operations and after dividends paid on unvested restricted shares |
$ | (0.28 | ) | $ | 0.24 | $ | 0.25 | $ | (0.01 | ) | ||||||
Discontinued operations |
0.02 | 0.03 | 0.11 | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
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|
|||||
Net income (loss) applicable to common shareholders after dividends paid on unvested restricted shares |
$ | (0.26 | ) | $ | 0.27 | $ | 0.36 | $ | (0.01 | ) | ||||||
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|||||
Earnings per weighted average common share outstandingdiluted: |
||||||||||||||||
Income (loss) applicable to common shareholdersbefore discontinued operations |
$ | (0.27 | ) | $ | 0.23 | $ | 0.24 | $ | (0.01 | ) | ||||||
Discontinued operations |
0.02 | 0.03 | 0.11 | | ||||||||||||
|
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|||||
Net income (loss) applicable to common shareholders |
$ | (0.25 | ) | $ | 0.26 | $ | 0.35 | $ | (0.01 | ) | ||||||
|
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|||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic |
24,045,610 | 26,395,156 | 27,805,183 | 28,684,261 | ||||||||||||
Diluted |
24,729,272 | 26,917,093 | 28,351,296 | 29,266,357 |
F-39
Schedule IIIReal Estate and Accumulated Depreciation
As of December 31, 2005
(Dollars in thousands)
Encum-
brances |
Initial Cost
|
Cost Capitalized
Subsequent to Acquisition |
Gross Amounts at Which
Carried at Close of Period |
Accumulated
Depreciation |
Net Book
Value |
Date of
Original Construction |
Date of
Acquisition |
Life On
Depreciation
|
||||||||||||||||||||||||||||||||||||
Land
|
Building and
ments |
Furniture,
Fixtures and Equipment |
Land
|
Building and
ments |
Furniture,
Fixtures and Equipment |
Land
|
Building and
Improve- ments |
Furniture,
Fixtures and Equipment |
||||||||||||||||||||||||||||||||||||
1. | Sheraton Bloomington Hotel Minneapolis South (1) | $ | 27,201 | $ | 8,172 | $ | 11,258 | $ | 13,811 | $ | | $ | 6,329 | $ | 13,269 | $ | 8,172 | $ | 17,587 | $ | 27,080 | $ | 26,542 | $ | 26,297 | 1969 | 12/01/95 | 3-40 years | ||||||||||||||||
2. | Westin City Center Dallas | 14,543 | 2,452 | 20,847 | 2,166 | | 5,043 | 8,041 | 2,452 | 25,890 | 10,207 | 13,033 | 25,516 | 1980 | 04/29/98 | 3-40 years | ||||||||||||||||||||||||||||
3. | Seaview Resort and Spa | | 7,415 | 40,337 | 2,339 | 182 | 7,835 | 12,986 | 7,597 | 48,172 | 15,325 | 23,509 | 47,585 | 1912 | 04/29/98 | 3-40 years | ||||||||||||||||||||||||||||
4. | Le Montrose Suite Hotel | 13,847 | 5,004 | 19,752 | 2,951 | | 3,789 | 4,836 | 5,004 | 23,541 | 7,787 | 10,690 | 25,642 | 1976 | 04/29/98 | 3-40 years | ||||||||||||||||||||||||||||
5. | LaGuardia Airport Marriott | | 8,127 | 32,139 | 3,976 | | 4,407 | 6,269 | 8,127 | 36,546 | 10,245 | 17,266 | 37,652 | 1981 | 04/29/98 | 3-40 years | ||||||||||||||||||||||||||||
6. | San Diego Paradise Point Resort (2) | 62,559 | | 69,639 | 3,665 | | 21,279 | 11,891 | | 90,918 | 15,556 | 34,348 | 72,126 | 1962 | 06/01/98 | 3-40 years | ||||||||||||||||||||||||||||
7. | Harborside Hyatt Conference Center & Hotel | 42,500 | | 66,159 | 5,246 | | 691 | 5,208 | | 66,850 | 10,454 | 25,934 | 51,370 | 1993 | 06/24/98 | 3-40 years | ||||||||||||||||||||||||||||
8. | Hotel Viking | | 2,421 | 24,375 | 353 | 78 | 12,963 | 4,881 | 2,499 | 37,338 | 5,234 | 11,658 | 33,412 | 1850 | 06/02/99 | 3-40 years | ||||||||||||||||||||||||||||
9. | Topaz Hotel | | 2,137 | 8,549 | | 12 | 3,942 | 2,642 | 2,149 | 12,491 | 2,642 | 3,845 | 13,437 | 1963 | 03/08/01 | 3-40 years | ||||||||||||||||||||||||||||
10. | Hotel Madera | | 1,682 | 6,726 | | 15 | 5,066 | 2,499 | 1,697 | 11,792 | 2,499 | 3,119 | 12,869 | 1963 | 03/08/01 | 3-40 years | ||||||||||||||||||||||||||||
11. | Hotel Rouge | | 2,162 | 8,647 | | 17 | 5,007 | 3,832 | 2,179 | 13,654 | 3,832 | 4,812 | 14,853 | 1963 | 03/08/01 | 3-40 years | ||||||||||||||||||||||||||||
12. | Hotel Helix | | 2,636 | 10,546 | | 13 | 8,612 | 4,866 | 2,649 | 19,158 | 4,866 | 5,370 | 21,303 | 1962 | 03/08/01 | 3-40 years | ||||||||||||||||||||||||||||
13. | Holiday Inn on the Hill Hotel | | 8,353 | 33,412 | 2,742 | | 4,457 | 5,252 | 8,353 | 37,869 | 7,994 | 10,821 | 43,395 | 1968 | 06/01/01 | 3-40 years | ||||||||||||||||||||||||||||
14. | Lansdowne Resort (3) | | 27,421 | 74,835 | 3,114 | 14,334 | 31,469 | 10,513 | 41,755 | 106,304 | 13,627 | 10,342 | 151,344 | 1991 | 06/17/03 | 3-40 years | ||||||||||||||||||||||||||||
15. | Hotel George | | 1,743 | 22,221 | 531 | | 225 | 915 | 1,743 | 22,446 | 1,446 | 2,131 | 23,504 | 1928 | 09/18/03 | 3-40 years | ||||||||||||||||||||||||||||
16. | Indianapolis Marriott Dowtown | 57,000 | | 96,173 | 9,879 | | 139 | 444 | | 96,312 | 10,323 | 10,285 | 96,350 | 2001 | 02/10/04 | 3-40 years | ||||||||||||||||||||||||||||
17. | Hilton Alexandria Old Town | 33,534 | 11,079 | 45,539 | 2,597 | | 336 | 648 | 11,079 | 45,875 | 3,245 | 3,269 | 56,930 | 2000 | 05/28/04 | 3-40 years | ||||||||||||||||||||||||||||
18. | Chaminade Resort and Conference Center (4) | 5,240 | 13,111 | 299 | | 838 | 269 | 5,240 | 13,949 | 568 | 633 | 19,124 | 1985 | 11/18/04 | 3-40 years | |||||||||||||||||||||||||||||
19. | Hilton San Diego Gaslamp Quarter | 59,600 | 5,008 | 77,892 | 2,250 | 0 | 59 | 112 | 5,008 | 77,951 | 2,362 | 2,403 | 82,918 | 2000 | 01/06/05 | 3-40 years | ||||||||||||||||||||||||||||
20. | The Grafton on Sunset | | 1,882 | 23,226 | 431 | 11 | 49 | 225 | 1,893 | 23,275 | 656 | 690 | 25,134 | 1954 | 01/10/05 | 3-40 years | ||||||||||||||||||||||||||||
21. | Onyx Hotel | | 6,963 | 21,262 | 445 | | 119 | 1 | 6,963 | 21,381 | 446 | 401 | 28,390 | 2004 | 05/18/05 | 3-40 years | ||||||||||||||||||||||||||||
22. | Westin Copley Place | 210,000 | | 295,809 | 28,223 | | 223 | 55 | | 296,032 | 28,278 | 4,349 | 319,961 | 1983 | 08/31/05 | 3-40 years | ||||||||||||||||||||||||||||
23. | University Tower Hotel | 11,376 | 4,936 | 21,720 | 577 | | | 69 | 4,936 | 21,720 | 646 | 57 | 27,245 | 1931 | 12/08/05 | 3-40 years | ||||||||||||||||||||||||||||
24. | Hilton San Diego Resort | | | 85,572 | 4,800 | | 14 | | | 85,586 | 4,800 | 258 | 90,128 | 1962 | 12/15/05 | 3-40 years | ||||||||||||||||||||||||||||
25. | Washington Grand Hotel | | 11,379 | 34,555 | | | | 11,379 | 34,555 | | 75 | 45,859 | 1972 | 12/16/05 | 3-40 years | |||||||||||||||||||||||||||||
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|
|||||||||||||||||||||
Total |
$ | 532,160 | $ | 126,212 | $ | 1,164,301 | $ | 90,395 | $ | 14,662 | $ | 122,891 | $ | 99,723 | $ | 140,874 | $ | 1,287,192 | $ | 190,118 | $ | 225,840 | $ | 1,392,344 | ||||||||||||||||||||
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|
(1) | Total Investment in hotel properties does not include $584 of property under development for the Sheraton Bloomington Hotel Minneapolis South. |
(2) | Total Investment in hotel properties does not include $239 of property under development for the San Diego Paradise Point Resort. |
(3) | Total Investment in hotel properties does not include $8166 of property under development for the Lansdowne Resort. |
(4) | Total Investment in hotel properties does not include $2692 of property under development for the Chaminade Resort and Conference Center. |
F-40
LASALLE HOTEL PROPERTIES
Schedule IIIReal Estate and Accumulated DepreciationContinued
As of December 31, 2005
Reconciliation of real estate and accumulated depreciation:
F-41
EXHIBIT INDEX
Exhibit Number
|
Description |
|
3.1 | Articles of Amendment and Restatement of Declaration of Trust of the Registrant (including all articles supplementary) | |
10.3 | Second Amendment to the Amended and Restated Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of September 30, 2003 | |
21 | List of Subsidiaries | |
23 | Consent of KPMG LLP | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 3.1
LASALLE HOTEL PROPERTIES
ARTICLES OF AMENDMENT AND RESTATEMENT OF
DECLARATION OF TRUST
FIRST: LaSalle Hotel Properties, a Maryland real estate investment trust (the Trust) under Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland (Title 8), desires to amend and restate its Declaration of Trust as currently in effect (as so amended and restated, and as the same may be amended hereafter, the Declaration of Trust).
SECOND: The following provisions are all the provisions of this Declaration of Trust currently in effect and as hereinafter amended:
ARTICLE I
FORMATION
The Trust is a real estate investment trust within the meaning of Title 8. The Trust shall not be deemed to be a general partnership, limited partnership, joint venture, joint stock company or, except as provided in Section 13.4 hereof, a corporation (but nothing herein shall preclude the Trust from being treated for tax purposes as an association under the Internal Revenue Code of 1986, as amended (the Code)).
ARTICLE II
NAME
The name of the Trust is: LaSalle Hotel Properties.
So far as may be practicable, the business of the Trust shall be conducted and transacted under that name, which name (and the word Trust wherever used in this Declaration of Trust, except where the context otherwise requires) shall refer to the Trustees (as hereinafter defined) collectively but not individually or personally and shall not refer to the Shareholders (as hereinafter defined) or to any officers, employees or agents of the Trust or of such Trustees.
Under circumstances in which the Board of Trustees of the Trust (the Board of Trustees or Board) determines that the use of the name of the Trust is not practicable, the Trust may use any other designation or name for the Trust.
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ARTICLE III
PURPOSES AND POWERS
Section 3.1 Purposes. The purposes for which the Trust is formed are to invest in and to acquire, hold, finance, manage, administer, control and dispose of property, including, without limitation or obligation, engaging in business as a real estate investment trust under the Code.
Section 3.2 Powers. The Trust shall have all of the powers granted to real estate investment trusts pursuant to Title 8 or any successor statute and shall have all other and further powers set forth in this Declaration of Trust which are not inconsistent with law and are appropriate to promote and attain the purposes set forth in this Declaration of Trust.
Section 3.3 Investment Policy. The fundamental investment policy of the Trust is to make investments in such a manner as to comply with the provisions of the Code applicable to real estate investment trusts and with the requirements of Title 8, with respect to the composition of the Trusts investments and the derivation of its income. Subject to Section 5.2(u) hereof, the Trustees will use their best efforts to carry out this fundamental investment policy and to conduct the affairs of the Trust in such a manner as to continue to qualify the Trust for the tax treatment provided for real estate investment trusts in the Code; provided, however, no Trustee, officer, employee or agent of the Trust shall be liable for any act or omission resulting in the loss of tax benefits under the Code, except to the extent provided in Section 9.2 hereof. The Trustees may change from time to time by resolution or in the bylaws of the Trust (the Bylaws), such investment policies as they determine to be in the best interests of the Trust, including prohibitions or restrictions upon certain types of investments.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland is The Corporation Trust Incorporated, 300 East Lombard Street, Suite 1400, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation. The Trust may have such offices or places of business within or outside the State of Maryland as the Board of Trustees may from time to time determine.
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ARTICLE V
BOARD OF TRUSTEES
Section 5.1 Powers. Subject to any express limitations contained in this Declaration of Trust or in the Bylaws, (a) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (b) the Board shall have full, exclusive and absolute power, control and authority over any and all property of the Trust. The Board may take any action as in its sole judgment and discretion is necessary or appropriate to conduct the business and affairs of the Trust. This Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Board. Any construction of this Declaration of Trust or determination made in good faith by the Board concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Trustees included in this Declaration of Trust or in the Bylaws shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of this Declaration of Trust or the Bylaws or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board or the Trustees under the general laws of the State of Maryland as now or hereafter in force or any other applicable laws.
Section 5.2 Specific Powers and Authority. Subject only to the express limitations herein, and in addition to all other powers and authority conferred by this Declaration of Trust or by law, the Trustees, without any vote, action or consent by the Shareholders, shall have and may exercise, at any time or times, in the name of the Trust or on its behalf the following powers and authorities:
(a) Investments. Subject to Section 9.4 hereof, to invest in, purchase or otherwise acquire and to hold real, personal or mixed, tangible or intangible, property of any kind wherever located, or rights or interests therein or in connection therewith, all without regard to whether such property, interests or rights are authorized by law for the investment of funds held by trustees or other fiduciaries, or whether obligations the Trust acquires have a term greater or lesser than the term of office of the Trustees or the possible termination of the Trust, for such consideration as the Trustees may deem proper (including cash, property of any kind or securities of the Trust); provided, however, that the Trustees shall take such actions as they deem necessary and desirable to comply with any requirements of Title 8 relating to the types of assets held by the Trust.
(b) Sale, Disposition and Use of Property. Subject to Sections 3.3 and 9.4 and Article XI hereof: (i) to sell, rent, lease, hire, exchange, release, partition, assign, mortgage,
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grant security interests in, encumber, negotiate, dedicate, grant easements in and options with respect to, convey, transfer (including transfers to entities wholly or partially owned by the Trust or the Trustees) or otherwise dispose of any or all of the property of the Trust by deeds (including deeds in lieu of foreclosure with or without consideration), trust deeds, assignments, bills of sale, transfers, leases, mortgages, financing statements, security agreements and other instruments for any of such purposes executed and delivered for and on behalf of the Trust or the Trustees by one or more of the Trustees or by a duly authorized officer, employee, agent or nominee of the Trust, on such terms as they deem appropriate; (ii) to give consents and make contracts relating to the property of the Trust and its use or other property or matters; (iii) to develop, improve, manage, use, alter or otherwise deal with the property of the Trust; and (iv) to rent, lease or hire from others property of any kind; provided, however, that the Trust may not use or apply land for any purposes not permitted by applicable law.
(c) Financings. To borrow or in any other manner raise money for the purposes and on the terms they determine, and to evidence the same by issuance of securities of the Trust, which may have such provisions as the Trustees determine; to reacquire such securities of the Trust; to enter into other contracts or obligations on behalf of the Trust; to guarantee, indemnify or act as surety with respect to payment or performance of obligations of any person; to mortgage, pledge, assign, grant security interests in or otherwise encumber the property of the Trust to secure any such securities of the Trust, contracts or obligations (including guarantees, indemnifications and suretyships); and to renew, modify, release, compromise, extend, consolidate or cancel, in whole or in part, any obligation to or of the Trust or participate in any reorganization of obligors to the Trust.
(d) Loans. Subject to the provisions of Section 9.4 hereof, to lend money or other property of the Trust on such terms, for such purposes and to such persons as they may determine.
(e) Issuance of Securities. Subject to the provisions of Article VI hereof: (i) to create and authorize and direct the issuance (on either a pro rata or a non-pro rata basis) by the Trust, in Shares (as hereinafter defined), units or amounts of one or more types, series or classes, of securities of the Trust, which may have such voting rights, dividend or interest rates, preferences, subordinations, conversion or redemption prices or rights, maturity dates, distribution, exchange, or liquidation rights or other rights as the Trustees may determine, without vote of or other action by the Shareholders, to such persons for such consideration, at such time or times and in such manner and
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on such terms as the Trustees determine; (ii) to list or to designate for listing or quotation any of the securities of the Trust on any national securities exchange or automated inter-dealer quotation system; and (iii) to purchase or otherwise acquire, hold, cancel, reissue, sell and transfer any securities of the Trust.
(f) Expenses and Taxes. To pay any charges, expenses or liabilities necessary or desirable, in the sole discretion of the Trustees, for carrying out the purposes of this Declaration of Trust and conducting the business of the Trust, including compensation or fees to Trustees, officers, employees and agents of the Trust, and to persons contracting with the Trust, and any taxes, levies, charges and assessments of any kind imposed upon or chargeable against the Trust, the property of the Trust or the Trustees in connection therewith; and to prepare and file any tax returns, reports or other documents and take any other appropriate action relating to the payment of any such charges, expenses or liabilities.
(g) Collection and Enforcement. To collect, sue for and receive money or other property due to the Trust; to consent to extensions of the time for payment, or to the renewal, of any securities or obligations; to engage or to intervene in, prosecute, defend, compound, enforce, compromise, release, abandon or adjust any actions, suits, proceedings, disputes, claims, demands, security interests or things relating to the Trust, the property of the Trust or the Trusts affairs; to exercise any rights and enter into any agreements and take any other action necessary or desirable in connection with the foregoing.
(h) Deposits. To deposit funds or securities constituting part of the property of the Trust in banks, trust companies, savings and loan associations, financial institutions and other depositories, whether or not such deposits will draw interest, subject to withdrawal on such terms and in such manner as the Trustees determine.
(i) Allocation; Accounts. To determine whether moneys, profits or other assets of the Trust shall be charged or credited to, or allocated between, income and capital, including whether or not to amortize any premium or discount and to determine in what manner any expenses or disbursements are to be borne as between income and capital (regardless of how such items would normally or otherwise be charged to or allocated between income and capital without such determination); to treat any dividend or other distribution on any investment as, or apportion it between, income and capital; in their discretion to provide reserves for depreciation, amortization, obsolescence or other purposes in respect of any property of the Trust in such amounts and by such methods as they determine; to determine what constitutes net
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earnings, profits or surplus; to determine the method or form in which the accounts and records of the Trust shall be maintained; and to allocate to the Shareholders equity account less than all of the consideration paid for Shares and to allocate the balance to paid-in capital or capital surplus.
(j) Valuation of Property. To determine the value of all or any part of the property of the Trust and of any services, securities, property or other consideration to be furnished to or acquired by the Trust, and to revalue all or any part of the property of the Trust, all in accordance with such appraisals or other information as are reasonable, in their sole judgment.
(k) Ownership and Voting Powers. To exercise all of the rights, powers, options and privileges pertaining to the ownership of any mortgages, securities, real estate and other property of the Trust to the same extent that an individual owner might, including, without limitation, to vote or give any consent, request or notice or waive any notice, either in person or by proxy or power of attorney, which proxies and powers of attorney may be for any general or special meetings or action, and may include the exercise of discretionary powers.
