Interstate Hotels & Resorts Reports Third-Quarter 2006 Results
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Interstate Hotels & Resorts Reports Third-Quarter 2006 Results
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Category: Worldwide -
This is a press release selected by our editorial committee and published online for free on 2006-11-08
Interstate Hotels & Resorts (NYSE: IHR), one of the nation's largest independent hotel management companies, today reported record operating results for the third quarter ended September 30, 2006. The company's performance for the third quarter and first nine months of 2006 includes the following (in millions, except per share amounts):
The third quarter operating results include $17.0 million of termination fees, the majority of which were earned from the Blackstone Group. This includes $15.1 million of one-time termination fees resulting from an agreement to remove all remaining contingencies related to the unpaid termination fees for hotels where Blackstone terminated its management agreement with Interstate on or before October 1, 2006. Of the $15.1 million in one-time termination fees, $14.5 million was paid in the fourth quarter, the majority of which was in conjunction with the purchase of the Hilton in Arlington, Texas in October 2006. Excluding $14.5 million of the termination fees from the operating results, which were not anticipated to be recognized in the quarter, Adjusted EBITDA would have been $10.7 million, which exceeds the high end of the company's previously issued earnings guidance by $0.7 million. Adjusted Net Income and Adjusted diluted EPS would have been $4.5 million and $0.14 per share, respectively, or $0.7 million and $0.02 per share, respectively, above the high end of earnings guidance.
The statement of operations also includes the following non-recurring and special charges:
-- A $4.5 million gain related to the sale and subsequent reinvestment of
the joint venture interest in the Sawgrass Marriott Resort and Spa,
which has been recorded in the equity in earnings of affiliates line;
-- A $2.0 million loss from asset impairments and other write-offs,
primarily related to the termination of 13 management contracts by
Sunstone Hospitality and the termination of three management contracts
by The Blackstone Group.
These two items are classified as non-recurring and have been excluded from Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS.
Hotel Operating Results
Same-store RevPAR for all managed hotels in the third quarter of 2006 increased 7.3 percent to $90.07. Average daily rate (ADR) advanced 6.9 percent to $118.92, and occupancy increased 0.3 percent to 75.7 percent.
Same-store RevPAR for all full-service managed hotels increased 7.3 percent to $94.18, ADR rose 6.7 percent to $124.78, and occupancy improved 0.7 percent to 75.5 percent.
Same-store RevPAR for all select-service managed hotels increased 7.1 percent to $75.37, reflecting a 7.7 percent gain in ADR to $98.31 and a 0.5 percent decline in occupancy to 76.7 percent.
"We had a tremendous quarter, reporting strong results at our managed properties, double-digit RevPAR gains at our owned hotels and another excellent quarter at our BridgeStreet corporate housing division," said Thomas F. Hewitt, chief executive officer.
RevPAR increased 25 percent in the third quarter for the company's three wholly owned hotels: the Hilton Concord (Calif.), the Hilton Durham (N.C.), and the Baton Rouge Hilton Garden Inn (LA). EBITDA from the company's owned hotels was $1.9 million for the third quarter and $4.9 million for the nine months ended September 30, 2006, as illustrated below (in millions)
"The strong performance of our wholly-owned properties underscores our ability to source sound investment opportunities," Hewitt said. "We continued to execute on our strategy by acquiring our fourth wholly-owned property, the Hilton in Arlington, Texas, in October 2006.
"This acquisition was a very unique transaction that allowed us to use management termination fees as currency and acquire, at a very competitive price, a great property that we already managed," Hewitt said. "The property has enjoyed significant RevPAR gains for the past two years, and also has a great combination of both business and leisure demand generators, including a growing number of corporate offices in the area and a new football stadium for the Dallas Cowboys currently being developed."
The company continued to diversify its revenue streams with increased real estate ownership through joint venture investments. The Sawgrass Marriott Resort & Spa, of which the company had a 10 percent joint venture interest, was sold in July 2006. The company has received $15.3 million from the sale and has reinvested $9.3 million for a 10 percent preferred equity interest in the new joint venture that owns the hotel. "Not only did we participate in the appreciation of the Sawgrass Marriott Resort & Spa upon its sale, we were also able to secure a long-term management contract with our reinvestment in the property," Hewitt noted. The company recognized a $4.5 million gain related to this transaction in the 2006 third quarter and expects to recognize $9.3 million of income as the company receives distributions of unrecovered capital from its investment. In addition, the company will record earnings on its 10 percent preferred interest in the new joint venture.