(l) Officers; Delegation of Powers. To elect, appoint or employ such officers for the Trust and such committees of the Board of Trustees with such powers and duties as the Trustees may determine or the Bylaws provide; to engage, employ or contract with and pay compensation to any person (including, subject to Section 9.4 hereof, any Trustee and any person who is an affiliate of any Trustee) as agent, representative, advisor, member of an advisory board, employee or independent contractor (including advisers, consultants, transfer agents, registrars, underwriters, accountants, attorneys-at-law, real estate agents, property and other managers, appraisers, brokers, architects, engineers, construction managers, general contractors or otherwise) in one or more capacities, to perform such services on such terms as the Trustees may determine; and to delegate to one or more Trustees, officers or other persons engaged or employed as aforesaid, or to committees of Trustees, the performance of acts or other things (including granting of consents), the making of decisions and the execution of such deeds, contracts or other instruments, in the name of the Trust or the Trustees, or as their attorneys or otherwise, as the Trustees may determine.
(m) Associations. Subject to Section 9.4 hereof, to cause the Trust to enter into joint ventures, general or limited partnerships, participation or agency arrangements or any other lawful combinations, relationships or associations of any kind.
(n) Reorganization; Merger, Consolidation or Sale of Trust Property. Subject to Article XI hereof: (i) to cause to be organized or assist in organizing any person under the laws of
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any jurisdiction to acquire all or any part of the property of the Trust, carry on any business in which the Trust shall have an interest or otherwise exercise the powers the Trustees deem necessary, useful or desirable to carry on the business of the Trust or to carry out the provisions of this Declaration of Trust; (ii) to merge or consolidate the Trust with any person; (iii) to sell, rent, lease, hire, convey, negotiate, assign, exchange or transfer all or any part of the property of the Trust to or with any person in exchange for securities of such person or otherwise; and (iv) to lend money to, subscribe for and purchase the securities of, and enter into any contracts with, any person in which the Trust holds, or is about to acquire, securities or any other interests.
(o) Insurance. To purchase and pay for out of property of the Trust insurance policies insuring the Trust and the property of the Trust against any and all risks, and insuring the Shareholders, Trustees, officers, employees and agents of the Trust individually against all claims and liabilities of every nature arising by reason of holding or having held any such status, office or position or by reason of any action alleged to have been taken or omitted (including those alleged to constitute misconduct, gross negligence, reckless disregard of duty or bad faith) by any such person in such capacity, whether or not the Trust would have the power to indemnify such person against such claim or liability.
(p) Executive Compensation, Pension and Other Plans. To adopt and implement executive compensation, pension, profit sharing, share option, share bonus, share purchase, share appreciation rights, restricted share, savings, thrift, retirement, incentive or benefit plans, trusts or provisions, applicable to any or all Trustees, officers, employees or agents of the Trust, or to other persons who have benefited the Trust, all on such terms and for such purposes as the Trustees may determine.
(q) Distributions. To declare and pay dividends or other distributions to Shareholders, subject to the provisions of Section 6.5 hereof.
(r) Indemnification. In addition to the indemnification provided for in Section 9.3 hereof, to indemnify any person, including any independent contractor, with whom the Trust has dealings.
(s) Charitable Contributions. To make donations for the public welfare or for community, charitable, religious, educational, scientific, civic or similar purposes, regardless of any direct benefit to the Trust.
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(t) Advisory Services. To engage or terminate any advisor to perform or assist in the performance of any of the activities of the Trust.
(u) Discontinue Operations; Bankruptcy. To discontinue the operations of the Trust (subject to Section 12.2 hereof); to petition or apply for relief under any provision of federal or state bankruptcy, insolvency or reorganization laws or similar laws for the relief of debtors; to permit any property of the Trust to be foreclosed upon without raising any legal or equitable defenses that may be available to the Trust or the Trustees or otherwise defending or responding to such foreclosure; to confess judgment against the Trust; or to take such other action with respect to indebtedness or other obligations of the Trustees, in such capacity, the property of the Trust or the Trust as the Trustees in their discretion may determine.
(v) Termination of Status. To terminate the status of the Trust as a real estate investment trust under the Code; provided, however, that the Board of Trustees shall take no action to terminate the Trusts status as a real estate investment trust under the Code until such time as (i) the Board of Trustees adopts a resolution recommending that the Trust terminate its status as a real estate investment trust under the Code, (ii) the Board of Trustees presents the resolution at an annual or special meeting of the Shareholders and (iii) such resolution is approved by the holders of a majority of the issued and outstanding Common Shares (as hereinafter defined).
(w) Fiscal Year. Subject to the Code, to adopt, and from time to time change, a fiscal year for the Trust.
(x) Seal. To adopt and use a seal, but the use of a seal shall not be required for the execution of instruments or obligations of the Trust.
(y) Bylaws. To adopt, implement and from time to time alter, amend or repeal Bylaws relating to the business and organization of the Trust which are not inconsistent with the provisions of this Declaration of Trust.
(z) Accounts and Books. To determine from time to time whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Trust, or any of them, shall be open to the inspection of Shareholders.
(aa) Voting Trust. To participate in, and accept securities issued under or subject to, any voting trust.
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(ab) Proxies. To solicit proxies of the Shareholders at the expense of the Trust.
(bb) Ownership Limits. To determine that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a real estate investment trust under the Code or that compliance with any restriction or limitations on ownership and transfers of Shares set forth in Article VII hereof is no longer required for the Trust to qualify as a real estate investment trust under the Code.
(cc) Further Powers. To do all other acts and things and execute and deliver all instruments incident to the foregoing powers, and to exercise all powers which they deem necessary, useful or desirable to carry on the business of the Trust or to carry out the provisions of this Declaration of Trust, even if such powers are not specifically provided hereby.
Section 5.3 Determination of Best Interest of Trust. In determining what is in the best interest of the Trust, a Trustee shall consider the interests of the Shareholders of the Trust and, in his sole and absolute discretion, may consider (a) the interests of the Trusts employees, suppliers, creditors and customers, (b) the economy of the nation, (c) community and societal interests and (d) the long-term as well as short-term interests of the Trust and its Shareholders, including the possibility that these interests may be best served by the continued independence of the Trust.
Section 5.4 Number and Classification. The number of Trustees (the Trustees) shall initially be two (2), which number (i) shall automatically be increased to seven (7) effective immediately following the closing of the Trusts initial public offering and (ii) may be thereafter increased or decreased from time to time in accordance with the Bylaws of the Trust; provided, however, that, effective immediately following the closing of the Trusts initial public offering, the total number of Trustees shall not be fewer than three (3) and not more than nine (9). Notwithstanding the foregoing, if for any reason any or all of the Trustees cease to be Trustees, such event shall not terminate the Trust or affect this Declaration of Trust or the powers of any remaining Trustees. The names and addresses of the initial two (2) Trustees are:
Name |
Address |
|
Stuart L. Scott | 200 East Randolph Drive | |
Chicago, Illinois 60601 | ||
Jon E. Bortz | 220 East 42nd Street | |
New York, New York 10017 |
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Effective immediately following the closing of the Trusts initial public offering, the number of Trustees shall automatically be increased to seven (7), whereupon the Trustees, including the initial Trustees, shall be divided into three classes as nearly equal in number as possible and initially consisting of two, two and three members, respectively, with the term of office of one class expiring each year. One class of Trustees, consisting initially of two member, shall hold office initially for a term expiring at the annual meeting of Shareholders in 1999; another class, consisting initially of two members, shall hold office initially for a term expiring at the annual meeting of Shareholders in 2000; and the third class, consisting initially of three members, shall hold office initially for a term expiring at the annual meeting of Shareholders in 2001. The Board of Trustees, by resolution, shall designate the Trustees who will serve in each class.
The Trustees may fill any vacancy, whether resulting from an increase in the number of Trustees or otherwise, on the Board of Trustees. Beginning with the annual meeting of Shareholders in 1999 and at each succeeding annual meeting of Shareholders, the successor or successors to the class of Trustees whose term expires at such meeting shall be elected to hold office for a term expiring at the third succeeding annual meeting of Shareholders. Trustees shall hold office until their successors are duly elected and qualify. Election of Trustees by Shareholders shall require the vote and be in accordance with the procedures set forth in the Bylaws.
It shall not be necessary to list in this Declaration of Trust the names and addresses of any Trustees hereafter elected.
Section 5.5 Resignation, Removal or Death. Any Trustee may resign by written notice to the Board, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. Subject to the rights of holders of one or more classes or series of Preferred Shares, as hereinafter defined, to elect one or more Trustees, a Trustee may be removed at any time, only with cause, at a meeting of the Shareholders, by the affirmative vote of the holders of a majority of the Shares then outstanding and entitled to vote for the election of Trustees. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall automatically cease to have any right, title or interest in and to the property of the Trust and shall execute and deliver such documents as the remaining Trustees require for the conveyance of any property of the Trust held in his name, and shall account to
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the remaining Trustees as they require for all property which he holds as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform the acts described in the foregoing sentence.
Section 5.6 Title to Property of the Trust. Legal title to all property of the Trust shall be vested in the Trustees, but they may cause legal title to any property of the Trust to be held by or in the name of any Trustee, or the Trust, or any other person as nominee. The right, title and interest of the Trustees in and to the property of the Trust shall automatically vest in successor and additional Trustees upon their qualification and acceptance of election or appointment as Trustees, and they shall thereupon have all the rights and obligations of Trustees, whether or not conveyancing documents have been executed and delivered pursuant to Section 5.5 hereof or otherwise. Written evidence of the qualification and acceptance of election or appointment of successor and additional Trustees may be filed with the records of the Trust and in such other offices, agencies or places as the Trustees may deem necessary or desirable.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1 Authorized Shares. The Trust shall have the authority to issue a total of 120 million shares of beneficial interest (Shares), of which 100 million shall be common shares of beneficial interest, $.01 par value per share (Common Shares), and 20 million shall be preferred shares of beneficial interest, $.01 par value per share (Preferred Shares). The Board of Trustees, with the approval of the holders of record of outstanding Shares (the Shareholders) by a majority of the votes entitled to be cast at a meeting of Shareholders duly called and at which a quorum is present, may amend this Declaration of Trust from time to time to increase or decrease the aggregate number of Shares or the number of Shares of any class that the Trust has authority to issue.
Section 6.2 Common Shares. Subject to the provisions of Article VII, each Common Share shall entitle the holder thereof to one vote on each matter upon which holders of Common Shares are entitled to vote, and all Common Shares shall have equal dividend, distribution, liquidation and other rights, and shall have no preference, cumulative, preemptive, appraisal, conversion or exchange rights.
Section 6.3 Preferred Shares. The Board of Trustees may classify any unissued Preferred Shares, and may reclassify any previously classified but unissued Preferred Shares of any series from time to time, in one or more series of Preferred
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Shares. Prior to issuance of classified or reclassified Preferred Shares of any series, the Board of Trustees by resolution shall (a) designate that series to distinguish it from all other series of Preferred Shares; (b) specify the number of Preferred Shares to be included in the series; (c) set, subject to the provisions of Article VII and subject to the express terms of any series of Preferred Shares outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each series; and (d) cause the Trust to file Articles Supplementary with the State Department of Assessments and Taxation of Maryland (the SDAT). Any of the terms of any series of Preferred Shares set pursuant to clause (c) of this Section 6.3 may be made dependent upon facts ascertainable outside this Declaration of Trust (including, without limitation, the occurrence of any event or a determination or action by the Trust or any other person or body) and may vary among holders thereof, provided that the manner in which such facts or variations shall operate upon the terms of such series of Shares is clearly and expressly set forth in the Articles Supplementary filed with the SDAT.
Section 6.4 Authorization by Board of Share Issuance. The Board of Trustees may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Trustees may deem advisable (or without consideration in the case of a Share split or Share dividend), subject to such restrictions or limitations, if any, as may be set forth in this Declaration of Trust or the Bylaws.
Section 6.5 Dividends and Distributions. The Board of Trustees may from time to time authorize, declare and pay to Shareholders such dividends or distributions, in cash, property or other assets of the Trust or in securities of the Trust or from any other source as the Board of Trustees in its discretion shall determine. The Board of Trustees shall endeavor to declare and pay such dividends and distributions as shall be necessary for the Trust to qualify as a real estate investment trust under the Code; provided, however, that Shareholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board. The exercise of the powers and rights of the Board of Trustees pursuant to this Section 6.5 shall be subject to the provisions of any class or series of Shares at the time outstanding. The receipt by any person in whose name any Shares are registered on the records of the Trust or by his duly authorized agent shall be a sufficient discharge for all dividends or distributions payable or deliverable in respect of such Shares and from all liability to see to the application
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thereof. Unless the status of the Trust as a real estate investment trust under the Code has been terminated pursuant to Section 5.2(u) hereof, no determination shall be made by the Board of Trustees nor shall any transaction be entered into by the Trust which would cause any Shares or other beneficial interest in the Trust not to constitute transferable shares or transferable certificates of beneficial interest under Section 856(a)(2) of the Code or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code.
Section 6.6 General Nature of Shares. All Shares shall be personal property entitling the Shareholders only to those rights provided in this Declaration of Trust. The Shareholders shall have no interest in the property of the Trust and shall have no right to compel any partition, division, dividend or distribution of the Trust or of the property of the Trust. The death of a Shareholder shall not terminate the Trust or give his legal representative any rights against other Shareholders, the Trustees or the property of the Trust, except the right, exercised in accordance with applicable provisions of the Bylaws, to receive a new certificate for Shares in exchange for the certificate held by the deceased Shareholder. The Trust is entitled to treat as Shareholders only those persons in whose names Shares are registered as holders of Shares on the beneficial interest ledger of the Trust.
Section 6.7 Fractional Shares. The Trust may, without the consent or approval of any Shareholders, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it, or pay cash for the fair value of a fraction of a Share.
Section 6.8 Declaration and Bylaws. All Shareholders are subject to the provisions of this Declaration of Trust and the Bylaws.
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
Section 7.1 Definitions. For the purpose of this Article VII, the following terms shall have the following meanings:
Beneficial Ownership. The term Beneficial Ownership shall mean ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms Beneficial Owner, Beneficially Own, Beneficially Owns, Beneficially Owning and Beneficially Owned shall have the correlative meanings.
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Benefit Plan Investor. The term Benefit Plan Investor shall have the meaning provided in 29 C.F.R. ss. 2510.3-101(f)(2), or any successor regulation thereto.
Business Day. The term Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close.
Charitable Beneficiary. The term Charitable Beneficiary shall mean one or more beneficiaries of the Charitable Trust as determined pursuant to Section 7.3.7, provided that each such organization must be described in Sections 501(c)(3), 170(b)(1)(A) (other than clause (vii) or (viii) thereof) and 170(c)(2) of the Code.
Charitable Trust. The term Charitable Trust shall mean any trust provided for in Section 7.2.1(b)(i) and Section 7.3.1.
Charitable Trustee. The term Charitable Trustee shall mean the Person unaffiliated with the Trust and a Prohibited Owner, that is appointed by the Trust to serve as trustee of the Charitable Trust.
Closing Price. The Closing Price on any date shall mean the last sale price for such Shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Shares are not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Shares are listed or admitted to trading or, if such Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ Stock Market or, if such system is no longer in use, the principal other automated inter-dealer quotation system that may then be in use or, if such Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Shares selected by the Board of Trustees or, in the event that no trading price is available for such Shares, the fair market value of Shares, as determined in good faith by the Board of Trustees.
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Constructive Ownership. The term Constructive Ownership shall mean ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms Constructive Owner, Constructively Own, Constructively Owns, Constructively Owning and Constructively Owned shall have the correlative meanings.
Effective Date. The term Effective Date shall mean the date of the closing of the initial public offering of Common Shares.
ERISA Investor. The term ERISA Investor shall mean any holder of Shares that is (i) an employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), (ii) a plan as defined in Section 4975(e) of the Code (any such employee benefit plan or plan described in clause (i) or this clause (ii) being referred to herein as a Plan), (iii) a trust which was established pursuant to a Plan, or a nominee for such trust or Plan, or (iv) an entity whose underlying assets include assets of a Plan by reason of such Plans investment in such entity.
Initial Date. The term Initial Date shall mean January 15, 1998.
Initial Shareholder. The term Initial Shareholder shall mean.
Market Price. The term Market Price on any date shall mean, with respect to any class or series of outstanding Shares, the Closing Price for such Shares on such date.
NYSE. The term NYSE shall mean the New York Stock Exchange, Inc.
Ownership Limit. The term Ownership Limit shall mean (i) with respect to the Common Shares, 9.8% (in value or number of Shares, whichever is more restrictive) of the outstanding Common Shares of the Trust; and (ii) with respect to any class or series of Preferred Shares, 9.8% (in value or number of Shares, whichever is more restrictive) of the outstanding Shares of such class or series of Preferred Shares of the Trust.
Person. The term Person shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a
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portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Prohibited Owner. The term Prohibited Owner shall mean, with respect to any purported Transfer, any Person who, but for the provisions of Section 7.2.1, would Beneficially Own or Constructively Own Shares, and if appropriate in the context, shall also mean any Person who would have been the record owner of Shares that the Prohibited Owner would have so owned.
Publicly Offered Securities. The term Publicly Offered Securities shall have the meaning provided in 29 C.F.R. ss. 2510.3-101(b)(2), or any successor regulation thereto.
REIT. The term REIT shall mean a real estate investment trust within the meaning of Section 856 of the Code.
Restriction Termination Date. The term Restriction Termination Date shall mean the first day after the Initial Date on which the Board of Trustees determines that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of Shares set forth herein is no longer required in order for the Trust to qualify as a REIT.
Transfer. The term Transfer shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Shares or the right to vote or receive dividends on Shares, including (a) a change in the capital structure of the Trust, (b) a change in the relationship between two or more Persons which causes a change in ownership of Shares by application of Section 544 of the Code, as modified by Section 856(h), (c) the granting or exercise of any option or warrant (or any disposition of any option or warrant), pledge, security interest, or similar right to acquire Shares, (d) any disposition of any securities or rights convertible into or exchangeable for Shares or any interest in Shares or any exercise of any such conversion or exchange right and (e) Transfers of interests in other entities that result in changes in Beneficial Ownership or Constructive Ownership of Shares; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. (For purposes of this Article VII, the right of a limited partner in LaSalle Hotel Operating
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Partnership, L.P., a Delaware limited partnership, to require the partnership to redeem such limited partners units of partnership interest pursuant to Section 8.6 of the Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P. shall not be considered to be an option or similar right to acquire Shares of the Trust.) The terms Transferring and Transferred shall have the correlative meanings.
Section 7.2 Restrictions on Ownership and Transfer of Shares.
Section 7.2.1 Ownership Limitations. From the Initial Date and prior to the Restriction Termination Date:
(a) Basic Restrictions.
(i) (1) No Person, other than the Initial Shareholder, shall Beneficially Own or Constructively Own Shares in excess of the Ownership Limit and (2) the Initial Shareholder shall not Beneficially Own or Constructively Own Shares in excess of the Ownership Limit on any date after the Effective Date.
(ii) No Person shall Beneficially Own or Constructively Own Shares to the extent that (1) such Beneficial Ownership of Shares would result in the Trust being closely held within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or (2) such Beneficial Ownership or Constructive Ownership of Shares would result in the Trust otherwise failing to qualify as a REIT (including, but not limited to, ownership that would result in the Trust actually owning or Constructively Owning an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Trust from such tenant would cause the Trust to fail to satisfy any of the gross income requirements of Section 856(c) of the Code).
(iii) No Person shall Transfer any Shares if, as a result of the Transfer, the Shares would be Beneficially Owned by less than 100 Persons (determined without reference to the rules of attribution under Section 544 of the Code). Notwithstanding any other provisions contained herein (but subject to Section 7.5), any Transfer of Shares (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) that, if effective, would result in Shares being Beneficially Owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares.
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(b) Transfer in Trust. If any Transfer of Shares (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning Shares in violation of Section 7.2.1(a)(i) or (ii), then:
(i) that number of Shares the Beneficial Ownership or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii) (rounded to the nearest whole share) shall be automatically transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such Shares; or
(ii) subject to Section 7.5, if the transfer to the Charitable Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number of Shares that otherwise would cause any Person to violate Section 7.2.1(a)(i) or (ii) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares.
Section 7.2.2 Remedies for Breach. Subject to Section 7.5, if the Board of Trustees or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any Shares in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Trustees or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Trust to redeem Shares, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfer or attempted Transfer or other event in violation of Section 7.2.1 shall automatically result in the transfer to the Charitable Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Trustees or a committee thereof.
Section 7.2.3 Notice of Restricted Transfer. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of Shares that will or may violate Section 7.2.1(a), or any Person who would have owned Shares that resulted in a transfer to the Charitable Trust
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pursuant to the provisions of Section 7.2.1(b), shall immediately give written notice to the Trust of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such acquisition or ownership on the Trusts status as a REIT.
Section 7.2.4 Owners Required To Provide Information. From the Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than five percent (or such lower percentage as required by the Code or the regulations promulgated thereunder) of the outstanding Shares, within 30 days after the end of each taxable year, shall give written notice to the Trust stating the name and address of such owner, the number of Shares Beneficially Owned and a description of the manner in which such Shares are held; provided that a Shareholder of record who holds outstanding Shares as nominee for another Person, which other Person is required to include in gross income the dividends received on such Shares (an Actual Owner), shall give written notice to the Trust stating the name and address of such Actual Owner and the number of Shares of such Actual Owner with respect to which the Shareholder of record is nominee. Each owner shall provide to the Trust such additional information as the Trust may request in order to determine the effect, if any, of such Beneficial Ownership on the Trusts status as a REIT and to ensure compliance with the Ownership Limit.
(b) each Person who is a Beneficial Owner or Constructive Owner of Shares and each Person (including the Shareholders of record) who is holding Shares for a Beneficial Owner or Constructive Owner shall provide to the Trust such information as the Trust may request, in good faith, in order to determine the Trusts status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance.
Section 7.2.5 Remedies Not Limited. Subject to Section 5.2(u) and Section 7.5, nothing contained in this Section 7.2 shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of its Shareholders in preserving the Trusts status as a REIT.
Section 7.2.6 Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Section 7.2, Section 7.3 or any definition contained in Section 7.1, the Board of Trustees shall have the power to determine the application of the provisions of this Section 7.2 or Section 7.3
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with respect to any situation based on the facts known to it. If this Section 7.2 or Section 7.3 requires an action by the Board of Trustees and this Declaration of Trust fails to provide specific guidance with respect to such action, the Board of Trustees shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of this Section 7.2 or Sections 7.1 or 7.3.
Section 7.2.7 Exceptions.
(a) The Board, in its sole and absolute discretion, may grant to any Person who makes a request therefor an exception to the Ownership Limit or the Excluded Holder Limit with respect to the ownership of any series or class of Preferred Shares, subject to the following conditions and limitations: (A) the Board shall have determined that (x) assuming such Person would Beneficially Own or Constructively Own the maximum amount of Common Shares and Preferred Shares permitted as a result of the exception to be granted and (y) assuming that all other Persons who would be treated as individuals for purposes of Section 542(a)(2) of the Code (determined taking into account Section 856(h)(3)(A) of the Code) would Beneficially Own or Constructively Own the maximum amount of Common Shares and Preferred Shares permitted under this Article VII (taking into account any exception, waiver, or exemption granted under this Section 7.2.7 to (or with respect to) such Persons), the Trust would not be closely held within the meaning of Section 856(h) of the Code (assuming that the ownership of Shares is determined during the second half of a taxable year) and would not otherwise fail to qualify as a REIT; and (B) such Person provides to the Board such representations and undertakings, if any, as the Board may, in its sole and absolute discretion, determine to be necessary in order for it to make the determination that the conditions set forth in clause (A) above of this Section 7.2.7(a) have been or will continue to be satisfied (including, without limitation, an agreement as to a reduced Ownership Limit, for such Person with respect to the Beneficial Ownership or Constructive Ownership of one or more other classes of Shares not subject to the exception), and such Person agrees that any violation of such representations and undertakings or any attempted violation thereof will result in the application of the remedies set forth in Section 7.2 with respect to Shares held in excess of the Ownership Limit (as may be applicable) with respect to such Person (determined without regard to the exception granted such Person under this subparagraph (a)). If a member of the Board requests that the Board grant an exception pursuant to this subparagraph (a) with respect to such member or with respect to any other Person if such Board member would be considered to be the Beneficial Owner or Constructive Owner of Shares owned by such Person, such member of the Board shall not participate in the decision of the Board as to whether to grant any such exception.
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(b) In addition to exceptions permitted under subparagraph (a) above, the Board in its sole and absolute discretion, may grant to any Person who makes a request therefor an exception from the Ownership Limit if: (i) such Person submits to the Board information satisfactory to the Board, in its reasonable discretion, demonstrating that such Person is not an individual for purposes of Section 542(a)(2) of the Code (determined taking into account Section 856(h)(3)(A) of the Code) and (ii) such Person provides to the Board such representations and undertakings, if any, as the Board may, in its reasonable discretion, require to ensure that the conditions in clause (i) hereof is satisfied and will continue to be satisfied throughout the period during which such Person owns Shares in excess of the Ownership Limit pursuant to any exception thereto granted under this subparagraph (b), and such Person agrees that any violation of such representations and undertakings or any attempted violation thereof will result in the application of the remedies set forth in Section 7.2 with respect to Shares held in excess of the Ownership Limit with respect to such Person (determined without regard to the exception granted such Person under this subparagraph (b)).
(c) Prior to granting any exception or exemption pursuant to subparagraph (a) or (b), the Board must receive a ruling from the Internal Revenue Service or advice of counsel, in either case in form and substance satisfactory to the Board, in its sole and absolute discretion, as it may deem necessary or advisable in order to determine or ensure the Trusts status as a REIT.
(d) Subject to Section 7.2.1(a)(ii), an underwriter that participates in a public offering or a private placement of Shares (or securities convertible into or exchangeable for Shares) may Beneficially Own or Constructively Own Shares (or securities convertible into or exchangeable for Shares) in excess of the Ownership Limit, but only to the extent necessary to facilitate such public offering or private placement; and, provided, that the ownership of Shares by such underwriter would not result in the Trust being closely held within the meaning of Section 856(h) of the Code, or otherwise result in the Trusts failing to qualify as a REIT.
Section 7.2.8 Increase in Ownership Limit. The Board of Trustees may from time to time increase the Ownership Limit, subject to the limitations provided in this Section 7.2.8.
(a) The Ownership Limit may not be increased if, after giving effect to such increase, five Persons who are considered individuals pursuant to Section 542 of the Code, as modified by Section 856(h)(3) of the Code, could Beneficially Own, in the aggregate, more than 49.5% of the value of the outstanding Shares.
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(b) Prior to the modification of the Ownership Limit pursuant to this Section 7.2.8, the Board may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Trusts status as a REIT if the modification in the Ownership Limit were to be made.
Section 7.2.9 Legend. Each certificate for Shares shall bear substantially the following legend:
The Shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Trusts maintenance of its status as a real estate investment trust (a REIT) under the Internal Revenue Code of 1986, as amended (the Code). Subject to certain further restrictions and except as expressly provided in the Trusts Declaration of Trust, (i) no Person may Beneficially Own or Constructively Own Common Shares of the Trust in excess of 9.8 percent (in value or number of Shares) of the outstanding Common Shares of the Trust; (ii) with respect to any class or series of Preferred Shares, no Person may Beneficially Own or Constructively Own more than 9.8 percent (in value or number of Shares) of the outstanding Shares of such class or series of Preferred Shares of the Trust; (iii) no Person may Beneficially Own or Constructively Own Shares that would result in the Trust being closely held under Section 856(h) of the Code or otherwise cause the Trust to fail to qualify as a REIT; and (iv) no Person may Transfer Shares if such Transfer would result in Shares of the Trust being owned by fewer than 100 Persons. Any Person who Beneficially Owns or Constructively Owns or attempts to Beneficially Own or Constructively Own Shares which cause or will cause a Person to Beneficially Own or Constructively Own Shares in excess or in violation of the above limitations must immediately notify the Trust. If any of the restrictions on transfer or ownership are violated, the Shares represented hereby will be automatically transferred to a Charitable Trustee of a Charitable Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. A Person who attempts to Beneficially Own or Constructively Own Shares in violation of the ownership limitations described above shall have no claim, cause of action, or any recourse whatsoever against a transferor of such Shares. Unless otherwise defined herein, all capitalized terms in this legend have the meanings defined in the Trusts Declaration of Trust,
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as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Shares of the Trust on request and without charge.
Instead of the foregoing legend, the certificate may state that the Trust will furnish a full statement about certain restrictions on transferability to a Shareholder on request and without charge.
Section 7.3 Transfer of Shares in Trust.
Section 7.3.1 Ownership in Trust. Upon any purported Transfer or other event described in Section 7.2.1(b) that would result in a transfer of Shares to a Charitable Trust, such Shares shall be deemed to have been transferred to the Charitable Trustee as trustee of a Charitable Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Charitable Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Charitable Trust pursuant to Section 7.2.1(b). The Charitable Trustee shall be appointed by the Trust and shall be a Person unaffiliated with the Trust and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Trust as provided in Section 7.3.7.
Section 7.3.2 Status of Shares Held by the Charitable Trustee. Shares held by the Charitable Trustee shall be issued and outstanding Shares of the Company. The Prohibited Owner shall have no rights in the Shares held by the Charitable Trustee. The Prohibited Owner shall not benefit economically from ownership of any Shares held in trust by the Charitable Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the Shares held in the Charitable Trust. The Prohibited Owner shall have no claim, cause of action, or any other recourse whatsoever against the purported transferor of such Shares.
Section 7.3.3 Dividend and Voting Rights. The Charitable Trustee shall have all voting rights and rights to dividends or other distributions with respect to Shares held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Trust that Shares have been transferred to the Charitable Trustee shall be paid by the recipient thereof with respect to such Shares to the Charitable Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Charitable Trustee. Any dividends or distributions so paid over to the Charitable Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting
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rights with respect to Shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that Shares have been transferred to the Charitable Trustee, the Charitable Trustee shall have the authority (at the Charitable Trustees sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Trust that Shares have been transferred to the Charitable Trustee and (ii) to recast such vote in accordance with the desires of the Charitable Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Trust has already taken irreversible action, then the Charitable Trustee shall not have the power to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Trust has received notification that Shares have been transferred into a Charitable Trust, the Trust shall be entitled to rely on its share transfer and other Shareholder records for purposes of preparing lists of Shareholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of Shareholders.
Section 7.3.4 Rights Upon Liquidation. Upon any voluntary or involuntary liquidation, dissolution or winding up of or any distribution of the assets of the Trust, the Charitable Trustee shall be entitled to receive, ratably with each other holder of Shares of the class or series of Shares that is held in the Charitable Trust, that portion of the assets of the Trust available for distribution to the holders of such class or series (determined based upon the ratio that the number of Shares or such class or series of Shares held by the Charitable Trustee bears to the total number of Shares of such class or series of Shares then outstanding). The Charitable Trustee shall distribute any such assets received in respect of the Shares held in the Charitable Trust in any liquidation, dissolution or winding up of, or distribution of the assets of the Trust, in accordance with Section 7.3.5.
Section 7.3.5 Sale of Shares by Charitable Trustee. Within 20 days of receiving notice from the Trust that Shares have been transferred to the Charitable Trust, the Charitable Trustee of the Charitable Trust shall sell the Shares held in the Charitable Trust to a person, designated by the Charitable Trustee, whose ownership of the Shares will not violate the ownership limitations set forth in Section 7.2.1(a). Upon such sale, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.5. The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the Shares or, if the Prohibited Owner did not give value for the Shares in connection with the event causing the Shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other such
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transaction), the Market Price of the Shares on the day of the event causing the Shares to be held in the Charitable Trust and (2) the price per share received by the Charitable Trustee from the sale or other disposition of the Shares held in the Charitable Trust. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Trust that Shares have been transferred to the Charitable Trustee, such Shares are sold by a Prohibited Owner, then (i) such Shares shall be deemed to have been sold on behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner received an amount for such Shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 7.3.5, such excess shall be paid to the Charitable Trustee upon demand.
Section 7.3.6 Purchase Right in Shares Transferred to the Charitable Trustee. Shares transferred to the Charitable Trustee shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer until the Charitable Trustee has sold the Shares held in the Charitable Trust pursuant to Section 7.3.5. Upon such a sale to the Trust, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.
Section 7.3.7 Designation of Charitable Beneficiaries. By written notice to the Charitable Trustee, the Trust shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) Shares held in the Charitable Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Sections 501(c)(3), 170(b)(1)(A) or 170(c)(2) of the Code.
Section 7.4 Restrictions on Ownership and Transfer of Shares by Benefit Plans.
Section 7.4.1 Ownership Limitations. Notwithstanding any other provisions herein, if and to the extent that any Shares do not constitute Publicly Offered Securities, then Benefit Plan Investors may not, on any date, hold, individually or in the aggregate, 25 percent or more of the value of such class of Shares. For purposes of determining whether Benefit Plan Investors hold, individually or in the aggregate, 25 percent or more of the value of such class of Shares, the value
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of Shares of such class held by any Trustee or officer of the Trust, or any other Person who has discretionary authority or control with respect to the assets of the Trust, or any Person who provides investment advice for a fee to the Trust in connection with its assets, shall be disregarded.
Section 7.4.2 Remedies for Violations by Benefit Plan Investors. If the Board of Trustees or any duly authorized committee thereof shall at any time determine in good faith that (i) a Transfer or other event has taken place that results in a violation of Section 7.4.1 or will otherwise result in the underlying assets and property of the Trust becoming assets of any ERISA Investor or (ii) that a Person intends to acquire or has attempted to acquire or hold Shares in a manner that will result in a violation of Section 7.4.1 or will otherwise result in the underlying assets and property of the Trust becoming assets of any ERISA Investor, the Board of Trustees or a committee thereof shall take such action as it deems advisable to mitigate, prevent or cure the consequences that might result to the Trust from such Transfer or other event, including without limitation, refusing to give effect to or preventing such Transfer or event through redemption of such Shares or refusal to give effect to the Transfer or event on the books of the Trust, or instituting proceedings to enjoin such Transfer or other event.
Section 7.4.3 Information on Benefit Plan Status. Any Person who acquires or attempts or intends to acquire or hold Shares shall provide to the Trust such information as the Trust may request in order to determine whether such acquisition or holding has or will result in a violation of Section 7.4.1 or otherwise result in the underlying assets and property of the Trust becoming assets of any ERISA Investor, including the name and address of any Person for whom a nominee holds Shares and whether the underlying assets of such Person include assets of any Benefit Plan Investor.
Section 7.5 NYSE Transactions. Nothing in this Article VII shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system; provided, that the fact that the settlement of any transaction takes place shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII.
Section 7.6 Enforcement. The Trust is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII.
Section 7.7 Non-Waiver. No delay or failure on the part of the Trust or the Board of Trustees in exercising any
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right hereunder shall operate as a waiver of any right of the Trust or the Board of Trustees, as the case may be, except to the extent specifically waived in writing.
ARTICLE VIII
SHAREHOLDERS
Section 8.1 Meetings. There shall be an annual meeting of the Shareholders, to be held on proper notice at such time (after the delivery of the annual report as provided in the Bylaws) and convenient location as shall be determined by or in the manner prescribed in the Bylaws, for the election of the Trustees, if required, and for the transaction of any other business within the powers of the Trust. Except as otherwise provided in this Declaration of Trust, special meetings of Shareholders may be called in the manner provided in the Bylaws. If there are no Trustees, the officers of the Trust shall promptly call a special meeting of the Shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws.
Section 8.2 Voting Rights. Subject to the provisions of any class or series of Shares then outstanding, the Shareholders shall be entitled to vote only on the following matters: (a) election of Trustees as provided in Section 5.4 and the removal of Trustees as provided in Section 5.5; (b) amendment of this Declaration of Trust as provided in Article X; (c) termination of the Trust as provided in Section 12.2; (d) reorganization, merger or consolidation of the Trust, or the sale or disposition of substantially all of the property of the Trust, as provided in Article XI; (e) such other matters with respect to which the Board of Trustees has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the Shareholders for approval or ratification (including, without limitation, a resolution recommending the termination of the Trusts status as a real estate investment trust under the Code pursuant to Section 5.2(u) hereof); and (f) such other matters as may be properly brought before a meeting by a Shareholder pursuant to the Bylaws. Except with respect to the foregoing matters, no action taken by the Shareholders at any meeting shall in any way bind the Board of Trustees.
Section 8.3 Preemptive and Appraisal Rights. Except as may be provided by the Board of Trustees in setting the terms of classified or reclassified Preferred Shares pursuant to Section 6.3, no holder of Shares shall, as such holder, (a) have any preemptive right to purchase or subscribe for any additional Shares of the Trust or any other security of the Trust which it may issue or sell or (b) except as expressly required by Title 8, have any right to require the Trust to pay him the fair value of his Shares in an appraisal or similar proceeding.
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Section 8.4 Extraordinary Actions. Except as otherwise specifically provided in this Declaration of Trust (including without limitation, in those provisions relating to election and removal of Trustees and changes in the number of authorized Shares), notwithstanding any provision of law permitting or requiring any action to be taken or authorized by the affirmative vote of the holders of a greater number of votes, any such action shall be effective and valid if taken or authorized by the affirmative vote of not less than [sixty-six and two-thirds percent (66 2/3%)] of all the votes entitled to be cast on the matter.
Section 8.5 Action By Shareholders without a Meeting. Subject to Title 8 and any other applicable provisions of law, the Bylaws may provide that any action required or permitted to be taken at a meeting of the Shareholders may be taken without a meeting by the written consent of all Shareholders entitled to vote on such matter; provided, that all Shareholders entitled to notice of any such meeting but not entitled to vote on such matter shall have made a written waiver of any right to dissent to such action taken without a meeting.
ARTICLE IX
LIABILITY LIMITATION, INDEMNIFICATION AND
TRANSACTIONS WITH THE TRUST
Section 9.1 Limitation of Shareholders Liability. No Shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a Shareholder, nor shall any Shareholders be subject to any personal liability whatsoever, in tort, contract or otherwise, to any person in connection with the property or the affairs of the Trust by reason of his being a Shareholder.
Section 9.2 Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholders for money damages. Neither the amendment nor repeal of this Section 9.2, nor the adoption or amendment of any other provision of this Declaration of Trust inconsistent with this Section 9.2, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of
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trustees and officers of a Maryland real estate investment trust for money damages in a suit by or on behalf of the Trust or by any Shareholders, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholders for money damages except to the extent that (a) the Trustee or officer actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received, or (b) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustees or officers action or failure to act was material to the cause of action adjudicated in the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty.
Section 9.3 Indemnification. The Trust shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former Shareholder, Trustee or officer of the Trust or (b) any individual who, while a Trustee of the Trust and at the request of the Trust, serves or has served as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former Shareholder, Trustee or officer of the Trust. The Trust shall have the power, with the approval of its Board of Trustees, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Trust in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust.
Section 9.4 Transactions Between the Trust and its Trustees, Officers, Employees and Agents. Subject to any express restrictions in this Declaration of Trust or adopted by the Trustees in the Bylaws or by resolution, the Trust may enter into any contract or transaction of any kind with any person, including any Trustee, officer, employee or agent of the Trust or any person affiliated with a Trustee, officer, employee or agent of the Trust, whether or not any of them has a financial interest in such transaction.
Section 9.5 Express Exculpatory Clauses in Instruments. The Board of Trustees shall cause to be inserted in every written agreement, undertaking or obligation made or issued on behalf of the Trust, an appropriate provision to the effect that neither the Shareholders nor the Trustees, officers, employees or agents of the Trust shall be liable under any written instrument creating an obligation of the Trust, and all
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persons shall look solely to the property of the Trust for the payment of any claim under or for the performance of that instrument. The omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any Shareholder, Trustee, officer, employee or agent liable thereunder to any third party nor shall the Trustees or any officer, employee or agent of the Trust be liable to anyone for such omission.