"We also have increased our focus on management opportunities in Europe, signing two important contracts during the second half of the year," Hewitt added. "We executed a long-term contract to manage the landmark, 275-room Hilton Moscow Leningradskaya in Moscow beginning in 2007 after a complete renovation. This is our fourth property in that city. In addition, earlier in the quarter we were selected to manage our first property in Ireland, the Hotel Rath. We are one of the few hotel management companies with global expertise and a growing international portfolio, which also includes an under- construction Marriott hotel in Ghent, Belgium, that is expected to open in 2007. With these additions, the company now has six hotels under management in Europe.
"Combined with our BridgeStreet corporate housing division, which has an international presence, we have a solid grasp of the European lodging market. We see additional opportunities in first-class, full-service hotels, those affiliated with top-quality brands like Marriott, Starwood, Intercontinental and Hilton, as well as independent hotels and resorts in this market," said Hewitt.
BridgeStreet Division
"BridgeStreet continues to perform at high levels, with the London, Chicago and New York markets leading the way," Hewitt said. "They also achieved a couple of important landmarks in the third period: they entered the northern New Jersey market, an area that includes more than 50 Fortune 1,000 companies and more than 10 million square feet of office space; and they were named the exclusive corporate housing manager for a new, luxury condominium building in New York City's Times Square, marking their entry into that city's high-end, luxury apartment sector.
"We see continued growth opportunities for BridgeStreet in major U.S. markets and a growing number of international markets. We plan to continue our expansion through partnerships with top local and regional providers of corporate housing who share our deep commitment to exceeding client and guest expectations and through acquisitions in key locations around the globe."
Balance Sheet
On September 30, 2006, Interstate had:
-- Total cash of $12.3 million.
-- Total debt of $71.3 million, consisting of $52.3 million of senior debt
and $19 million of non-recourse mortgage debt.
During the nine months ended September 30, 2006, the company generated $30.5 million of cash flow from operations. "Utilizing our operating cash flow and proceeds of $15.3 million from the sale of the Sawgrass Marriott Resort and Spa, we were able to acquire an ownership interest in 10 hotels for $29.6 million and pay down $13.8 million of senior debt," said Bruce Riggins, chief financial officer. "We continue to maintain a prudently leveraged balance sheet and have approximately $45 million under our line of credit to respond to available business opportunities." In addition to the third quarter transactions, subsequent to the end of the quarter, the company closed on mortgage debt of $24.7 million as part of the acquisition of the Hilton in Arlington, Texas.
Outlook and Guidance
"Based on the positive trends we continue to see in business and leisure travel we remain optimistic about the hotel industry outlook for 2007 and beyond," Hewitt said. "We are confident that our strategy of diversifying our earnings base through increased real estate ownership, combined with our core management business, will enable us to produce strong returns for our shareholders."
The company provides the following guidance for the fourth-quarter and full-year 2006:
-- RevPAR, on a same-store basis, is expected to increase 6.5 to 7.5
percent in the fourth quarter and 8.7 to 9.7 percent for the full year;
-- Net income of $7.1 million to $8.3 million in the fourth quarter and
$26.0 million to $27.2 million for the full year;
-- Diluted earnings per share of $0.22 to $0.26 for the fourth quarter and
$0.82 to $0.86 for the full year;
-- Adjusted net income of $7.1 million to $8.3 million in the fourth
quarter and $29.8 million to $31.0 million for the full year;
-- Adjusted diluted earnings per share of $0.22 to $0.26 for the fourth
quarter and $0.94 to $0.98 for the full year;
-- Adjusted EBITDA of $16.0 million to $18.0 million for the fourth
quarter and $63.8 million to $65.8 million for the full year.