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ARTICLE X
AMENDMENTS
Section 10.1 General. The Trust reserves the right from time to time to make any amendment to this Declaration of Trust, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in this Declaration of Trust, of any Shares. All rights and powers conferred by this Declaration of Trust on Shareholders, Trustees and officers are granted subject to this reservation. Articles of Amendment to this Declaration of Trust (a) shall be signed and acknowledged by at least a majority of the Trustees, or an officer duly authorized by at least a majority of the Trustees, (b) shall be filed for record as provided in Section 13.5 and (c) shall become effective as of the later of the time the SDAT accepts the Articles of Amendment for record or the time established in the Articles of Amendment, not to exceed 30 days after the Articles of Amendment are accepted for record. All references to this Declaration of Trust shall include all amendments thereto.
Section 10.2 By Trustees. The Trustees may amend this Declaration of Trust from time to time, in the manner provided by Title 8, without any action by the Shareholders, to qualify as a real estate investment trust under the Code or under Title 8.
Section 10.3 By Shareholders. Except as otherwise provided in this Declaration of Trust, any amendment to this Declaration of Trust shall be valid only if proposed in a resolution adopted by the Board of Trustees, which resolution shall set forth the proposed amendment and declare that it is advisable, and approved at an annual or special meeting of Shareholders by the affirmative vote of not less than two-thirds of all the votes entitled to be cast on the matter.
ARTICLE XI
REORGANIZATION; MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY
Section 11.1 Reorganization. Subject to the provisions of any class or series of Shares at the time outstanding, the Trustees shall have the power (i) to cause the organization of a corporation, association, trust or other organization to take over the property of the Trust and carry on the affairs of the Trust, or (ii) merge the Trust into, or sell, convey and transfer the property of the Trust to, any such corporation, association, trust or organization in exchange for securities thereof or beneficial interests therein, and the assumption by the transferee of the liabilities of the Trust, and upon the occurrence of (i) or (ii) above terminate the Trust and deliver such securities or beneficial interests ratably among the
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Shareholders according to the respective rights of the class or series of Shares held by them; provided, however, that any such action shall have been approved, at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote thereon.
Section 11.2 Merger, Consolidation or Sale of Property of the Trust. Subject to the provisions of any class or series of Shares at the time outstanding, the Trustees shall have the power to (a) merge into another entity, (b) consolidate the Trust with one or more other entities into a new entity or (c) sell, lease, exchange or otherwise transfer or dispose of all or substantially all of the property of the Trust. Any such action must be approved by the Board of Trustees and, after notice to all Shareholders entitled to vote on the matter, by the affirmative vote of not less than two-thirds of all the votes entitled to be cast on the matter.
ARTICLE XII
DURATION AND TERMINATION OF TRUST
Section 12.1 Duration. The Trust shall continue perpetually unless terminated pursuant to Section 12.2 or pursuant to any applicable provision of Title 8.
Section 12.2 Termination.
(a) Subject to the provisions of any class or series of Shares at the time outstanding, the Trust may be terminated at any meeting of Shareholders, by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter. Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration of Trust shall continue, including the powers to fulfill or discharge the Trusts contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining property of the Trust to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business.
(iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such
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releases, indemnities and agreements as they deem necessary for their protection, the Trustees may distribute the remaining property of the Trust among the Shareholders so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares at the time outstanding shall be entitled, the remaining property of the Trust shall, subject to any participating or similar rights of Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding.
(b) After termination of the Trust, the liquidation of its business and the distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and file with the Trusts records a document certifying that the Trust has been duly terminated, and the Trustees shall be discharged from all liabilities and duties hereunder, and the rights and interests of all Shareholders shall cease.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Governing Law. This Declaration of Trust is executed by the undersigned Trustees and delivered in the State of Maryland with reference to the laws thereof, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof.
Section 13.2 Reliance by Third Parties. Any certificate shall be final and conclusive as to any person dealing with the Trust if executed by the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a) the number or identity of Trustees, officers of the Trust or Shareholders; (b) the due authorization of the execution of any document; (c) the action or vote taken, and the existence of a quorum, at a meeting of the Board of Trustees or Shareholders; (d) a copy of this Declaration of Trust or of the Bylaws as a true and complete copy as then in force; (e) an amendment to this Declaration of Trust; (f) the termination of the Trust; or (g) the existence of any fact or relating to the affairs of the Trust. No purchaser, lender, transfer agent or other person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trust on its behalf or by any officer, employee or agent of the Trust.
Section 13.3 Severability.
(a) The provisions of this Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any one or more of such provisions
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(the Conflicting Provisions) are in conflict with the Code, Title 8 or other applicable federal or state laws, the Conflicting Provisions, to the extent of the conflict, shall be deemed never to have constituted a part of this Declaration of Trust, even without any amendment of this Declaration of Trust pursuant to Article X and without affecting or impairing any of the remaining provisions of this Declaration of Trust or rendering invalid or improper any action taken or omitted prior to such determination. No Trustee shall be liable for making or failing to make such a determination.
(b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall apply only to the extent of any such invalidity or unenforceability and shall not in any manner affect, impair or render invalid or unenforceable such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction.
Section 13.4 Construction. In this Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts are inserted for convenience and shall not affect the meaning, construction or effect of this Declaration of Trust. In defining or interpreting the powers and duties of the Trust and its Trustees and officers, reference may be made by the Trustees or officers, to the extent appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3 of the Corporations and Associations Article of the Annotated Code of Maryland.
Section 13.5 Recordation. This Declaration of Trust and any Articles of Amendment hereto shall be filed for record with the SDAT and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record this Declaration of Trust or any Articles of Amendment hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of this Declaration of Trust or any amendment hereto. A restated Declaration of Trust shall, upon filing, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration of Trust and the various Articles of Amendment thereto.
THIRD: The amendment to and restatement of the Declaration of Trust of the Trust as hereinabove set forth has been duly approved and advised by the Board of Trustees by majority vote thereof and approved by the sole shareholder of the Trust as required by law.
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FOURTH: The current address of the principal office of the Trust is 220 East 42nd Street, New York, New York 10017.
FIFTH: The name and address of the Trusts current resident agent is as set forth in Article IV of the foregoing amendment and restatement of the Declaration of Trust of the Trust.
SIXTH: The number of trustees of the Trust and the names of those currently in office are as set forth in Article V of the foregoing amendment and restatement of the Declaration of Trust of the Trust.
IN WITNESS WHEREOF, these Articles of Amendment and Restatement of Declaration of Trust have been signed on this 24th day of April, 1998 by all of the Trustees of the Trust, each of whom acknowledges, that this document is his free act and deed, and that to the best of his knowledge, information, and belief, the matters and facts set forth herein are true in all material respects and that the statement is made under the penalties for perjury.
/s/ Stuart L. Scott |
Stuart L. Scott |
/s/ Jon E. Bortz |
Jon E. Bortz |
LASALLE HOTEL PROPERTIES
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF 10 1 / 4 % SERIES A CUMULATIVE REDEEMABLE PREFERRED SHARES, $.01 PAR VALUE PER SHARE
LASALLE HOTEL PROPERTIES, a Maryland real estate investment trust (the Trust), having its principal office in Bethesda, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Trustees by Article VI Section 6.3 of the Articles of Amendment and Restatement of Declaration of Trust, dated April 24, 1998, as amended (the Declaration of Trust), the Trustees have duly classified and designated 4,000,000 Preferred Shares of the Trust as 10 1 / 4 % Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, of the Trust (Series A Preferred Shares).
SECOND: The preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the Series A Preferred Shares are as follows,
10 1 / 4 % Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share
1. Designation and Number. A series of Preferred Shares, designated the 10 1 / 4 % Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, is hereby established. The number of authorized Series A Preferred Shares shall be 4,000,000.
2. Relative Seniority. The Series A Preferred Shares will, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Trust, rank (a) senior to all classes or series of Common Shares (as defined in the Declaration of Trust) and to all equity securities the terms of which provide that such equity securities shall rank junior to such Series A Preferred Shares; (b) on a parity with all equity securities issued by the Trust, other than those equity securities referred to in clauses (a) and (c); and (c) junior to all equity securities issued by the Trust which rank senior to the Series A Preferred Shares in accordance with Section 6(d). The term equity securities shall not include convertible debt securities.
3. Distributions.
(a) Holders of Series A Preferred Shares shall be entitled to receive, when and as authorized by the Trustees, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of ten and one-quarter percent (10 1 / 4 %) per annum of the Twenty-five Dollars ($25.00) per share liquidation preference of the Series A Preferred Shares (equivalent to a fixed annual amount of $2.5625 per
share). Such distributions shall accumulate on a daily basis and be cumulative from (but excluding) March 6, 2002 and be payable quarterly in equal amounts in arrears on the fifteenth day of January, April, July and October of each year, beginning on April 15, 2002 (each such day being hereinafter called a Distribution Payment Date); provided that if any Distribution Payment Date is not a Business Day (as hereinafter defined), then the distribution which would otherwise have been payable on such Distribution Payment Date may be paid on the next succeeding Business Day with the same force and effect as if paid on such Distribution Payment Date, and no interest or additional distributions or other sums shall accrue on the amount so payable from such Distribution Payment Date to such next succeeding Business Day. Any distribution payable on the Series A Preferred Shares for any partial distribution period shall be prorated and computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be payable to holders of record as they appear in the share records of the Trust at the close of business on the applicable record date, which shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Trustees for the payment of distributions that is not more than 90 nor less than 10 days prior to such Distribution Payment Date (each, a Distribution Record Date).
(b) No distribution on the Series A Preferred Shares shall be authorized by the Trustees or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law.
(c) Notwithstanding anything to the contrary contained herein, distributions on the Series A Preferred Shares shall accumulate whether or not the restrictions referred to in clause (b) exist, whether or not the Trust has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accumulated but unpaid distributions on the Series A Preferred Shares will accumulate as of the Distribution Payment Date on which they first become payable or on the date of redemption as the case may be.
(d) If any Series A Preferred Shares are outstanding, no full distributions will be authorized or paid or set apart for payment on any equity securities of the Trust of any other class or series ranking, as to distributions, on a parity with or junior to the Series A Preferred Shares unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series A Preferred Shares for all past distribution periods and the then current distribution period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series A Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series A Preferred Shares, all distributions authorized, paid or set apart for payment upon the Series A Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series A Preferred Shares shall be authorized and paid pro rata or authorized and set apart for payment pro rata so that the amount of distributions authorized per Series A Preferred Share and each such other equity security shall in all cases bear to each other the same ratio that accumulated distributions per Series A Preferred Share and other equity security (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such equity securities do not have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on Series A Preferred Shares which may be in arrears.
(e) Except as provided in clause (d), unless full cumulative distributions on the Series A Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than in Common Shares or other equity securities of the Trust ranking junior to the Series A Preferred Shares as to distributions and upon liquidation) shall be authorized or paid or set aside for payment nor shall any other distribution be authorized or made upon the Common Shares or any other equity securities of
the Trust ranking junior to or on a parity with the Series A Preferred Shares as to distributions or upon liquidation, nor shall any Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series A Preferred Shares as to distributions or upon liquidation be redeemed, purchased or otherwise acquired directly or indirectly for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such equity securities) by the Trust (except by conversion into or exchange for other equity securities of the Trust ranking junior to the Series A Preferred Shares as to distributions and upon liquidation, by redemption, purchase or acquisition of equity securities under incentive, benefit or share purchase plans of the Trust for officers, Trustees or employees or others performing or providing similar services, or by other redemption, purchase or acquisition of such equity securities for the purpose of preserving the Trusts status as a REIT).
(f) Holders of Series A Preferred Shares shall not be entitled to any distribution, whether payable in cash, property or shares, in excess of full cumulative distributions on the Series A Preferred Shares as described above. Any distribution payment made on the Series A Preferred Shares shall first be credited against the earliest accumulated but unpaid distribution due with respect to such shares which remains payable.
(g) In determining whether a distribution by dividend, redemption or other acquisition of the Trusts equity securities is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution.
(h) Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close.
4. Liquidation Rights.
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust (referred to herein sometimes as a liquidation), the holders of Series A Preferred Shares then outstanding shall be entitled to receive, out of the assets of the Trust legally available for distribution to shareholders (after payment or provision for payment of all debts and other liabilities of the Trust), a liquidation preference in cash of Twenty-five Dollars ($25.00) per Series A Preferred Share, plus an amount equal to all accumulated and unpaid distributions to the date of payment, before any distribution of assets is made to holders of Common Shares or any other equity securities of the Trust that rank junior to the Series A Preferred Shares as to liquidation rights.
(b) If, upon any such voluntary or involuntary liquidation, dissolution or winding up of the Trust, the assets of the Trust are insufficient to make full payment to holders of Series A Preferred Shares and to the corresponding amounts payable on all shares of other classes or series of equity securities of the Trust ranking on a parity with the Series A Preferred Shares as to liquidation rights, then the holders of the Series A Preferred Shares and all other such classes or series of equity securities shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
(c) Written notice of any such liquidation, dissolution or winding up of the Trust, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage pre-paid, not less than 30 nor more than 60 days prior to the payment date stated therein, to each record holder of the Series A Preferred Shares at the respective address of such holders as the same shall appear on the share transfer records of the Trust.
(d) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series A Preferred Shares will have no right or claim to any of the remaining assets of the Trust.
(e) None of a consolidation or merger of the Trust with or into another entity, a merger of another entity with or into the Trust, a statutory share exchange by the Trust or a sale, lease, transfer or conveyance of all or substantially all of the Trusts property or business shall be considered a liquidation, dissolution or winding up of the Trust.
5. Redemption
(a) The Series A Preferred Shares are not redeemable prior to March 6, 2007. To ensure that the Trust remains qualified as a real estate investment trust (REIT) for federal income tax purposes, however, the Series A Preferred Shares shall be subject to the provisions of Article VII of the Declaration of Trust pursuant to which Series A Preferred Shares owned by a shareholder in excess of the Ownership Limit (as defined in Article VII of the Declaration of Trust) shall automatically be transferred to a Charitable Trust (as defined in Article VII of the Declaration of Trust) and the Trust shall have the right to purchase such shares, as provided in Article VII of the Declaration of Trust. On and after March 6, 2007, the Trust, at its option, upon giving notice as provided below, may redeem the Series A Preferred Shares, in whole or from time to time in part, for cash, at a redemption price of Twenty-five Dollars ($25.00) per share, plus all accumulated and unpaid distributions on such Series A Preferred Shares to the date of such redemption (the Redemption Right).
(b) If fewer than all of the outstanding Series A Preferred Shares are to be redeemed pursuant to the Redemption Right, the shares to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional shares) or by lot or in such other equitable method prescribed by the Trustees. If such redemption is to be by lot and, as a result of such redemption, any holder of Series A Preferred Shares would become a holder of a number of Series A Preferred Shares in excess of the Ownership Limit because such holders Series A Preferred Shares were not redeemed, or were only redeemed in part then, except as otherwise provided in the Declaration of
Trust, the Trust will redeem the requisite number of Series A Preferred Shares of such holder such that no holder will hold in excess of the Ownership Limit subsequent to such redemption.
(c) Notwithstanding anything to the contrary contained herein, unless full cumulative distributions on all Series A Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series A Preferred Shares shall be redeemed unless all outstanding Series A Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase by the Trust of Series A Preferred Shares pursuant to Article VII of the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series A Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all Series A Preferred Shares. In addition, unless full cumulative distributions on all Series A Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distributions periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series A Preferred Shares (except by conversion into or exchange for equity securities of the Trust ranking junior to the Series A Preferred Shares as to distributions and upon liquidation; provided, however, that the foregoing shall not prevent any purchase or acquisition of Series A Preferred Shares for the purpose of preserving the Trusts status as a REIT or pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series A Preferred Shares.)
(d) Immediately prior to any redemption of Series A Preferred Shares, the Trust shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each holder of Series A Preferred Shares at the close of business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Trust will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series A Preferred Shares for which a notice of redemption has been given.
(e) The following provisions set forth the procedures for redemption:
(i) Notice of redemption will be given by publication in a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the redemption date. A similar notice will be
mailed by the Trust, postage prepaid, no less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series A Preferred Shares to be redeemed at their respective addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series A Preferred Shares except as to the holder to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the Series A Preferred Shares may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series A Preferred Shares to be redeemed; (D) the place or places where the Series A Preferred Shares are to be surrendered for payment of the redemption price; and (E) that distributions on the Series A Preferred Shares to be redeemed will cease to accumulate on such redemption date. If less than all of the Series A Preferred Shares held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of Series A Preferred Shares held by such holder to be redeemed.
(iii) On or after the redemption date, each holder of Series A Preferred Shares to be redeemed shall present and surrender the certificates representing his Series A Preferred Shares to the Trust at the place designated in the notice of redemption and thereupon the redemption price of such shares (including all accumulated and unpaid distributions up to the redemption date) shall be paid to or on the order of the person whose name appears on such certificate representing Series A Preferred Shares as the owner thereof and each surrendered certificate shall be canceled. If fewer than all the shares represented by any such certificate representing Series A Preferred Shares are to be redeemed, a new certificate shall be issued representing the unredeemed shares.
(iv) From and after the redemption date (unless the Trust defaults in payment of the redemption price), all distributions on the Series A Preferred Shares designated for redemption in such notice shall cease to accumulate and all rights of the holders thereof, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the Trusts share transfer records, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series A Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company, in which case the redemption notice to holders of the Series A Preferred Shares to be redeemed shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require such holders to surrender the certificates representing such shares at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the holders of the Series A Preferred Shares at the end of two years after the redemption date shall be returned by such bank or trust company to the Trust.
(f) Any Series A Preferred Shares that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series until such shares are once more designated as part of a particular series by the Trustees.
6. Voting Rights.
(a) Holders of the Series A Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law. In any matter in which the holders of Series A Preferred Shares are entitled to vote, each such holder shall have the right to one vote for each Series A Preferred Share held by such holder. If the holders of the Series A Preferred Shares and the holders of another series of preferred shares are entitled to vote together as a single class on any matter, the holders of the Series A Preferred Shares and the holders of such other preferred shares shall each have one vote for each $25.00 of liquidation preference.
(b) Whenever distributions on any Series A Preferred Shares shall be in arrears for six or more consecutive quarterly periods (a Preferred Distribution Default), the holders of Series A Preferred Shares (voting as a single class with all other equity securities upon which like voting rights have been conferred and are exercisable (Parity Preferred Shares)) will be entitled to vote for the election of a total of two additional trustees of the Trust (each, a Preferred Share Trustee) at a special meeting called by the holders of at least 10% of the outstanding
Series A Preferred Shares or the holders of at least 10% of any other series of Parity Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of shareholders) or, if the request for a special meeting is received by the Trust less than 90 days before the date fixed for the next annual or special meeting of shareholders, at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on the Series A Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or authorized and a sum sufficient for the payment thereof set aside for payment in full.
(c) If and when all accumulated distributions and the distribution for the then current distribution period on the Series A Preferred Shares shall have been paid in full or authorized and set aside for payment in full, the holders of Series A Preferred Shares shall be divested of the voting rights set forth in clause (b) above (subject to revesting in the event of each and every Preferred Distribution Default) and, if all accumulated distributions and the distribution for the current distribution period have been paid in full or authorized by the Trustees and set aside for payment in full on all other series of Parity Preferred Shares upon which like voting rights have been conferred and are exercisable, the term of office of each Preferred Share Trustee so elected shall terminate. Any Preferred Share Trustee may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of a majority of the outstanding Series A Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Share Trustee may be filled by written consent of the Preferred Share Trustee remaining in office, or if none remains in office, by a vote of the holders of a majority of the outstanding Series A Preferred Shares when they have the voting rights set forth in
clause (b) above and all other series of Parity Preferred Shares (voting as a single class). The Preferred Share Trustees shall each be entitled to one vote per trustee on any matter.
(d) So long as any Series A Preferred Shares remain outstanding, the Trust shall not, without the affirmative vote of the holders of at least two-thirds of the Series A Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of equity securities ranking senior to the Series A Preferred Shares with respect to payment of distributions or the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, or reclassify any authorized equity securities of the Trust into any such equity securities, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such equity securities; or (ii) amend, alter or repeal the provisions of the Declaration of Trust (including these Articles Supplementary), whether by merger or consolidation (in either case, an Event) or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series A Preferred Shares or the holders thereof; provided, however, that with respect to the occurrence of any Event set forth in (ii) above, so long as Series A Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity and such surviving entity may thereafter be the issuer of the Series A Preferred Shares, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the holders of the Series A Preferred Shares; and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other class or series of equity securities, or (y) any increase in the amount of authorized Series A Preferred Shares or any other class or series of equity securities, in the case of each of (x) or (y) above ranking on a parity with or junior to the Series A Preferred Shares with respect to payment of distributions and the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
(e) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series A Preferred Shares shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
7. Conversion. The Series A Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust at the option of holders thereof.
8. Application of Article VII. The Series A Preferred Shares are subject to the provisions of Article VII of the Declaration of Trust.
SECOND: The Series A Preferred Shares have been classified and designated by the Trustees under the authority contained in the Declaration of Trust.
THIRD: These Articles Supplementary have been approved by the Trustees in the manner and by the vote required by law.
FOURTH: These Articles Supplementary shall be effective at the time the State Department of Assessments and Taxation of Maryland accepts these Articles Supplementary for record.
FIFTH: The undersigned President of the Trust acknowledges these Articles Supplementary to be the act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, LASALLE HOTEL PROPERTIES has caused these Articles Supplementary to be signed in its name and on its behalf by its President and witnessed by its Secretary on February 28, 2002.
WITNESS: | LASALLE HOTEL PROPERTIES | |||||
/s/ Hans S. Weger |
By: |
/s/ Jon E. Bortz |
||||
Hans S. Weger | Jon E. Bortz | |||||
Secretary | President |
LASALLE HOTEL PROPERTIES
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF
8.375% SERIES B CUMULATIVE REDEEMABLE PREFERRED SHARES,
$.01 PAR VALUE PER SHARE
LASALLE HOTEL PROPERTIES, a Maryland real estate investment trust (the Trust), having its principal office in Bethesda, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Trustees by Article VI Section 6.3 of the Articles of Amendment and Restatement of Declaration of Trust, dated April 24, 1998, as amended (the Declaration of Trust), the Trustees have duly classified and designated 1,200,000 Preferred Shares of the Trust as 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, of the Trust (Series B Preferred Shares).
SECOND: The preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the Series B Preferred Shares are as follows,
8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share
1. Designation and Number . A series of Preferred Shares, designated the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, is hereby established. The number of authorized Series B Preferred Shares shall be 1,200,000.
2. Relative Seniority . The Series B Preferred Shares will, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Trust, rank (a) senior to all classes or series of Common Shares (as defined in the Declaration of Trust) and to all equity securities the terms of which provide that such equity securities shall rank junior to such Series B Preferred Shares; (b) on a parity with all equity securities issued by the Trust, other than those equity securities referred to in clauses (a) and (c); and (c) junior to all equity securities issued by the Trust which rank senior to the Series B Preferred Shares in accordance with Section 6(d). The term equity securities shall not include convertible debt securities.
3. Distributions .
(a) Holders of Series B Preferred Shares shall be entitled to receive, when and as authorized by the Trustees, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of eight and three-eighths percent (8.375%) per annum of the Twenty-five Dollars ($25.00) per share liquidation preference of the Series B Preferred Shares (equivalent to a fixed annual amount of $2.09375 per share). Such distributions shall accumulate on a daily basis and be cumulative from (but excluding) September 30, 2003 and be payable quarterly in equal amounts in arrears on the fifteenth day of January, April, July and October of each year, beginning on January 15, 2004 (each such day being hereinafter called a Distribution Payment Date); provided that if any Distribution Payment Date is not a Business Day (as hereinafter defined), then the distribution which would otherwise have been payable on such Distribution Payment Date may be paid on the next succeeding Business Day with the same force and effect as if paid on such Distribution Payment Date, and no interest or additional distributions or other sums shall accrue on the amount so payable from such Distribution Payment Date to such next succeeding Business Day. Any distribution payable on the Series B Preferred Shares for any partial distribution period shall be prorated and computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be payable to holders of record as they appear in
the share records of the Trust at the close of business on the applicable record date, which shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Trustees for the payment of distributions that is not more than 90 nor less than 10 days prior to such Distribution Payment Date (each, a Distribution Record Date).
(b) No distribution on the Series B Preferred Shares shall be authorized by the Trustees or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law.
(c) Notwithstanding anything to the contrary contained herein, distributions on the Series B Preferred Shares shall accumulate whether or not the restrictions referred to in clause (b) exist, whether or not the Trust has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accumulated but unpaid distributions on the Series B Preferred Shares will accumulate as of the Distribution Payment Date on which they first become payable or on the date of redemption as the case may be.
(d) If any Series B Preferred Shares are outstanding, no full distributions will be authorized or paid or set apart for payment on any equity securities of the Trust of any other class or series ranking, as to distributions, on a parity with or junior to the Series B Preferred Shares unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series B Preferred Shares for all past distribution periods and the then current distribution period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series B Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series B Preferred Shares, all distributions authorized, paid or set apart for payment upon the Series B Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series B Preferred Shares shall be authorized and paid pro rata or authorized and set apart for payment pro rata so that the amount of distributions authorized per Series B Preferred Share and each such other equity security shall in all cases bear to each other the same ratio that accumulated distributions per Series B Preferred Share and other equity security (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such equity securities do not have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on Series B Preferred Shares which may be in arrears.
(e) Except as provided in clause (d), unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than in Common Shares or other equity securities of the Trust ranking junior to the Series B Preferred Shares as to distributions and upon liquidation) shall be authorized or paid or set aside for payment nor shall any other distribution be authorized or made upon the Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series B Preferred Shares as to distributions or upon liquidation, nor shall any Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series B Preferred Shares as to distributions or upon liquidation be redeemed, purchased or otherwise acquired directly or indirectly for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such equity securities) by the Trust (except by conversion into or exchange for other equity securities of the Trust ranking junior to the Series B Preferred Shares as to distributions and upon liquidation, by redemption, purchase or acquisition of equity securities under incentive, benefit or share purchase plans of the Trust for officers, Trustees or employees or others performing or providing similar services, or by other redemption, purchase or acquisition of such equity securities for the purpose of preserving the Trusts status as a REIT).
(f) Holders of Series B Preferred Shares shall not be entitled to any distribution, whether payable in cash, property or shares, in excess of full cumulative distributions on the Series B Preferred Shares as described above. Any distribution payment made on the Series B Preferred Shares shall first be credited against the earliest accumulated but unpaid distribution due with respect to such shares which remains payable.
(g) In determining whether a distribution by dividend, redemption or other acquisition of the Trusts equity securities is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution.
(h) Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close.
4. Liquidation Rights .
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust (referred to herein sometimes as a liquidation), the holders of Series B Preferred Shares then outstanding shall be entitled to receive, out of the assets of the Trust legally available for distribution to shareholders (after payment or provision for payment of all debts and other liabilities of the Trust), a liquidation preference in cash of Twenty-five Dollars ($25.00) per Series B Preferred Share, plus an amount equal to all accumulated and unpaid distributions to the date of payment, before any distribution of assets is made to holders of Common Shares or any other equity securities of the Trust that rank junior to the Series B Preferred Shares as to liquidation rights.
(b) If, upon any such voluntary or involuntary liquidation, dissolution or winding up of the Trust, the assets of the Trust are insufficient to make full payment to holders of Series B Preferred Shares and to the corresponding amounts payable on all shares of other classes or series of equity securities of the Trust ranking on a parity with the Series B Preferred Shares as to liquidation rights, then the holders of the Series B Preferred Shares and all other such classes or series of equity securities shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
(c) Written notice of any such liquidation, dissolution or winding up of the Trust, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage pre-paid, not less than 30 nor more than 60 days prior to the payment date stated therein, to each record holder of the Series B Preferred Shares at the respective address of such holders as the same shall appear on the share transfer records of the Trust.
(d) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series B Preferred Shares will have no right or claim to any of the remaining assets of the Trust.
(e) None of a consolidation or merger of the Trust with or into another entity, a merger of another entity with or into the Trust, a statutory share exchange by the Trust or a sale, lease, transfer or conveyance of all or substantially all of the Trusts property or business shall be considered a liquidation, dissolution or winding up of the Trust.
5. Redemption
(a) The Series B Preferred Shares are not redeemable prior to September 30, 2008. To ensure that the Trust remains qualified as a real estate investment trust (REIT) for federal income tax purposes, however, the Series B Preferred Shares shall be subject to the provisions of Article VII of the Declaration of Trust pursuant to which Series B Preferred Shares owned by a shareholder in excess of the Ownership Limit (as defined in Article VII of the Declaration of Trust) shall automatically be transferred to a Charitable Trust (as defined in Article VII of the Declaration of Trust) and the Trust shall have the right to purchase such shares, as provided in Article VII of the Declaration of Trust. On and after September 30, 2008, the Trust, at its option, upon giving notice as provided below, may redeem the Series B Preferred Shares, in whole or from time to time in part, for cash, at a redemption price of Twenty-five Dollars ($25.00) per share, plus all accumulated and unpaid distributions on such Series B Preferred Shares to the date of such redemption (the Redemption Right).
(b) If fewer than all of the outstanding Series B Preferred Shares are to be redeemed pursuant to the Redemption
Right, the shares to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional shares) or by lot or in such other equitable method prescribed by the Trustees. If such redemption is to be by lot and, as a result of such redemption, any holder of Series B Preferred Shares would become a holder of a number of Series B Preferred Shares in excess of the Ownership Limit because such holders Series B Preferred Shares were not redeemed, or were only redeemed in part then, except as otherwise provided in the Declaration of Trust, the Trust will redeem the requisite number of Series B Preferred Shares of such holder such that no holder will hold in excess of the Ownership Limit subsequent to such redemption.
(c) Notwithstanding anything to the contrary contained herein, unless full cumulative distributions on all Series B Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series B Preferred Shares shall be redeemed unless all outstanding Series B Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase by the Trust of Series B Preferred Shares pursuant to Article VII of the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series B Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all Series B Preferred Shares. In addition, unless full cumulative distributions on all Series B Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distributions periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series B Preferred Shares (except by conversion into or exchange for equity securities of the Trust ranking junior to the Series B Preferred Shares as to distributions and upon liquidation; provided, however , that the foregoing shall not prevent any purchase or acquisition of Series B Preferred Shares for the purpose of preserving the Trusts status as a REIT or pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series B Preferred Shares.)
(d) Immediately prior to any redemption of Series B Preferred Shares, the Trust shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each holder of Series B Preferred Shares at the close of business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Trust will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series B Preferred Shares for which a notice of redemption has been given.
(e) The following provisions set forth the procedures for redemption:
(i) Notice of redemption will be given by publication in a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the redemption date. A similar notice will be mailed by the Trust, postage prepaid, no less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series B Preferred Shares to be redeemed at their respective addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series B Preferred Shares except as to the holder to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the Series B Preferred Shares may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series B Preferred Shares to be redeemed; (D) the place or places where the Series B Preferred Shares are to be surrendered for payment of the redemption price; and (E) that distributions on the Series B Preferred Shares to be redeemed will cease to accumulate on such redemption date. If less than all of the Series B Preferred Shares held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of Series B Preferred Shares held by such holder to be redeemed.
(iii) On or after the redemption date, each holder of Series B Preferred Shares to be redeemed shall present and surrender the certificates representing his Series B Preferred Shares to the Trust at the place designated in the notice of redemption and thereupon the redemption price of such shares (including all accumulated and unpaid distributions up to the redemption date) shall be paid to or on the order of the person whose name appears on such certificate representing Series B Preferred Shares as the owner thereof and each surrendered certificate shall be canceled. If fewer than all the shares represented by any such certificate representing Series B Preferred Shares are to be redeemed, a new certificate shall be issued representing the unredeemed shares.
(iv) From and after the redemption date (unless the Trust defaults in payment of the redemption price), all distributions on the Series B Preferred Shares designated for redemption in such notice shall cease to accumulate and all rights of the holders thereof, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the Trusts share transfer records, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series B Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company, in which case the redemption notice to holders of the Series B Preferred Shares to be redeemed shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require such holders to surrender the certificates representing such shares at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the holders of the Series B Preferred Shares at the end of two years after the redemption date shall be returned by such bank or trust company to the Trust.
(f) Any Series B Preferred Shares that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series until such shares are once more designated as part of a particular series by the Trustees.
6. Voting Rights .
(a) Holders of the Series B Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law. In any matter in which the holders of Series B Preferred Shares are entitled to vote, each such holder shall have the right to one vote for each Series B Preferred Share held by such holder. If the holders of the Series B Preferred Shares and the holders of another series of preferred shares are entitled to vote together as a single class on any matter, the holders of the Series B Preferred Shares and the holders of such other preferred shares shall each have one vote for each $25.00 of liquidation preference.
(b) Whenever distributions on any Series B Preferred Shares shall be in arrears for six or more quarterly periods, whether or not consecutive (a Preferred Distribution Default), the holders of Series B Preferred Shares (voting as a single class with all other equity securities upon which like voting rights have been conferred and are exercisable (Parity Preferred Shares)) will be entitled to vote for the election of a total of two additional trustees of the Trust (each, a Preferred Share Trustee) at a special meeting called by the holders of at least 10% of the outstanding Series B Preferred Shares or the holders of at least 10% of any other series of Parity Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of shareholders) or, if the request for a special meeting is received by the Trust less than 90 days before the date fixed for the next annual or special meeting of shareholders, at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on the Series B Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or authorized and a sum sufficient for the payment thereof set aside for payment in full.
(c) If and when all accumulated distributions and the distribution for the then current distribution period on the Series B Preferred Shares shall have been paid in full or authorized and set aside for payment in full, the holders of Series B Preferred Shares shall be divested of the voting rights set forth in clause (b) above (subject to revesting in the event of each and every Preferred Distribution Default) and, if all accumulated distributions and the distribution for the current distribution period have been paid in full or authorized by the Trustees and set aside for payment in full on all other series of Parity Preferred Shares upon which like voting rights have been
conferred and are exercisable, the term of office of each Preferred Share Trustee so elected shall terminate. Any Preferred Share Trustee may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of a majority of the outstanding Series B Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Share Trustee may be filled by written consent of the Preferred Share Trustee remaining in office, or if none remains in office, by a vote of the holders of a majority of the outstanding Series B Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). The Preferred Share Trustees shall each be entitled to one vote per trustee on any matter.
(d) So long as any Series B Preferred Shares remain outstanding, the Trust shall not, without the affirmative vote of the holders of at least two-thirds of the Series B Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of equity securities ranking senior to the Series B Preferred Shares with respect to payment of distributions or the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, or reclassify any authorized equity securities of the Trust into any such equity securities, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such equity securities; or (ii) amend, alter or repeal the provisions of the Declaration of Trust (including these Articles Supplementary), whether by merger or consolidation (in either case, an Event) or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series B Preferred Shares or the holders thereof; provided, however , that with respect to the occurrence of any Event set forth in (ii) above, so long as Series B Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity and such surviving entity may thereafter be the issuer of the Series B Preferred Shares, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the holders of the Series B Preferred Shares; and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other class or series of equity securities, or (y) any increase in the amount of authorized Series B Preferred Shares or any other class or series of equity securities, in the case of each of (x) or (y) above ranking on a parity with or junior to the Series B Preferred Shares with respect to payment of distributions and the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
(e) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series B Preferred Shares shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
7. Conversion . The Series B Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust at the option of holders thereof.
8. Application of Article VII . The Series B Preferred Shares are subject to the provisions of Article VII of the Declaration of Trust.
SECOND: The Series B Preferred Shares have been classified and designated by the Trustees under the authority contained in the Declaration of Trust.
THIRD: These Articles Supplementary have been approved by the Trustees in the manner and by the vote required by law.
FOURTH: These Articles Supplementary shall be effective at the time the State Department of Assessments and Taxation of Maryland accepts these Articles Supplementary for record.
FIFTH: The undersigned President of the Trust acknowledges these Articles Supplementary to be the act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, LASALLE HOTEL PROPERTIES has caused these Articles Supplementary to be signed in its name and on its behalf by its President and witnessed by its Secretary on September 23, 2003.
WITNESS: | LASALLE HOTEL PROPERTIES | |||||
/s/ HANS S. WEGER |
By: |
/s/ JON E. BORTZ |
||||
Hans S. Weger Secretary |
Jon E. Bortz President |
LASALLE HOTEL PROPERTIES
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF
7.25% SERIES C CUMULATIVE REDEEMABLE PREFERRED
SHARES OF BENEFICIAL INTEREST,
$.01 PAR VALUE PER SHARE
LASALLE HOTEL PROPERTIES, a Maryland real estate investment trust (the Trust), having its principal office in Bethesda, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST : Pursuant to authority expressly vested in the Trustees by Article VI, Section 6.3 of the Articles of Amendment and Restatement of Declaration of Trust, dated April 24, 1998, as amended (the Declaration of Trust), the Trustees have duly classified and designated 2,450,000 shares of the authorized but unissued preferred shares of the Trust as 7.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, of the Trust (Series C Preferred Shares).
SECOND : The preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the Series C Preferred Shares are as follows:
7.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share
1. Designation and Number . A series of Preferred Shares, designated the 7.25% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, is hereby established. The number of authorized Series C Preferred Shares shall be 2,450,000.
2. Relative Seniority . The Series C Preferred Shares will, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Trust, rank (a) senior to all classes or series of Common Shares (as defined in the Declaration of Trust) and to all equity securities the terms of which provide that such equity securities shall rank junior to such Series C Preferred Shares; (b) on a parity with all equity securities issued by the Trust, other than those equity securities referred to in clauses (a) and (c); and (c) junior to all equity securities issued by the Trust which rank senior to the Series C Preferred Shares in accordance with Section 6(d). The term equity securities shall not include convertible debt securities.
3. Distributions .
(a) Holders of Series C Preferred Shares shall be entitled to receive, when and as
authorized by the Trustees, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of seven and one-quarter percent (7.25%) per annum of the Twenty-five Dollars ($25.00) per share liquidation preference of the Series C Preferred Shares (equivalent to a fixed annual amount of $1.8125 per share). Such distributions shall accumulate on a daily basis and be cumulative from (but excluding) the original date of issuance and be payable quarterly in equal amounts in arrears on the fifteenth day of January, April, July and October of each year, beginning on October 15, 2005 (each such day being hereinafter called a Distribution Payment Date); provided that if any Distribution Payment Date is not a Business Day (as hereinafter defined), then the distribution which would otherwise have been payable on such Distribution Payment Date may be paid on the next succeeding Business Day with the same force and effect as if paid on such Distribution Payment Date, and no interest or additional distributions or other sums shall accrue on the amount so payable from such Distribution Payment Date to such next succeeding Business Day. Any distribution payable on the Series C Preferred Shares for any partial distribution period shall be prorated and computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be payable to holders of record as they appear in the share records of the Trust at the close of business on the applicable record date, which shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Trustees for the payment of distributions that is not more than 90 nor less than 10 days prior to such Distribution Payment Date (each, a Distribution Record Date).
(b) No distribution on the Series C Preferred Shares shall be authorized by the Trustees or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law.
(c) Notwithstanding anything to the contrary contained herein, distributions on the Series C Preferred Shares shall accumulate whether or not the restrictions referred to in clause (b) exist, whether or not the Trust has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accumulated but unpaid distributions on the Series C Preferred Shares will accumulate as of the Distribution Payment Date on which they first become payable or on the date of redemption, as the case may be. Accumulated and unpaid distributions will not bear interest.
(d) If any Series C Preferred Shares are outstanding, no distributions will be authorized or paid or set apart for payment on any equity securities of the Trust of any other class or series ranking, as to distributions, on a parity with or junior to the Series C Preferred Shares unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series C Preferred Shares for all past distribution periods and the then
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current distribution period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series C Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series C Preferred Shares, all distributions authorized, paid or set apart for payment upon the Series C Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series C Preferred Shares shall be authorized and paid pro rata or authorized and set apart for payment pro rata so that the amount of distributions authorized per Series C Preferred Share and each such other equity security shall in all cases bear to each other the same ratio that accumulated distributions per Series C Preferred Share and other equity security (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such equity securities do not have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on Series C Preferred Shares which may be in arrears.