Interstate will hold a conference call to discuss its third-quarter results today, November 7, at 11 a.m. Eastern Time. To hear the webcast, interested parties may visit the company's Web site at http://www.ihrco.com and click on Investor Relations and then Third-Quarter Conference Call. A replay of the conference call will be available until midnight on Tuesday, November 14, 2006, by dialing (800) 405-2236, reference number 11073214, and an archived webcast of the conference call will be posted on the company's Web site through December 7, 2006.
As of September 30, Interstate Hotels & Resorts operated 233 hospitality properties with more than 52,000 rooms in 40 states, the District of Columbia, Canada, and Russia. BridgeStreet Worldwide, an Interstate Hotels & Resorts subsidiary, is one of the world's largest corporate housing providers. BridgeStreet and its network of Global Partners offer approximately 10,000 corporate apartments located in more than 100 MSAs throughout the United States and internationally. For more information about Interstate Hotels & Resorts, visit the company's Web site: http://www.ihrco.com.
Non-GAAP Financial Measures
Included in this press release are certain non-GAAP financial measures, which are measures of our historical or estimated future performance that are different from measures calculated and presented in accordance with generally accepted accounting principles in the United States of America (or GAAP), within the meaning of applicable Securities and Exchange Commission rules, that we believe are useful to investors. They are as follows: (i) Earnings before interest, taxes, depreciation and amortization (or "EBITDA") and (ii) Adjusted EBITDA, Adjusted net income, and Adjusted diluted EPS. The following discussion defines these terms and presents the reasons we believe they are useful measures of our performance.
EBITDA
A significant portion of our non-current assets consists of intangible and long lived assets, which includes the cost of our three owned hotels. Intangible assets, excluding goodwill, are amortized over their expected term. Property and equipment is depreciated over its useful life. Because amortization and depreciation are non-cash items, management and many industry investors believe the presentation of EBITDA is useful. We believe EBITDA provides useful information to investors regarding our performance and our capacity to incur and service debt, fund capital expenditures and expand our business. Management uses EBITDA to evaluate property-level results and as one measure in determining the value of acquisitions and dispositions. It is also widely used by management in the annual budget process. We believe that the rating agencies and a number of lenders use EBITDA for those purposes and a number of restrictive covenants related to our indebtedness use measures similar to EBITDA presented herein.
Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS
We define Adjusted EBITDA as, EBITDA, excluding the effects of certain recurring and non-recurring charges, transactions and expenses incurred in connection with events management believes do not provide the best indication of our ongoing operating performance. These charges include restructuring and severance expenses, asset impairments and write-offs, equity in earnings (losses) of affiliates, gains and losses on asset dispositions and other investments, and other non-cash charges. We believe that the presentation of Adjusted EBITDA will provide useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income, is beneficial to an investor's complete understanding of our operating performance.
Similarly, we define Adjusted net income and Adjusted diluted EPS as net income and diluted EPS, without the effects of those same charges, transactions and expenses described earlier. We believe that Adjusted EBITDA, Adjusted net income and Adjusted diluted EPS are useful performance measures because including these expenses, transactions, and special charges may either mask or exaggerate trends in our ongoing operating performance. Furthermore, performance measures that include these charges may not be indicative of the continuing performance of our underlying business. Therefore, we present Adjusted EBITDA, Adjusted net income and Adjusted diluted EPS because they may help investors to compare our performance before the effect of various items that do not directly affect our ongoing operating performance.
Limitations on the use of EBITDA, Adjusted EBITDA and Adjusted Net Income
We calculate EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted diluted EPS as we believe they are important measures for our management's and our investors' understanding of our operations. These may not be comparable to measures with similar titles as calculated by other companies. This information should not be considered as an alternative to net income, operating profit, cash from operations or any other operating performance measure calculated in accordance with GAAP. Cash receipts and expenditures from investments, interest expense and other non-cash items have been and will be incurred and are not reflected in the EBITDA and Adjusted EBITDA presentations. Adjusted net income and Adjusted diluted EPS do not include cash receipts and expenditures related to those same items and charges discussed above. Management compensates for these limitations by separately considering these excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. Additionally, EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted diluted EPS should not be considered a measure of our liquidity. Adjusted net income and Adjusted diluted EPS should also not be used as a measure of amounts that accrue directly to our stockholders' benefit.
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