(e) Except as provided in clause (d), unless full cumulative distributions on the Series C Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than in Common Shares or other equity securities of the Trust ranking junior to the Series C Preferred Shares as to distributions and upon liquidation) shall be authorized or paid or set apart for payment nor shall any other distribution be authorized or made upon the Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series C Preferred Shares as to distributions or upon liquidation, nor shall any Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series C Preferred Shares as to distributions or upon liquidation be redeemed, purchased or otherwise acquired directly or indirectly for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such equity securities) by the Trust (except by conversion into or exchange for other equity securities of the Trust ranking junior to the Series C Preferred Shares as to distributions and upon liquidation, by redemption, purchase or acquisition of equity securities under incentive, benefit or share purchase plans of the Trust for officers, Trustees or employees or others performing or providing similar services, or by other redemption, purchase or acquisition of such equity securities for the purpose of preserving the Trusts status as a REIT).
(f) Holders of Series C Preferred Shares shall not be entitled to any distribution, whether payable in cash, property or shares, in excess of full cumulative distributions on the Series C Preferred Shares as described above. Any distribution payment made on the Series C Preferred Shares shall first be credited against the earliest accumulated but unpaid distribution due with respect to such shares which remains payable.
(g) In determining whether a distribution by dividend, redemption or other acquisition of the Trusts equity securities is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution.
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(h) Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close.
4. Liquidation Rights .
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust (referred to herein sometimes as a liquidation), the holders of Series C Preferred Shares then outstanding shall be entitled to receive, out of the assets of the Trust legally available for distribution to shareholders (after payment or provision for payment of all debts and other liabilities of the Trust), a liquidation preference in cash of Twenty-five Dollars ($25.00) per Series C Preferred Share, plus an amount equal to all accumulated and unpaid distributions to the date of payment, before any distribution of assets is made to holders of Common Shares or any other equity securities of the Trust that rank junior to the Series C Preferred Shares as to liquidation rights.
(b) If, upon any such voluntary or involuntary liquidation, dissolution or winding up of the Trust, the assets of the Trust are insufficient to make full payment to holders of Series C Preferred Shares and to the corresponding amounts payable on all shares of other classes or series of equity securities of the Trust ranking on a parity with the Series C Preferred Shares as to liquidation rights, then the holders of the Series C Preferred Shares and all other such classes or series of equity securities shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
(c) Written notice of any such liquidation, dissolution or winding up of the Trust, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage pre-paid, not less than 30 nor more than 60 days prior to the payment date stated therein, to each record holder of the Series C Preferred Shares at the respective address of such holders as the same shall appear on the share transfer records of the Trust.
(d) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series C Preferred Shares will have no right or claim to any of the remaining assets of the Trust.
(e) None of a consolidation or merger of the Trust with or into another entity, a merger of another entity with or into the Trust, a statutory share exchange by the Trust or a sale, lease, transfer or conveyance of all or substantially all of the Trusts property or business shall be considered a liquidation, dissolution or winding up of the Trust.
5. Redemption .
(a) Except as provided below, the Series C Preferred Shares are not redeemable
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prior to January 1, 2021. To ensure that the Trust remains qualified as a real estate investment trust (REIT) for federal income tax purposes, however, the Series C Preferred Shares shall be subject to the provisions of Article VII of the Declaration of Trust pursuant to which Series C Preferred Shares owned by a shareholder in excess of the Ownership Limit (as defined in Article VII of the Declaration of Trust) shall automatically be transferred to a Charitable Trust (as defined in Article VII of the Declaration of Trust) and the Trust shall have the right to purchase such shares, as provided in Article VII of the Declaration of Trust. Notwithstanding the first sentence of this Section 5(a), at any time during the period from January 1, 2016 to and including December 31, 2016, the Trust, at its option, upon giving notice as provided below, may redeem the Series C Preferred Shares, in whole or in part, for cash, at a redemption price of Twenty-five Dollars ($25.00) per share, plus all accumulated and unpaid distributions on such Series C Preferred Shares to the date of such redemption (the Redemption Right). The Trust may also exercise its Redemption Right at any time and from time to time on or after January 1, 2021, upon giving notice as provided below.
(b) If fewer than all of the outstanding Series C Preferred Shares are to be redeemed pursuant to the Redemption Right, the shares to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional shares) or by lot or in such other equitable method prescribed by the Trustees. If such redemption is to be by lot and, as a result of such redemption, any holder of Series C Preferred Shares would become a holder of a number of Series C Preferred Shares in excess of the Ownership Limit because such holders Series C Preferred Shares were not redeemed, or were only redeemed in part then, except as otherwise provided in the Declaration of Trust, the Trust will redeem the requisite number of Series C Preferred Shares of such holder such that no holder will hold in excess of the Ownership Limit subsequent to such redemption.
(c) Notwithstanding anything to the contrary contained herein, unless full cumulative distributions on all Series C Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series C Preferred Shares shall be redeemed unless all outstanding Series C Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase by the Trust of Series C Preferred Shares pursuant to Article VII of the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series C Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all Series C Preferred Shares. In addition, unless full cumulative distributions on all Series C Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distributions periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series C Preferred Shares (except by conversion into or exchange for equity securities of the Trust ranking junior to the Series C Preferred Shares as to distributions and upon
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liquidation; provided, however, that the foregoing shall not prevent any purchase or acquisition of Series C Preferred Shares for the purpose of preserving the Trusts status as a REIT or pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series C Preferred Shares.)
(d) Immediately prior to any redemption of Series C Preferred Shares, the Trust shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each holder of Series C Preferred Shares at the close of business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date (including any accrued and unpaid distributions for prior periods) notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Trust will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series C Preferred Shares for which a notice of redemption has been given.
(e) The following provisions set forth the procedures for redemption:
(i) Notice of redemption will be given by publication in a newspaper of general circulation in The City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the redemption date (and in any event no later than March 31, 2016, in the case of a redemption to occur between January 1, 2016 and December 31, 2016). A similar notice will be mailed by the Trust, postage prepaid, no less than 30 nor more than 60 days prior to the redemption date (and in any event no later than March 31, 2016, in the case of a redemption to occur between January 1, 2016 and December 31, 2016), addressed to the respective holders of record of the Series C Preferred Shares to be redeemed at their respective addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series C Preferred Shares except as to the holder to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the Series C Preferred Shares may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series C Preferred Shares to be redeemed; (D) the place or places where the Series C Preferred Shares are to be surrendered for payment of the redemption price; and (E) that distributions on the Series C Preferred Shares to be redeemed will cease to accumulate on such redemption date. If less than all of the Series C Preferred Shares held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of Series C Preferred Shares held by such holder to be redeemed.
(iii) On or after the redemption date, each holder of Series C Preferred Shares to be redeemed shall present and surrender the certificates representing his Series C Preferred
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Shares to the Trust at the place designated in the notice of redemption and thereupon the redemption price of such shares (including all accumulated and unpaid distributions up to the redemption date) shall be paid to or on the order of the person whose name appears on such certificate evidencing Series C Preferred Shares as the owner thereof and each surrendered certificate shall be canceled. If fewer than all the shares evidenced by any such certificate evidencing Series C Preferred Shares are to be redeemed, a new certificate shall be issued evidencing the unredeemed shares.
(iv) From and after the redemption date (unless the Trust defaults in payment of the redemption price), all distributions on the Series C Preferred Shares designated for redemption in such notice shall cease to accumulate and all rights of the holders thereof, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the Trusts share transfer records, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series C Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company, in which case the redemption notice to holders of the Series C Preferred Shares to be redeemed shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require such holders to surrender the certificates evidencing such shares at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the holders of the Series C Preferred Shares at the end of two years after the redemption date shall be returned by such bank or trust company to the Trust.
(f) Any Series C Preferred Shares that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series until such shares are once more designated as part of a particular series by the Trustees.
6. Voting Rights .
(a) Holders of the Series C Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law. In any matter in which the holders of Series C Preferred Shares are entitled to vote, each such holder shall have the right to one vote for each Series C Preferred Share held by such holder. If the holders of the Series C Preferred Shares and the holders of another series of preferred shares are entitled to vote together as a single class on any matter, the holders of the Series C Preferred Shares and the holders of such other preferred shares shall each have one vote for each $25.00 of liquidation preference.
(b) Whenever distributions on any Series C Preferred Shares shall be in arrears
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for six or more quarterly periods, whether or not consecutive (a Preferred Distribution Default), the holders of Series C Preferred Shares (voting as a single class with all other equity securities upon which like voting rights have been conferred and are exercisable (Parity Preferred Shares)) will be entitled to vote for the election of a total of two additional trustees of the Trust (each, a Preferred Share Trustee) at a special meeting called by the holders of at least 10% of the outstanding Series C Preferred Shares or the holders of at least 10% of any other series of Parity Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of shareholders) or, if the request for a special meeting is received by the Trust less than 90 days before the date fixed for the next annual or special meeting of shareholders, at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on the Series C Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or authorized and a sum sufficient for the payment thereof set aside for payment in full.
(c) If and when all accumulated distributions and the distribution for the then current distribution period on the Series C Preferred Shares shall have been paid in full or authorized and set apart for payment in full, the holders of Series C Preferred Shares shall be divested of the voting rights set forth in clause (b) above (subject to revesting in the event of each and every Preferred Distribution Default) and, if all accumulated distributions and the distribution for the current distribution period have been paid in full or authorized by the Trustees and set apart for payment in full on all other series of Parity Preferred Shares upon which like voting rights have been conferred and are exercisable, the term of office of each Preferred Share Trustee so elected shall terminate. Any Preferred Share Trustee may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of a majority of the outstanding Series C Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Share Trustee may be filled by written consent of the Preferred Share Trustee remaining in office, or if none remains in office, by a vote of the holders of a majority of the outstanding Series C Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). The Preferred Share Trustees shall each be entitled to one vote per trustee on any matter.
(d) So long as any Series C Preferred Shares remain outstanding, the Trust shall not, without the affirmative vote of the holders of at least two-thirds of the Series C Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of equity securities ranking senior to the Series C Preferred Shares with respect to payment of distributions or the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, or reclassify any authorized equity securities of the Trust into any such equity securities, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such equity securities; or (ii) amend, alter or repeal the provisions of the
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Declaration of Trust (including these Articles Supplementary), whether by merger or consolidation (in either case, an Event) or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series C Preferred Shares or the holders thereof; provided, however, that with respect to the occurrence of any Event set forth in (ii) above, so long as Series C Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity and such surviving entity may thereafter be the issuer of the Series C Preferred Shares, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the Series C Preferred Shares or the holders thereof; and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other class or series of equity securities, or (y) any increase in the amount of authorized Series C Preferred Shares or any other class or series of equity securities, in the case of each of (x) or (y) above ranking on a parity with or junior to the Series C Preferred Shares with respect to payment of distributions and the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
(e) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series C Preferred Shares shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
7. Conversion . The Series C Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust at the option of holders thereof.
8. Application of Article VII . The Series C Preferred Shares are subject to the provisions of Article VII of the Declaration of Trust.
THIRD : The Series C Preferred Shares have been classified and designated by the Trustees under the authority contained in the Declaration of Trust.
FOURTH : These Articles Supplementary have been approved by the Trustees in the manner and by the vote required by law.
FIFTH : These Articles Supplementary shall be effective at the time the State Department of Assessments and Taxation of Maryland accepts these Articles Supplementary for record.
SIXTH : The undersigned President of the Trust acknowledges these Articles Supplementary to be the act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
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IN WITNESS WHEREOF, LASALLE HOTEL PROPERTIES has caused these Articles Supplementary to be signed in its name and on its behalf by its President and witnessed by its Secretary on August 24, 2005.
WITNESS: | LASALLE HOTEL PROPERTIES | |||||||
By: |
/s/ Hans S. Weger |
By: |
/s/ Jon E. Bortz |
|||||
Secretary | President |
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LASALLE HOTEL PROPERTIES
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF
7.5% SERIES D CUMULATIVE REDEEMABLE PREFERRED SHARES,
$.01 PAR VALUE PER SHARE
LASALLE HOTEL PROPERTIES, a Maryland real estate investment trust (the Trust), having its principal office in Bethesda, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Trustees by Article VI Section 6.3 of the Articles of Amendment and Restatement of Declaration of Trust, dated April 24, 1998, as amended (the Declaration of Trust), the Trustees have duly classified and designated 3,300,000 Preferred Shares of the Trust as 7.5% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, of the Trust (Series D Preferred Shares).
SECOND: The preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the Series D Preferred Shares are as follows,
7.5% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share
1. Designation and Number . A series of Preferred Shares, designated the 7.5% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, is hereby established. The number of authorized Series D Preferred Shares shall be 3,300,000.
2. Relative Seniority . The Series D Preferred Shares will, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Trust, rank (a) senior to all classes or series of Common Shares (as defined in the Declaration of Trust) and to all equity securities the terms of which provide that such equity securities shall rank junior to such Series D Preferred Shares; (b) on a parity with all equity securities issued by the Trust, other than those equity securities referred to in clauses (a) and (c); and (c) junior to all equity securities issued by the Trust which rank senior to the Series D Preferred Shares in accordance with Section 6(d). The term equity securities shall not include convertible debt securities.
3. Distributions .
(a) Holders of Series D Preferred Shares shall be entitled to receive, when and as authorized by the Trustees, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of seven and one-half percent (7.5%) per annum of the Twenty-five Dollars ($25.00) per share liquidation preference of the Series D Preferred Shares (equivalent to a fixed annual amount of $1.875 per share). Such distributions shall accumulate on a daily basis and be cumulative from (but excluding) the original date of issuance and be payable quarterly in equal amounts in arrears on or about the fifteenth day of each January, April, July and October of each year, beginning on October 17, 2005 (each such day being hereinafter called a Distribution Payment Date); provided that if any Distribution Payment Date is not a Business Day (as hereinafter defined), then the distribution which would otherwise have been payable on such Distribution Payment Date may be paid on the next succeeding Business Day with the same force and effect as if paid on such Distribution Payment Date, and no interest or additional distributions or other sums shall accrue on the amount so payable from such Distribution Payment Date to such next succeeding Business Day. Any distribution payable on the Series D Preferred Shares for any partial distribution period shall be prorated and computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be payable to holders of record as they appear in the share records of the Trust at the close of business on the applicable
record date, which shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Trustees for the payment of distributions that is not more than 90 nor less than 10 days prior to such Distribution Payment Date (each, a Distribution Record Date).
(b) No distribution on the Series D Preferred Shares shall be authorized by the Trustees or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law.
(c) Notwithstanding anything to the contrary contained herein, distributions on the Series D Preferred Shares shall accumulate whether or not the restrictions referred to in clause (b) exist, whether or not the Trust has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accumulated but unpaid distributions on the Series D Preferred Shares will accumulate as of the Distribution Payment Date on which they first become payable or on the date of redemption as the case may be. Accumulated and unpaid distributions will not bear interest.
(d) If any Series D Preferred Shares are outstanding, no distributions will be authorized or paid or set apart for payment on any equity securities of the Trust of any other class or series ranking, as to distributions, on a parity with or junior to the Series D Preferred Shares unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series D Preferred Shares for all past distribution periods and the then current distribution period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series D Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series D Preferred Shares, all distributions authorized, paid or set apart for payment upon the Series D Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series D Preferred Shares shall be authorized and paid pro rata or authorized and set apart for payment pro rata so that the amount of distributions authorized per Series D Preferred Share and each such other equity security shall in all cases bear to each other the same ratio that accumulated distributions per Series D Preferred Share and other equity security (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such equity securities do not have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on Series D Preferred Shares which may be in arrears.
(e) Except as provided in clause (d), unless full cumulative distributions on the Series D Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than in Common Shares or other equity securities of the Trust ranking junior to the Series D Preferred Shares as to distributions and upon liquidation) shall be authorized or paid or set apart for payment nor shall any other distribution be authorized or made upon the Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series D Preferred Shares as to distributions or upon liquidation, nor shall any Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series D Preferred Shares as to distributions or upon liquidation be redeemed, purchased or otherwise acquired directly or indirectly for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such equity securities) by the Trust (except by conversion into or exchange for other equity securities of the Trust ranking junior to the Series D Preferred Shares as to distributions and upon liquidation, by redemption, purchase or acquisition of equity securities under incentive, benefit or share purchase plans of the Trust for officers, Trustees or employees or others performing or providing similar services, or by other redemption, purchase or acquisition of such equity securities for the purpose of preserving the Trusts status as a REIT).
(f) Holders of Series D Preferred Shares shall not be entitled to any distribution, whether payable in cash, property or shares, in excess of full cumulative distributions on the Series D Preferred Shares as described above. Any distribution payment made on the Series D Preferred Shares shall first be credited against the earliest accumulated but unpaid distribution due with respect to such shares which remains payable.
(g) In determining whether a distribution by dividend, redemption or other acquisition of the Trusts equity securities is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution.
(h) Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close.
4. Liquidation Rights .
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust (referred to herein sometimes as a liquidation), the holders of Series D Preferred Shares then outstanding shall be entitled to receive, out of the assets of the Trust legally available for distribution to shareholders (after payment or provision for payment of all debts and other liabilities of the Trust), a liquidation preference in cash of Twenty-five Dollars ($25.00) per Series D Preferred Share, plus an amount equal to all accumulated and unpaid distributions through and including the date of payment, before any distribution of assets is made to holders of Common Shares or any other equity securities of the Trust that rank junior to the Series D Preferred Shares as to liquidation rights.
(b) If, upon any such voluntary or involuntary liquidation, dissolution or winding up of the Trust, the assets of the Trust are insufficient to make full payment to holders of Series D Preferred Shares and to the corresponding amounts payable on all shares of other classes or series of equity securities of the Trust ranking on a parity with the Series D Preferred Shares as to liquidation rights, then the holders of the Series D Preferred Shares and all other such classes or series of equity securities shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
(c) Written notice of any such liquidation, dissolution or winding up of the Trust, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage pre-paid, not less than 30 nor more than 60 days prior to the payment date stated therein, to each record holder of the Series D Preferred Shares at the respective address of such holders as the same shall appear on the share transfer records of the Trust.
(d) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series D Preferred Shares will have no right or claim to any of the remaining assets of the Trust.
(e) None of a consolidation or merger of the Trust with or into another entity, a merger of another entity with or into the Trust, a statutory share exchange by the Trust or a sale, lease, transfer or conveyance of all or substantially all of the Trusts property or business shall be considered a liquidation, dissolution or winding up of the Trust.
5. Redemption
(a) The Series D Preferred Shares are not redeemable prior to August 24, 2010. To ensure that the Trust remains qualified as a real estate investment trust (REIT) for federal income tax purposes, however, the Series D Preferred Shares shall be subject to the provisions of Article VII of the Declaration of Trust pursuant to which Series D Preferred Shares owned by a shareholder in excess of the Ownership Limit (as defined in Article VII of the Declaration of Trust) shall automatically be transferred to a Charitable Trust (as defined in Article VII of the Declaration of Trust) and the Trust shall have the right to purchase such shares, as provided in Article VII of the Declaration of Trust. On and after August 24, 2010, the Trust, at its option, upon giving notice as provided below, may redeem the Series D Preferred Shares, in whole or from time to time in part, for cash, at a redemption price of Twenty-five Dollars ($25.00) per share, plus all accumulated and unpaid distributions on such Series D Preferred Shares through the date of such redemption (the Redemption Right).
(b) If fewer than all of the outstanding Series D Preferred Shares are to be redeemed pursuant to the Redemption Right, the shares to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional shares) or by lot or in such other equitable method prescribed by the Trustees. If such redemption is to be by lot and, as a result of such redemption, any holder of Series D Preferred Shares would become a holder of a number of Series D Preferred Shares in excess of the Ownership Limit because such holders Series D Preferred Shares were not redeemed, or were only redeemed in part then, except as otherwise provided in the Declaration of Trust, the Trust will redeem the requisite number of Series D Preferred Shares of such holder such that no holder will hold in excess of the Ownership Limit subsequent to such redemption.
(c) Notwithstanding anything to the contrary contained herein, unless full cumulative distributions on all Series D Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series D Preferred Shares shall be redeemed unless all outstanding Series D Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase by the Trust of Series D Preferred Shares pursuant to Article VII of the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series D Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all Series D Preferred Shares. In addition, unless full cumulative distributions on all Series D Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distributions periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series D Preferred Shares (except by conversion into or exchange for equity securities of the Trust ranking junior to the Series D Preferred Shares as to distributions and upon liquidation; provided, however , that the foregoing shall not prevent any purchase or acquisition of Series D Preferred Shares for the purpose of preserving the Trusts status as a REIT or pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series D Preferred Shares.)
(d) Immediately prior to any redemption of Series D Preferred Shares, the Trust shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each holder of Series D Preferred Shares at the close of business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date (including any accrued and unpaid distributions for prior periods) notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Trust will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series D Preferred Shares for which a notice of redemption has been given.
(e) | The following provisions set forth the procedures for redemption: |
(i) Notice of redemption will be given by publication in a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the redemption date. A similar notice will be mailed by the Trust, postage prepaid, no less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series D Preferred Shares to be redeemed at their respective addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series D Preferred Shares except as to the holder to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the Series D Preferred Shares may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series D Preferred Shares to be redeemed; (D) the place or places where the Series D Preferred Shares are to be surrendered for payment of the redemption price; and (E) that
distributions on the Series D Preferred Shares to be redeemed will cease to accumulate on such redemption date. If less than all of the Series D Preferred Shares held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of Series D Preferred Shares held by such holder to be redeemed.
(iii) On or after the redemption date, each holder of Series D Preferred Shares to be redeemed shall present and surrender the certificates representing his Series D Preferred Shares to the Trust at the place designated in the notice of redemption and thereupon the redemption price of such shares (including all accumulated and unpaid distributions up to the redemption date) shall be paid to or on the order of the person whose name appears on such certificate evidencing Series D Preferred Shares as the owner thereof and each surrendered certificate shall be canceled. If fewer than all the shares evidenced by any such certificate evidencing Series D Preferred Shares are to be redeemed, a new certificate shall be issued evidencing the unredeemed shares.
(iv) From and after the redemption date (unless the Trust defaults in payment of the redemption price), all distributions on the Series D Preferred Shares designated for redemption in such notice shall cease to accumulate and all rights of the holders thereof, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the Trusts share transfer records, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series D Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company, in which case the redemption notice to holders of the Series D Preferred Shares to be redeemed shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require such holders to surrender the certificates evidencing such shares at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the holders of the Series D Preferred Shares at the end of two years after the redemption date shall be returned by such bank or trust company to the Trust.
(f) Any Series D Preferred Shares that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series until such shares are once more designated as part of a particular series by the Trustees.
6. Voting Rights .
(a) Holders of the Series D Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law. In any matter in which the holders of Series D Preferred Shares are entitled to vote, each such holder shall have the right to one vote for each Series D Preferred Share held by such holder. If the holders of the Series D Preferred Shares and the holders of another series of preferred shares are entitled to vote together as a single class on any matter, the holders of the Series D Preferred Shares and the holders of such other preferred shares shall each have one vote for each $25.00 of liquidation preference.
(b) Whenever distributions on any Series D Preferred Shares shall be in arrears for six or more quarterly periods, whether or not consecutive (a Preferred Distribution Default), the holders of Series D Preferred Shares (voting as a single class with all other equity securities upon which like voting rights have been conferred and are exercisable (Parity Preferred Shares)) will be entitled to vote for the election of a total of two additional trustees of the Trust (each, a Preferred Share Trustee) at a special meeting called by the holders of at least 10% of the outstanding Series D Preferred Shares or the holders of at least 10% of any other series of Parity Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of shareholders) or, if the request for a special meeting is received by the Trust less than 90 days before the date fixed for the next annual or special meeting of shareholders, at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on the Series D Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or authorized and a sum sufficient for the payment thereof set apart for payment in full.
(c) If and when all accumulated distributions and the distribution for the then current distribution period on the Series D Preferred Shares shall have been paid in full or authorized and set aside for payment in full, the holders of Series D Preferred Shares shall be divested of the voting rights set forth in clause (b) above (subject to revesting in the event of each and every Preferred Distribution Default) and, if all accumulated distributions and the distribution for the current distribution period have been paid in full or authorized by the Trustees and set aside for payment in full on all other series of Parity Preferred Shares upon which like voting rights have been conferred and are exercisable, the term of office of each Preferred Share Trustee so elected shall terminate. Any Preferred Share Trustee may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of a majority of the outstanding Series D Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Share Trustee may be filled by written consent of the Preferred Share Trustee remaining in office, or if none remains in office, by a vote of the holders of a majority of the outstanding Series D Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). The Preferred Share Trustees shall each be entitled to one vote per trustee on any matter.
(d) So long as any Series D Preferred Shares remain outstanding, the Trust shall not, without the affirmative vote of the holders of at least two-thirds of the Series D Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of equity securities ranking senior to the Series D Preferred Shares with respect to payment of distributions or the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, or reclassify any authorized equity securities of the Trust into any such equity securities, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such equity securities; or (ii) amend, alter or repeal the provisions of the Declaration of Trust (including these Articles Supplementary), whether by merger or consolidation (in either case, an Event) or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series D Preferred Shares or the holders thereof; provided, however , that with respect to the occurrence of any Event set forth in (ii) above, so long as Series D Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity and such surviving entity may thereafter be the issuer of the Series D Preferred Shares, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the Series D Preferred Shares or the holders thereof; and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other class or series of equity securities, or (y) any increase in the amount of authorized Series D Preferred Shares or any other class or series of equity securities, in the case of each of (x) or (y) above ranking on a parity with or junior to the Series D Preferred Shares with respect to payment of distributions and the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
(e) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series D Preferred Shares shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
7. Conversion . The Series D Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust at the option of holders thereof.
8. Application of Article VII . The Series D Preferred Shares are subject to the provisions of Article VII of the Declaration of Trust.
THIRD: The Series D Preferred Shares have been classified and designated by the Trustees under the authority contained in the Declaration of Trust.
FOURTH: These Articles Supplementary have been approved by the Trustees in the manner and by the vote required by law.
FIFTH: These Articles Supplementary shall be effective at the time the State Department of Assessments and Taxation of Maryland accepts these Articles Supplementary for record.
SIXTH: The undersigned President of the Trust acknowledges these Articles Supplementary to be the act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, LASALLE HOTEL PROPERTIES has caused these Articles Supplementary to be signed in its name and on its behalf by its President and witnessed by its Secretary on August 22, 2005.
WITNESS: | LASALLE HOTEL PROPERTIES | |||||
/s/ Hans S. Weger |
By: |
/s/ Jon E. Bortz |
||||
Hans S. Weger Secretary |
Jon E. Bortz President |
LASALLE HOTEL PROPERTIES
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF
8% SERIES E CUMULATIVE REDEEMABLE PREFERRED SHARES,
$.01 PAR VALUE PER SHARE
LASALLE HOTEL PROPERTIES, a Maryland real estate investment trust (the Trust), having its principal office in Bethesda, Maryland, hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority expressly vested in the Trustees by Article VI Section 6.3 of the Articles of Amendment and Restatement of Declaration of Trust, dated April 24, 1998, as amended (the Declaration of Trust), the Trustees have duly classified and designated 3,500,000 Preferred Shares of the Trust as 8% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, of the Trust (Series E Preferred Shares).
SECOND: The preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the Series E Preferred Shares are as follows,
8% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share
1. Designation and Number . A series of Preferred Shares, designated the 8% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share, is hereby established. The number of authorized Series E Preferred Shares shall be 3,500,000.
2. Relative Seniority . The Series E Preferred Shares will, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Trust, rank (a) senior to all classes or series of Common Shares (as defined in the Declaration of Trust) and to all equity securities the terms of which provide that such equity securities shall rank junior to such Series E Preferred Shares; (b) on a parity with all equity securities issued by the Trust, other than those equity securities referred to in clauses (a) and (c); and (c) junior to all equity securities issued by the Trust which rank senior to the Series E Preferred Shares in accordance with Section 7(d) hereof. The term equity securities shall not include convertible debt securities.
3. Distributions .
(a) Holders of Series E Preferred Shares shall be entitled to receive, when and as authorized by the Trustees, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of eight percent (8%) per annum of the twenty-five dollars ($25.00) per share liquidation preference of the Series E Preferred Shares (equivalent to a fixed annual amount of $2.00 per share); provided, however, that during any period of time that both (i) the Series E Preferred Shares are not listed on the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX), or quoted on the NASDAQ Stock Market (NASDAQ), or listed or quoted on an exchange or quotation system that is a successor to the NYSE, AMEX or NASDAQ, and (ii) the Trust is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and any Series E Preferred Shares are outstanding, the holders of Series E Preferred Shares shall be entitled to receive, when and as authorized by the Board of Trustees and declared by the Trust, out of legally available funds, cumulative preferential cash distributions at the rate of nine percent 9% per annum of the twenty-five dollars ($25.00) per share liquidation preference of the Series E
Preferred Shares (equivalent to a fixed annual amount of $2.25 per share) (the Special Distribution). Such distributions shall accumulate on a daily basis and be cumulative from (but excluding) the original date of issuance or, with respect to the Special Distribution, if applicable, from the date following the date on which both (i) the Series E Preferred Shares are not listed on the NYSE or the AMEX or quoted on NASDAQ, or are not listed or quoted on an exchange or quotation system that is a successor to the NYSE, AMEX or NASDAQ, and (ii) the Trust is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and be payable quarterly in equal amounts in arrears on or about the fifteenth day of each January, April, July and October of each year, beginning on April 17, 2006 (each such day being hereinafter called a Distribution Payment Date); provided that if any Distribution Payment Date is not a Business Day (as hereinafter defined), then the distribution which would otherwise have been payable on such Distribution Payment Date may be paid on the next succeeding Business Day with the same force and effect as if paid on such Distribution Payment Date, and no interest or additional distributions or other sums shall accrue on the amount so payable from such Distribution Payment Date to such next succeeding Business Day. Any distribution payable on the Series E Preferred Shares for any partial distribution period shall be prorated and computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be payable to holders of record as they appear in the share records of the Trust at the close of business on the applicable record date, which shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Trustees for the payment of distributions that is not more than 90 nor less than 10 days prior to such Distribution Payment Date (each, a Distribution Record Date). The Special Distribution, if applicable, shall cease to accrue on the date following the earlier of (i) the listing of the Series E Preferred Shares on the NYSE or the AMEX or their quotation on NASDAQ, or listing or quotation on an exchange or quotation system that is a successor to the NYSE, AMEX or NASDAQ, or (ii) the Trust becoming subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act.
(b) No distribution on the Series E Preferred Shares shall be authorized by the Trustees or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law.
(c) Notwithstanding anything to the contrary contained herein, distributions on the Series E Preferred Shares shall accumulate whether or not the restrictions referred to in clause (b) exist, whether or not the Trust has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accumulated but unpaid distributions on the Series E Preferred Shares will accumulate as of the Distribution Payment Date on which they first become payable or on the date of redemption as the case may be. Accumulated and unpaid distributions will not bear interest.
(d) If any Series E Preferred Shares are outstanding, no distributions will be authorized or paid or set apart for payment on any equity securities of the Trust of any other class or series ranking, as to distributions, on a parity with or junior to the Series E Preferred Shares unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series E Preferred Shares for all past distribution periods and the then current distribution period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series E Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series E Preferred Shares, all distributions authorized, paid or set apart for payment upon the Series E Preferred Shares and all other equity securities ranking on a parity, as to distributions, with the Series E Preferred Shares shall be authorized and paid pro rata or authorized and set apart for payment pro rata so that the amount of distributions authorized per Series E Preferred Share and each such other equity security shall in all cases bear to each other the same ratio that accumulated distributions per Series E Preferred Share and
other equity security (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such equity securities do not have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on Series E Preferred Shares which may be in arrears.
(e) Except as provided in clause (d), unless full cumulative distributions on the Series E Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than in Common Shares or other equity securities of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation) shall be authorized or paid or set apart for payment nor shall any other distribution be authorized or made upon the Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series E Preferred Shares as to distributions or upon liquidation, nor shall any Common Shares or any other equity securities of the Trust ranking junior to or on a parity with the Series E Preferred Shares as to distributions or upon liquidation be redeemed, purchased or otherwise acquired directly or indirectly for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such equity securities) by the Trust (except by conversion into or exchange for other equity securities of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, by redemption, purchase or acquisition of equity securities under incentive, benefit or share purchase plans of the Trust for officers, Trustees or employees or others performing or providing similar services, or by other redemption, purchase or acquisition of such equity securities for the purpose of preserving the Trusts status as a REIT).
(f) Holders of Series E Preferred Shares shall not be entitled to any distribution, whether payable in cash, property or shares, in excess of full cumulative distributions on the Series E Preferred Shares as described above. Any distribution payment made on the Series E Preferred Shares shall first be credited against the earliest accumulated but unpaid distribution due with respect to such shares which remains payable.
(g) In determining whether a distribution by dividend, redemption or other acquisition of the Trusts equity securities is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution.
(h) Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York are authorized or required by law, regulation or executive order to close.
4. Liquidation Rights .
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Trust (referred to herein sometimes as a liquidation), the holders of Series E Preferred Shares then outstanding shall be entitled to receive, out of the assets of the Trust legally available for distribution to shareholders (after payment or provision for payment of all debts and other liabilities of the Trust), a liquidation preference in cash of Twenty-five Dollars ($25.00) per Series E Preferred Share, plus an amount equal to all accumulated and unpaid distributions through and including the date of payment, before any distribution of assets is made to holders of Common Shares or any other equity securities of the Trust that rank junior to the Series E Preferred Shares as to liquidation rights.
(b) If, upon any such voluntary or involuntary liquidation, dissolution or winding up of the Trust, the assets of the Trust are insufficient to make full payment to holders of Series E Preferred Shares and to the corresponding amounts payable on all shares of other classes or series of equity securities of the Trust ranking on a parity with the Series E Preferred Shares as to liquidation rights, then the holders of
the Series E Preferred Shares and all other such classes or series of equity securities shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
(c) Written notice of any such liquidation, dissolution or winding up of the Trust, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage pre-paid, not less than 30 nor more than 60 days prior to the payment date stated therein, to each record holder of the Series E Preferred Shares at the respective address of such holders as the same shall appear on the share transfer records of the Trust.
(d) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series E Preferred Shares will have no right or claim to any of the remaining assets of the Trust.
(e) None of a consolidation or merger of the Trust with or into another entity, a merger of another entity with or into the Trust, a statutory share exchange by the Trust or a sale, lease, transfer or conveyance of all or substantially all of the Trusts property or business shall be considered a liquidation, dissolution or winding up of the Trust.
5. Redemption
(a) Except as described in Section 6 below and this Section 5, the Series E Preferred Shares are not redeemable prior to February 8, 2011. To ensure that the Trust remains qualified as a real estate investment trust (REIT) for federal income tax purposes, however, the Series E Preferred Shares shall be subject to the provisions of Article VII of the Declaration of Trust pursuant to which Series E Preferred Shares owned by a shareholder in excess of the Ownership Limit (as defined in Article VII of the Declaration of Trust) shall automatically be transferred to a Charitable Trust (as defined in Article VII of the Declaration of Trust) and the Trust shall have the right to purchase such shares, as provided in Article VII of the Declaration of Trust. On and after February 8, 2011, the Trust, at its option, upon giving notice as provided below, may redeem the Series E Preferred Shares, in whole or from time to time in part, for cash, at a redemption price of twenty-five dollars ($25.00) per share, plus all accumulated and unpaid distributions on such Series E Preferred Shares through the date of such redemption (the Redemption Right).
(b) If fewer than all of the outstanding Series E Preferred Shares are to be redeemed pursuant to the Redemption Right, the shares to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional shares) or by lot or in such other equitable method prescribed by the Trustees. If such redemption is to be by lot and, as a result of such redemption, any holder of Series E Preferred Shares would become a holder of a number of Series E Preferred Shares in excess of the Ownership Limit because such holders Series E Preferred Shares were not redeemed, or were only redeemed in part then, except as otherwise provided in the Declaration of Trust, the Trust will redeem the requisite number of Series E Preferred Shares of such holder such that no holder will hold in excess of the Ownership Limit subsequent to such redemption.
(c) Notwithstanding anything to the contrary contained herein, unless full cumulative distributions on all Series E Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series E Preferred Shares shall be redeemed unless all outstanding Series E Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase by the Trust of Series E Preferred Shares pursuant to Article VII of the Declaration of Trust or otherwise in order to ensure that the Trust remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of Series E Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all Series E
Preferred Shares. In addition, unless full cumulative distributions on all Series E Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past distributions periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any Series E Preferred Shares (except by conversion into or exchange for equity securities of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation; provided, however , that the foregoing shall not prevent any purchase or acquisition of Series E Preferred Shares for the purpose of preserving the Trusts status as a REIT or pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series E Preferred Shares).
(d) Immediately prior to any redemption of Series E Preferred Shares, the Trust shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each holder of Series E Preferred Shares at the close of business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date (including any accrued and unpaid distributions for prior periods) notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Trust will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series E Preferred Shares for which a notice of redemption has been given.
(e) The following provisions set forth the procedures for redemption:
(i) Notice of redemption will be given by publication in a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the redemption date. A similar notice will be mailed by the Trust, postage prepaid, no less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series E Preferred Shares to be redeemed at their respective addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series E Preferred Shares except as to the holder to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the Series E Preferred Shares may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series E Preferred Shares to be redeemed; (D) the place or places where the Series E Preferred Shares are to be surrendered for payment of the redemption price; and (E) that distributions on the Series E Preferred Shares to be redeemed will cease to accumulate on such redemption date. If less than all of the Series E Preferred Shares held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of Series E Preferred Shares held by such holder to be redeemed.
(iii) On or after the redemption date, each holder of Series E Preferred Shares to be redeemed shall present and surrender the certificates representing his Series E Preferred Shares to the Trust at the place designated in the notice of redemption and thereupon the redemption price of such shares (including all accumulated and unpaid distributions up to the redemption date) shall be paid to or on the order of the person whose name appears on such certificate evidencing Series E Preferred Shares as the owner thereof and each surrendered certificate shall be canceled. If fewer than all the shares evidenced by any such certificate evidencing Series E Preferred Shares are to be redeemed, a new certificate shall be issued evidencing the unredeemed shares.
(iv) From and after the redemption date (unless the Trust defaults in payment of the redemption price), all distributions on the Series E Preferred Shares designated for redemption in such notice shall cease to accumulate and all rights of the holders thereof, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and
terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the Trusts share transfer records, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series E Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company, in which case the redemption notice to holders of the Series E Preferred Shares to be redeemed shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require such holders to surrender the certificates evidencing such shares at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the holders of the Series E Preferred Shares at the end of two years after the redemption date shall be returned by such bank or trust company to the Trust.
(f) Any Series E Preferred Shares that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series until such shares are once more designated as part of a particular series by the Trustees.
6. Special Optional Redemption by the Trust .
(a) If at any time both (i) the Series E Preferred Shares are not listed on the NYSE or the AMEX, or quoted on the NASDAQ, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, AMEX or NASDAQ, and (ii) the Trust is not subject to the reporting requirements of the Exchange Act, and the Series E Preferred Shares are outstanding, the Trust will have the option upon written notice mailed by the Trust, postage pre-paid, no less than 30 nor more than 60 days prior to the redemption date and addressed to the holders of record of the Series E Preferred Shares at their addresses as shown on the share transfer books of the Trust, to redeem the Series E Preferred Shares, in whole but not in part, within 90 days of the first date upon which both (i) the Series E Preferred Shares are not listed and (ii) the Trust is not subject to such reporting requirements of the Exchange Act, for cash at twenty-five dollars ($25.00) per share plus accrued and unpaid distributions, if any, to and including the redemption date, whether or not authorized. No failure to give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series E Preferred Shares except as to the holder to whom notice was defective or not given.
(b) In addition to any information required by law or by the applicable rules of any exchange upon which the Series E Preferred Shares may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series E Preferred Shares to be redeemed; (D) the place or places where the Series E Preferred Shares are to be surrendered for payment of the redemption price; and (E) that distributions on the Series E Preferred Shares to be redeemed will cease to accumulate on such redemption date.
(c) Immediately prior to any redemption of Series E Preferred Shares, the Trust shall pay, in cash, any accumulated and unpaid distributions through the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each holder of Series E Preferred Shares at the close of business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date (including any accrued and unpaid distributions for prior periods) notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Trust will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series E Preferred Shares for which a notice of redemption has been given.
(d) On or after the redemption date, each holder of Series E Preferred Shares to be redeemed shall present and surrender the certificates representing his Series E Preferred Shares to the Trust at the place designated in the notice of redemption and thereupon the redemption price of such shares (including all accumulated and unpaid distributions up to the redemption date) shall be paid to or on the order of the person whose name appears on such certificate evidencing Series E Preferred Shares as the owner thereof and each surrendered certificate shall be canceled.
(e) From and after the redemption date (unless the Trust defaults in payment of the redemption price), all distributions on the Series E Preferred Shares designated for redemption in such notice shall cease to accumulate and all rights of the holders thereof, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the Trusts share transfer records, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series E Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company, in which case the redemption notice to holders of the Series E Preferred Shares to be redeemed shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require such holders to surrender the certificates evidencing such shares at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the holders of the Series E Preferred Shares at the end of two years after the redemption date shall be returned by such bank or trust company to the Trust.
(f) Any Series E Preferred Shares that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series until such shares are once more designated as part of a particular series by the Trustees.
7. Voting Rights .
(a) Holders of the Series E Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law. In any matter in which the holders of Series E Preferred Shares are entitled to vote, each such holder shall have the right to one vote for each Series E Preferred Share held by such holder. If the holders of the Series E Preferred Shares and the holders of another series of preferred shares are entitled to vote together as a single class on any matter, the holders of the Series E Preferred Shares and the holders of such other preferred shares shall each have one vote for each $25.00 of liquidation preference.
(b) Whenever distributions on any Series E Preferred Shares shall be in arrears for six or more quarterly periods, whether or not consecutive (a Preferred Distribution Default), the holders of Series E Preferred Shares (voting as a single class with all other equity securities upon which like voting rights have been conferred and are exercisable (Parity Preferred Shares)) will be entitled to vote for the election of a total of two additional trustees of the Trust (each, a Preferred Share Trustee) at a special meeting called by the holders of at least 10% of the outstanding Series E Preferred Shares or the holders of at least 10% of any other series of Parity Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of shareholders) or, if the request for a special meeting is received by the Trust less than 90 days before the date fixed for the next annual or special meeting of shareholders, at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on the Series E Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or authorized and a sum sufficient for the payment thereof set apart for payment in full.
(c) If and when all accumulated distributions and the distribution for the then current distribution period on the Series E Preferred Shares shall have been paid in full or authorized and set aside for payment in full, the holders of Series E Preferred Shares shall be divested of the voting rights set forth in clause (b) above (subject to revesting in the event of each and every Preferred Distribution Default) and,
if all accumulated distributions and the distribution for the current distribution period have been paid in full or authorized by the Trustees and set aside for payment in full on all other series of Parity Preferred Shares upon which like voting rights have been conferred and are exercisable, the term of office of each Preferred Share Trustee so elected shall terminate. Any Preferred Share Trustee may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of a majority of the outstanding Series E Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Share Trustee may be filled by written consent of the Preferred Share Trustee remaining in office, or if none remains in office, by a vote of the holders of a majority of the outstanding Series E Preferred Shares when they have the voting rights set forth in clause (b) above and all other series of Parity Preferred Shares (voting as a single class). The Preferred Share Trustees shall each be entitled to one vote per trustee on any matter.
(d) So long as any Series E Preferred Shares remain outstanding, the Trust shall not, without the affirmative vote of the holders of at least two-thirds of the Series E Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of equity securities ranking senior to the Series E Preferred Shares with respect to payment of distributions or the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, or reclassify any authorized equity securities of the Trust into any such equity securities, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such equity securities; or (ii) amend, alter or repeal the provisions of the Declaration of Trust (including these Articles Supplementary), whether by merger or consolidation (in either case, an Event) or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series E Preferred Shares or the holders thereof; provided, however , that with respect to the occurrence of any Event set forth in (ii) above, so long as Series E Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity and such surviving entity may thereafter be the issuer of the Series E Preferred Shares, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the Series E Preferred Shares or the holders thereof; and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other class or series of equity securities, or (y) any increase in the amount of authorized Series E Preferred Shares or any other class or series of equity securities, in the case of each of (x) or (y) above ranking on a parity with or junior to the Series E Preferred Shares with respect to payment of distributions and the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Trust, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
(e) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series E Preferred Shares shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
8. Information Rights . During any period in which the Trust is required to pay a Special Distribution, the Trust will (i) transmit by mail or other permissible means under the Exchange Act to all holders of the Series E Preferred Shares, as their names and addresses appear in the Trusts record books and without cost to such holders, copies of the annual reports on Form 10-K and quarterly reports on Form 10-Q that the Trust would have been required to file with the SEC, pursuant to Section 13 or Section 15(d) of the Exchange Act if the Trust were subject to such sections (other than any exhibits that would have been required), and (ii) within 15 days following written request, supply copies of such reports to any prospective holder of the Series E Preferred Shares. The Trust will mail (or otherwise provide) the reports to the holders of Series E Preferred Shares within 15 days after the respective dates by which the Trust would have been required to file such reports with the SEC if it were subject to Section 13 or 15(d) of the Exchange Act.
9. Conversion . The Series E Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust at the option of holders thereof.
10. Application of Article VII . The Series E Preferred Shares are subject to the provisions of Article VII of the Declaration of Trust.
THIRD: The Series E Preferred Shares have been classified and designated by the Trustees under the authority contained in the Declaration of Trust.
FOURTH: These Articles Supplementary have been approved by the Trustees in the manner and by the vote required by law.
FIFTH: These Articles Supplementary shall be effective at the time the State Department of Assessments and Taxation of Maryland accepts these Articles Supplementary for record.
SIXTH: The undersigned President of the Trust acknowledges these Articles Supplementary to be the act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, LASALLE HOTEL PROPERTIES has caused these Articles Supplementary to be signed in its name and on its behalf by its President and witnessed by its Secretary on February 6, 2006.
WITNESS: | LASALLE HOTEL PROPERTIES | |||||||
By: |
/s/ Hans S. Weger |
By: |
/s/ Michael D. Barnello |
|||||
Hans S. Weger Secretary |
Michael D. Barnello Chief Operating Officer and Executive Vice President of Acquisitions |
Exhibit 10.3
Second Amendment to the
Amended and Restated Agreement
of Limited Partnership
of
LaSalle Hotel Operating Partnership, L.P.
This Amendment is made as of September 30, 2003 by and among LaSalle Hotel Properties, a Maryland real estate investment trust, as the general partner (the Trust or the General Partner) of LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership (the Partnership), and as attorney-in-fact for the Persons named on Exhibit A to the Agreement of Limited Partnership of LaSalle Hotel Operating Partnership, L.P., dated as of April 29, 1998 (the Partnership Agreement) for the purpose of amending the Partnership Agreement. Capitalized terms used herein and not defined shall have the meanings given to them in the Partnership Agreement.
WHEREAS, the Board of Trustees of the Trust (the Board), adopted certain resolutions by unanimous written consent September 16, 2003, and the Pricing Committee adopted certain resolutions on September 23, 2003, classifying and designating 1,200,000 Preferred Shares (as defined in the Articles of Amendment and Restatement of Declaration of Trust of the Trust (the Declaration of Trust)) as Series B Preferred Shares (as defined below);
WHEREAS, the Trust filed Articles Supplementary to the Declaration of Trust (the Articles Supplementary) with the State Department of Assessments and Taxation of Maryland on September 26, 2003, establishing a series of preferred shares, designated Series B Preferred Shares;
WHEREAS, on September 30, 2003, the Trust issued 1,000,000 Series B Preferred Shares;
WHEREAS, the General Partner has determined that, in connection with the issuance of the Series B Preferred Shares, it is necessary and desirable to amend the Partnership Agreement to create additional Partnership Units having designations, preferences and other rights which are substantially the same as the economic rights of the Series B Preferred Shares.
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NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement as follows:
1. Article 1 of the Partnership Agreement is hereby amended by adding the following definitions:
Series B Preferred Shares means the 8.375% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share (Liquidation Preference $25 per share) of the Trust, with the preferences, liquidation and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of shares as described in the Articles Supplementary; and
Series B Preferred Units means the series of Partnership Units representing units of Limited Partnership Interest designated as the 8.375% Series B Cumulative Redeemable Preferred Units (Liquidation Preference $25 per share), with the preferences, liquidation and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of units as described herein.
2. In accordance with Section 4.2.A of the Partnership Agreement, set forth below are the terms and conditions of the Series B Preferred Units hereby established and issued to the Trust in consideration of the Trusts contribution to the Partnership of the net proceeds from the issuance and sale of the Series B Preferred Shares by the Trust:
A. Designation and Number. A series of Partnership Units, designated as Series B Preferred Units, is hereby established. The number of Series B Preferred Units shall be 1,200,000.
B. Rank. The Series B Preferred Units will, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Partnership, rank (a) senior to the Class A Units, Class B Units and to all Partnership Interests the terms of which specifically provide that such Partnership Interests shall rank junior to such Series B Preferred Units; (b) on a parity with all Partnership Interests issued by the Partnership, other than those Partnership Interests referred to in clauses (a) and (c); and (c) junior to all Partnership Interests issued by the Partnership the terms of which specifically provide that such Partnership Interests shall rank senior to the Series B Preferred Units.
C. Distributions.
(i) Pursuant to Section 5.1 of the Partnership Agreement, holders of Series B Preferred Units shall be entitled to receive, out of Available Cash, cumulative preferential cash distributions at the rate of eight and three-eighths percent (8.375%) per annum of the twenty-five dollars ($25.00) per share liquidation preference of the Series B Preferred Units (equivalent to a fixed annual amount of $2.09375 per unit). Distributions on the Series B Preferred Units shall accumulate on a daily basis and be cumulative from (but excluding) September 30, 2003 and be payable quarterly in equal amounts in arrears on the fifteenth day of January, April, July, and October of each year, beginning on January 15, 2003 or, if not a Business Day, the next succeeding Business Day, or such other day as the General Partner may determine (each, a Series B Preferred Unit Distribution Payment Date). Any distribution (including the initial distribution) payable on the Series B Preferred Units for any partial distribution period shall be prorated and computed on the basis of a 360-day year consisting of twelve 30-day months.
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(ii) No distribution on the Series B Preferred Units shall be authorized by the Board or paid or set apart for payment by the Partnership at such time as the terms and provisions of any agreement of the Partnership, including any agreement relating to its indebtedness, prohibits such authorization, payment or setting apart for payment or provides that such authorization, payment or setting apart for payment would constitute a breach thereof, or a default thereunder, or if such authorization or payment shall be restricted or prohibited by law.
(iii) Notwithstanding anything to the contrary contained herein, distributions with respect to the Series B Preferred Units shall accumulate whether or not the restrictions referred to in Subsection 2.C.(ii) exist, whether or not the Partnership has earnings, whether or not there is sufficient Available Cash for the payment thereof and whether or not such distributions are authorized. Accumulated but unpaid distributions on the Series B Preferred Units will accumulate as of the Series B Preferred Unit Distribution Payment Date on which they first become payable or on the date of redemption as the case may be.
(iv) If any Series B Preferred Units are outstanding, no full distributions will be authorized or paid or set apart for payment on any Partnership Interests of the Partnership of any other class or series ranking, as to distributions, on a parity with or junior to the Series B Preferred Units unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series B Preferred Units for all past distribution periods and the then current distribution period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series B Preferred Units and all other Partnership Interests ranking on a parity, as to distributions, with the Series B Preferred Units, all distributions authorized, paid or set apart for payment upon the Series B Preferred Units and all other units ranking on a parity, as to distributions, with the Series B Preferred Units shall be authorized and paid pro rata or authorized and set apart for payment pro rata so that the amount of distributions authorized per Series B Preferred Unit and each such other Partnership Interest shall in all cases bear to each other the same ratio that accumulated distributions per Series B Preferred Unit and other Partnership Interest (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such Partnership Interests do not have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on Series B Preferred Units which may be in arrears.
(v) Except as provided in subsection 2.C.(iv), unless full cumulative distributions on the Series B Preferred Units have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof is set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than in Partnership Interests ranking junior to the Series B Preferred Units as to distributions and upon liquidation) shall be authorized or paid or set aside for payment nor shall any other distribution be authorized or made upon the Class A Units, Class B Units, or any other Partnership Interests ranking junior to or on a parity with the Series B Preferred Units as to distributions or upon liquidation, nor shall any Class A Units, Class B Units, or any other Partnership Interests ranking junior to or on a parity with the Series B Preferred Units as to distributions or upon liquidation be redeemed, purchased or otherwise acquired directly or indirectly for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any such Partnership Interests) by the Partnership (except by conversion into or exchange for other Partnership
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Interests ranking junior to the Series B Preferred Units as to distributions and upon liquidation, dissolution or winding up of the affairs of the Partnership or by redemption, purchase or acquisition of Partnership Interests under incentive, benefit or unit purchase plans of the Partnership for Employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them.)
(vi) Holders of Series B Preferred Units shall not be entitled to any distribution, whether payable in cash, property or Partnership Interests, in excess of full cumulative distributions on the Series B Preferred Units as described above. Any distribution payment made on the Series B Preferred Units shall first be credited against the earliest accumulated but unpaid distribution due with respect to such units which remains payable.
D. Allocations.
Allocations of the Partnerships items of income, gain, loss and deduction shall be allocated among holders of Series B Preferred Units in accordance with Article VI of the Partnership Agreement.
E. Liquidation Preference.
(i) In the event of any voluntary or involuntary liquidation , dissolution or winding up of the affairs of the Partnership, the holders of the Series B Preferred Units shall be entitled to receive out of the assets of the Partnership legally available for distribution to the Partners pursuant to Section 13.2.A of the Partnership Agreement a liquidation preference in cash of $25.00 per Series B Preferred Unit, plus an amount equal to all accumulated and unpaid distributions to the date of payment, before any distribution of assets is made to holders of Class A Units, Class B Units or any other Partnership Interests that rank junior to the Series B Preferred Units as to liquidation rights.
(ii) If upon any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Partnership, the assets of the Partnership are insufficient to make such full payment to holders of the Series B Preferred Units and the corresponding amounts payable on all other Partnership Interests ranking on a parity with the Series B Preferred Units in the distribution of assets, then the holders of the Series B Preferred Units and other such Partnership Interests shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled.
(iii) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series B Preferred Units shall have no right or claim to any of the remaining assets of the Partnership.
(iv) None of a consolidation or merger of the Partnership with or into another entity, a merger of another entity with or into the Partnership or a sale, lease or conveyance of all or substantially all of the Partnerships property or business shall be considered a liquidation, dissolution or winding up of the affairs of the Partnership.
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F. Redemption.
In connection with redemption by the Trust of any of its Series B Preferred Shares in accordance with the provisions of the Articles Supplementary, the Partnership shall provide cash to the Trust for such purpose which shall be equal to the redemption price (as set forth in the Articles Supplementary) and one Series B Preferred Unit shall be canceled with respect to each Series B Preferred Share so redeemed by the Trust (unless another Conversion Factor is specified under the Partnership Agreement). From and after the Series B Preferred Share redemption date, the Series B Preferred Units so canceled shall no longer be outstanding and all rights hereunder, to distributions or otherwise, with respect to such Series B Preferred Units shall cease.
3. Except as modified herein, all terms and conditions of the Partnership Agreement shall remain in full force and effect, which terms and conditions the General Partner hereby ratifies and confirms.
* * * * * * *
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IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first set forth above.
LASALLE HOTEL OPERATING PARTNERSHIP, L.P. |
||
By: | LaSalle Hotel Properties, a Maryland real estate investment trust, its General Partner, and attorney-in-fact of each Limited Partner | |
By: |
/s/ Hans S. Weger |
|
Name: | Hans S. Weger | |
Title: | Chief Financial Officer |
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List of Subsidiaries | Exhibit 21 |
LaSalle Hotel Properties
LaSalle Hotel Operating Partnership
LHO Hollywood Financing, Inc. (QRS)
LHO New Orleans Financing, Inc.
LHO Financing, Inc.
LHO Hollywood LM, LP
LHO New Orleans LM, LP
LHO Financing Partnership I, LP
LHO Viking Hotel, LLC
LHO Harborside Hotel, LLC
LHO Mission Bay Hotel, LP
LaSalle Washington One Lessee, Inc
LaSalle Washington Two Lessee, Inc
LaSalle Washington Three Lessee, Inc
LaSalle Washington Four Lessee, Inc
LHO Washington Five Lessee, LLC
LHO Washington Hotel One, LLC
LHO Washington Hotel Two, LLC
LHO Washington Hotel Three, LLC
LHO Washington Hotel Four, LLC
I&G Capital, LLC
LaSalle Hotel Lessee, Inc.
LHO Dallas One Lessee LLC
LHO Dallas Beverages, Inc
LHO Bloomington One Lessee, LLC
LHO Carlyle 540, LLC
Chicago 540 Hotel, LLC
540 Leaseco, LLC
Chicago 540 Lessee, Inc.
LHO Leesburg One Lessee, Inc
LHO Washington Hotel Six, LLC
LHO Washington Six Lessee, Inc
LHO Indianapolis One Lessee, LLC
LHO Indianapolis Hotel One MM LLC
LHO Indianapolis Hotel One CMM Inc
LHO Indianapolis Hotel One LLC
LHO Alexandria One, LLC
LHO Alexandria One Lessee, LLC
LHO Santa Cruz Hotel One, LLC
LHO San Diego Hotel One, LLC
LHO San Diego Hotel One, L.P
LHO Santa Cruz Hotel One, L.P.
LHO San Diego One Lessee, Inc
LHO Santa Cruz One Lessee, Inc.
LHO Grafton Hotel, L.P.
LHO Grafton Hotel Lessee, Inc.
LHO Grafton Hotel, L.L.C.
LHO Onyx One Lessee, L.L.C.
LHO Onyx Hotel One, L.L.C.
LHO Boss-Ton Square Hotel, LLC
LHO Boss-Ton Square Lessee, Inc.
LHO Badlands, LLC
LHO Badlands Lessee, LLC
LHO Le Parc, LLC
LHO Le Parc, LP
LHO Le Parc Lessee, Inc.
Westban Hotel Investors, LLC
LHO Backstreets, LLC
LHO Backstreets Lessee, LLC
LHO Tom Joad Circle DC Lessee
LHO Tom Joad Circle DC, LLC
LHO Mission Bay Rosie Hotel LLC
LHO Mission Bay Rosie Hotel, LP
LHO Mission Bay Rosie Lessee, Inc.
Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Trustees
LaSalle Hotel Properties:
We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-125058, 333-104056, 333-86911 and 333-72265) and on Form S-3 (Nos. 333-131384, 333-51476, 333-44872, and 333-76373) of LaSalle Hotel Properties of our reports dated February 22, 2006, with respect to the consolidated balance sheets of LaSalle Hotel Properties as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders equity and cash flows for each of the years in the three-year period ended December 31, 2005, and the related financial statement schedule, managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of LaSalle Hotel Properties.
/s/ KPMG LLP
Chicago, Illinois
February 22, 2006
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jon E. Bortz, certify that:
1. I have reviewed this annual report on Form 10-K of LaSalle Hotel Properties;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 22, 2006
/s/ J ON E. B ORTZ |
Jon E. Bortz |
Chairman of the Board, President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Hans S. Weger, certify that:
1. I have reviewed this annual report on Form 10-K of LaSalle Hotel Properties;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 22, 2006
/s/ H ANS S. W EGER |
Hans S. Weger |
Executive Vice President and Chief Financial Officer |
Exhibit 32.1
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Annual Report of LaSalle Hotel Properties (LHO) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jon E. Bortz, Chairman of the Board, President and Chief Executive Officer of LHO, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of LHO.
February 22, 2006
/s/ J ON E. B ORTZ |
Jon E. Bortz |
Chairman of the Board, President and Chief Executive Officer |
Exhibit 32.2
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Annual Report of LaSalle Hotel Properties (LHO) on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Hans S. Weger, Executive Vice President and Chief Financial Officer of LHO, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of LHO.
February 22, 2006
/s/ H ANS S. W EGER |
Hans S. Weger |
Executive Vice President and Chief Financial Officer |